UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





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





For
the Quarterly Period ended June 30, 2010





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





Commission
file number 000-51264





WESTERN RESERVE BANCORP,
INC.


(Exact
name of registrant as specified in its charter)





Ohio
                    31-1566623(State
      or other jurisdiction of
                    (IRS
      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
 ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such items).   Yes x   No
 ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check one):


Large accelerated filer ̈
              Accelerated filer ̈Non-accelerated filer ̈
              Smaller reporting companyx





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes  ̈   No
x





585,419
shares of common stock, no par value, $1.00 stated value as of August 13,
2010.





WESTERN
RESERVE BANCORP, INC.


FORM
10-Q


Six
months ended June 30, 2010





PagePART
      I—Financial InformationITEM
      1
                                  FINANCIAL
      STATEMENTSConsolidated
      Balance Sheets as of June 30, 2010 and December 31, 2009
                                  3Consolidated
      Statements of Income for the three- and six-month periods ended June 30,
      2010 and 2009
                                  4Consolidated
      Statements of Comprehensive Income for the three- and six-month periods
      ended June 30, 2010 and 2009
                                  5Consolidated
      Statements of Cash Flows for the six-month periods ended June 30, 2010 and
      2009
                                  6Notes
      to Consolidated Financial Statements
                                  7ITEM
      2
                                  MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                                  18ITEM
      3
                                  QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                                  N/AITEM
      4T
                                  CONTROLS
      AND PROCEDURES
                                  33PART
      II—Other Information
                                  34SIGNATURES
                                  38


2





WESTERN
RESERVE BANCORP, INC.


CONSOLIDATED
BALANCE SHEETS





June
      30,
                
                
                December
      31,2010
                
                
                2009(Unaudited)ASSETSCash
      and due from financial institutions
                
                $
                2,926,074
                
                
                $
                2,657,830Interest-bearing
      deposits in other financial institutions
                
                
                24,784,682
                
                
                
                15,005,771Federal
      funds sold
                
                
                139,000
                
                
                
                515,000Cash
      and cash equivalents
                
                
                27,849,756
                
                
                
                18,178,601Securities
      available for sale
                
                
                9,614,215
                
                
                
                10,019,225Loans
      held for sale
                
                
                1,069,273
                
                
                
                690,000Loans,
      net of allowance of $3,058,200 and $2,316,715
                
                
                161,239,364
                
                
                
                164,860,130Restricted
      stock
                
                
                966,100
                
                
                
                826,900Other
      real estate owned
                
                
                1,019,583
                
                
                
                1,067,814Premises
      and equipment, net
                
                
                1,011,905
                
                
                
                950,848Bank
      owned life insurance
                
                
                2,384,364
                
                
                
                2,334,187Prepaid
      Federal Deposit Insurance Corporation premiums
                
                
                839,962
                
                
                
                971,938Accrued
      interest receivable and other assets
                
                
                2,192,871
                
                
                
                2,033,310$
                208,187,393
                
                
                $
                201,932,953LIABILITIES
      AND SHAREHOLDERS' EQUITYDepositsNoninterest-bearing
                
                $
                21,000,423
                
                
                $
                22,789,030Interest-bearing
                
                
                164,263,868
                
                
                
                155,453,259Total
      deposits
                
                
                185,264,291
                
                
                
                178,242,289Federal
      Home Loan Bank advances
                
                
                1,900,000
                
                
                
                3,400,000Short-term
      secured borrowings
                
                
                1,134,386
                
                
                
                -Accrued
      interest payable and other liabilities
                
                
                789,604
                
                
                
                807,324Total
      Liabilities
                
                
                189,088,281
                
                
                
                182,449,613Shareholders'
      EquityCumulative
      preferred stock, no par value, $1,000 liquidation value:Series
      A, fixed rate, 4,700 shares authorized and issued at June 30, 2010 and
      December 31, 2009
                
                
                4,700,000
                
                
                
                4,700,000Discount
      on Series A preferred stock
                
                
                (234,660
                )
                
                
                (264,939
                )Series
      B, fixed rate, 235 shares authorized and issued at June 30, 2010 and
      December 31, 2009
                
                
                235,000
                
                
                
                235,000Premium
      on Series B preferred stock
                
                
                22,896
                
                
                
                25,850Common
      stock, no par value, $1 stated value, 1,500,000 shares authorized, 585,419
      and 584,727 shares issued and outstanding as of June 30, 2010 and December
      31, 2009
                
                
                585,419
                
                
                
                584,727Additional
      paid-in capital
                
                
                9,975,598
                
                
                
                9,933,257Retained
      earnings
                
                
                3,503,584
                
                
                
                4,036,186Accumulated
      other comprehensive income
                
                
                311,275
                
                
                
                233,259Total
      Shareholders' Equity
                
                
                19,099,112
                
                
                
                19,483,340$
                208,187,393
                
                
                $
                201,932,953





See
accompanying notes to consolidated financial statements.


3





WESTERN
RESERVE BANCORP, INC.


CONSOLIDATED
STATEMENTS OF INCOME


(UNAUDITED)





Three
      months ended
                    
                    
                    Six
      months endedJune
      30,
                    
                    
                    June
      30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Interest
      and dividend incomeLoans,
      including fees
                    
                    $
                    2,151,507
                    
                    
                    $
                    1,995,809
                    
                    
                    $
                    4,283,431
                    
                    
                    $
                    3,937,563Securities:Taxable
                    
                    
                    54,081
                    
                    
                    
                    69,108
                    
                    
                    
                    112,109
                    
                    
                    
                    139,845Tax
      exempt
                    
                    
                    44,460
                    
                    
                    
                    41,629
                    
                    
                    
                    88,843
                    
                    
                    
                    83,174Dividends
      on restricted stock
                    
                    
                    11,148
                    
                    
                    
                    9,277
                    
                    
                    
                    21,502
                    
                    
                    
                    18,404Federal
      funds sold and short-term investments
                    
                    
                    14,261
                    
                    
                    
                    16,983
                    
                    
                    
                    23,620
                    
                    
                    
                    36,2942,275,457
                    
                    
                    
                    2,132,806
                    
                    
                    
                    4,529,505
                    
                    
                    
                    4,215,280Interest
      expenseDeposits
                    
                    
                    556,221
                    
                    
                    
                    682,505
                    
                    
                    
                    1,111,831
                    
                    
                    
                    1,400,664Borrowings
                    
                    
                    20,395
                    
                    
                    
                    34,024
                    
                    
                    
                    51,264
                    
                    
                    
                    89,191576,616
                    
                    
                    
                    716,529
                    
                    
                    
                    1,163,095
                    
                    
                    
                    1,489,855Net
      interest income
                    
                    
                    1,698,841
                    
                    
                    
                    1,416,277
                    
                    
                    
                    3,366,410
                    
                    
                    
                    2,725,425Provision
      for loan losses
                    
                    
                    781,699
                    
                    
                    
                    344,000
                    
                    
                    
                    1,567,529
                    
                    
                    
                    482,000Net
      interest income after provision for loan losses
                    
                    
                    917,142
                    
                    
                    
                    1,072,277
                    
                    
                    
                    1,798,881
                    
                    
                    
                    2,243,425Noninterest
      incomeService
      charges on deposit accounts
                    
                    
                    46,878
                    
                    
                    
                    50,370
                    
                    
                    
                    97,942
                    
                    
                    
                    99,451Net
      gains on sales of loans
                    
                    
                    14,363
                    
                    
                    
                    853
                    
                    
                    
                    28,668
                    
                    
                    
                    9,896Other
                    
                    
                    73,616
                    
                    
                    
                    63,751
                    
                    
                    
                    153,785
                    
                    
                    
                    122,077134,857
                    
                    
                    
                    114,974
                    
                    
                    
                    280,395
                    
                    
                    
                    231,424Noninterest
      expenseSalaries
      and employee benefits
                    
                    
                    589,856
                    
                    
                    
                    643,146
                    
                    
                    
                    1,224,802
                    
                    
                    
                    1,259,817Occupancy
      and equipment
                    
                    
                    226,888
                    
                    
                    
                    227,857
                    
                    
                    
                    442,360
                    
                    
                    
                    452,321Federal
      deposit insurance
                    
                    
                    76,395
                    
                    
                    
                    155,083
                    
                    
                    
                    148,240
                    
                    
                    
                    214,017Data
      processing
                    
                    
                    94,523
                    
                    
                    
                    90,593
                    
                    
                    
                    188,177
                    
                    
                    
                    184,500Professional
      fees
                    
                    
                    61,380
                    
                    
                    
                    49,307
                    
                    
                    
                    128,629
                    
                    
                    
                    105,963Taxes
      other than income and payroll
                    
                    
                    48,466
                    
                    
                    
                    46,760
                    
                    
                    
                    98,631
                    
                    
                    
                    95,254Directors'
      fees
                    
                    
                    36,500
                    
                    
                    
                    38,250
                    
                    
                    
                    105,635
                    
                    
                    
                    72,050Collection
      and other real estate owned
                    
                    
                    32,671
                    
                    
                    
                    17,584
                    
                    
                    
                    113,986
                    
                    
                    
                    50,672Marketing
      and advertising
                    
                    
                    26,455
                    
                    
                    
                    18,752
                    
                    
                    
                    50,703
                    
                    
                    
                    46,389Community
      relations and contributions
                    
                    
                    22,655
                    
                    
                    
                    28,341
                    
                    
                    
                    37,595
                    
                    
                    
                    40,879Other
                    
                    
                    113,288
                    
                    
                    
                    83,752
                    
                    
                    
                    178,528
                    
                    
                    
                    150,1401,329,077
                    
                    
                    
                    1,399,425
                    
                    
                    
                    2,717,286
                    
                    
                    
                    2,672,002Income
      (loss) before income taxes
                    
                    
                    (277,078
                    )
                    
                    
                    (212,174
                    )
                    
                    
                    (638,010
                    )
                    
                    
                    (197,153
                    )Income
      tax expense (benefit)
                    
                    
                    (116,311
                    )
                    
                    
                    (92,072
                    )
                    
                    
                    (260,808
                    )
                    
                    
                    (107,714
                    )Net
      income (loss)
                    
                    $
                    (160,767
                    )
                    
                    $
                    (120,102
                    )
                    
                    $
                    (377,202
                    )
                    
                    $
                    (89,439
                    )Preferred
      stock dividends and amortization, net
                    
                    
                    77,700
                    
                    
                    
                    38,849
                    
                    
                    
                    155,400
                    
                    
                    
                    38,849Net
      income (loss) available to common shareholders
                    
                    $
                    (238,467
                    )
                    
                    $
                    (158,951
                    )
                    
                    $
                    (532,602
                    )
                    
                    $
                    (128,288
                    )Earnings
      (loss) per common share:Basic
                    
                    $
                    (0.41
                    )
                    
                    $
                    (0.27
                    )
                    
                    $
                    (0.91
                    )
                    
                    $
                    (0.22
                    )Diluted
                    
                    $
                    (0.41
                    )
                    
                    $
                    (0.27
                    )
                    
                    $
                    (0.91
                    )
                    
                    $
                    (0.22
                    )





See
accompanying notes to consolidated financial statements.


4





WESTERN
RESERVE BANCORP, INC.


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME


(UNAUDITED)





Three
      months ended June 30,
                  
                  
                  Six
      months ended June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Net
      income
                  
                  $
                  (160,767
                  )
                  
                  $
                  (120,102
                  )
                  
                  $
                  (377,202
                  )
                  
                  $
                  (89,439
                  )Other
      comprehensive income, net of tax:Unrealized
      gains on securities arising during the period
                  
                  
                  27,128
                  
                  
                  
                  (49,447
                  )
                  
                  
                  78,016
                  
                  
                  
                  1,573Comprehensive
      income
                  
                  $
                  (133,639
                  )
                  
                  $
                  (169,549
                  )
                  
                  $
                  (299,186
                  )
                  
                  $
                  (87,866
                  )





See
accompanying notes to consolidated financial statements.


5





WESTERN RESERVE BANCORP, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





Six
      months ended June 30,2010
                  
                  
                  2009Cash
      flows from operating activitiesNet
      income (loss)
                  
                  $
                  (377,202
                  )
                  
                  $
                  (89,439
                  )Adjustments
      to reconcile net income to net cash from operating
    activities:Provision
      for loan losses
                  
                  
                  1,567,529
                  
                  
                  
                  482,000Depreciation
                  
                  
                  77,927
                  
                  
                  
                  93,291Net
      accretion of securities
                  
                  
                  (5,522
                  )
                  
                  
                  (7,664
                  )Stock-based
      compensation
                  
                  
                  35,748
                  
                  
                  
                  1,201Loans
      originated for sale
                  
                  
                  (1,125,600
                  )
                  
                  
                  (574,300
                  )Proceeds
      from sales of loan originations
                  
                  
                  1,844,268
                  
                  
                  
                  584,196Gains
      on sales of loans
                  
                  
                  (28,668
                  )
                  
                  
                  (9,896
                  )Loss
      on disposal of fixed assets
                  
                  
                  3,408
                  
                  
                  
                  -Increase
      in cash surrender value of bank owned life insurance
                  
                  
                  (50,177
                  )
                  
                  
                  (51,094
                  )Net
      change in other assets and other liabilities
                  
                  
                  54,421
                  
                  
                  
                  (24,158
                  )Net
      cash from operating activities
                  
                  
                  1,996,132
                  
                  
                  
                  404,137Cash
      flows from investing activitiesAvailable
      for sale securities:Purchases
                  
                  
                  (270,880
                  )
                  
                  
                  (1,540,746
                  )Maturities,
      repayments and calls
                  
                  
                  799,618
                  
                  
                  
                  634,292Purchase
      of restricted stock
                  
                  
                  (139,200
                  )
                  
                  
                  (53,500
                  )Net
      increase in interest-bearing deposits in other banks
                  
                  
                  -
                  
                  
                  
                  (2,000,000
                  )Net
      decrease (increase) in loans
                  
                  
                  892,279
                  
                  
                  
                  (13,095,631
                  )Purchases
      of premises and equipment
                  
                  
                  (142,392
                  )
                  
                  
                  (69,166
                  )Net
      cash from investing activities
                  
                  
                  1,139,425
                  
                  
                  
                  (16,124,751
                  )Cash
      flows from financing activitiesNet
      increase in deposits
                  
                  
                  7,022,002
                  
                  
                  
                  12,376,244Net
      (repayment) proceeds on line of credit
                  
                  
                  -
                  
                  
                  
                  (500,000
                  )Net
      repayment of FHLB advances
                  
                  
                  (1,500,000
                  )
                  
                  
                  (3,100,000
                  )Net
      increase in secured borrowings
                  
                  
                  1,134,386
                  
                  
                  
                  -Net
      proceeds from issuance of preferred stock
                  
                  
                  -
                  
                  
                  
                  4,661,756Dividends
      on preferred stock
                  
                  
                  (128,075
                  )
                  
                  
                  -Proceeds
      from issuance of common stock under ESPP
                  
                  
                  7,285
                  
                  
                  
                  13,905Net
      cash from financing activities
                  
                  
                  6,535,598
                  
                  
                  
                  13,451,905Change
      in cash and cash equivalents
                  
                  
                  9,671,155
                  
                  
                  
                  (2,268,709
                  )Cash
      and cash equivalents at beginning of period
                  
                  
                  18,178,601
                  
                  
                  
                  21,302,463Cash
      and cash equivalents at end of period
                  
                  $
                  27,849,756
                  
                  
                  $
                  19,033,754Supplemental
      cash flow information:Interest
      paid
                  
                  $
                  1,163,336
                  
                  
                  $
                  1,492,521Income
      taxes paid
                  
                  
                  35,000
                  
                  
                  
                  -Supplemental
      disclosure of noncash investing activities:Transfer
      from loans to other real estate owned
                  
                  $
                  -
                  
                  
                  $
                  -Transfer
      from loans to other repossessed assets
                  
                  
                  91,685
                  
                  
                  
                  -





See
accompanying notes to consolidated financial statements.


6


WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


June
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


June
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 June 30,
                                
                                
                                Six
      months ended June 30,2010
                                
                                
                                2009
                                
                                
                                2010
                                
                                
                                2009Numerator:Net
      income (loss)
                                
                                $
                                (160,767
                                )
                                
                                $
                                (120,102
                                )
                                
                                $
                                (377,202
                                )
                                
                                $
                                (89,439
                                )Preferred
      stock dividends and amortization, net
                                
                                
                                (77,700
                                )
                                
                                
                                (38,849
                                )
                                
                                
                                (155,400
                                )
                                
                                
                                (38,849
                                )Net
      income (loss) available to common shareholders
                                
                                
                                (238,467
                                )
                                
                                
                                (158,951
                                )
                                
                                
                                (532,602
                                )
                                
                                
                                (128,288
                                )Denominator:Denominator
      for basic earnings per share available to common shareholders-weighted
      average shares
                                
                                
                                585,075
                                
                                
                                
                                583,950
                                
                                
                                
                                584,904
                                
                                
                                
                                583,645Effect
      of dilutive shares:Nonqualified
      stock options
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Denominator
      for diluted earnings per share available to common
      shareholders
                                
                                
                                585,075
                                
                                
                                
                                583,950
                                
                                
                                
                                584,904
                                
                                
                                
                                583,645Basic
      earnings (loss) per common share
                                
                                $
                                (0.41
                                )
                                
                                $
                                (0.27
                                )
                                
                                $
                                (0.91
                                )
                                
                                $
                                (0.22
                                )Diluted
      earnings (loss) per common share
                                
                                $
                                (0.41
                                )
                                
                                $
                                (0.27
                                )
                                
                                $
                                (0.91
                                )
                                
                                $
                                (0.22
                                )Stock
      options not considered in computing diluted earnings per common share
      because they were antidilutive
                                
                                
                                98,137
                                
                                
                                
                                106,136
                                
                                
                                
                                98,137
                                
                                
                                
                                106,136





Income
Taxes:  The provision for income tax for the first six months
of 2010 was a benefit of $260,808 on pre-tax loss of $638,010 as compared to a
benefit of $107,714 on pre-tax loss of $197,153 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 six months of
the prior year.  The Company and its subsidiary file consolidated
income tax returns.





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


8


WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


June
30, 2010





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





Adoption
of New Accounting Standards:  In January 2010, the Financial
Accounting Standards Board (FASB) issued guidance increasing fair value
disclosure and to clarify some existing disclosure requirements about fair value
measurement.  It requires 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


June
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 ValueJune
      30, 2010Mortgage-backed
      residential
                  
                  $
                  4,252,658
                  
                  
                  $
                  299,238
                  
                  
                  $
                  -
                  
                  
                  $
                  4,551,896Municipal
                  
                  
                  4,889,929
                  
                  
                  
                  172,390
                  
                  
                  
                  -
                  
                  
                  
                  5,062,319$
                  9,142,587
                  
                  
                  $
                  471,628
                  
                  
                  $
                  -
                  
                  
                  $
                  9,614,215December
      31, 2009Mortgage-backed
      residential
                  
                  $
                  5,048,768
                  
                  
                  $
                  215,372
                  
                  
                  $
                  -
                  
                  
                  $
                  5,264,140Municipal
                  
                  
                  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 June 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
                  
                  
                  Fair ValueDue
      in less than one year
                  
                  $
                  200,051
                  
                  
                  $
                  202,108Due
      from one to five years
                  
                  
                  1,008,581
                  
                  
                  
                  1,056,226Due
      from five to ten years
                  
                  
                  3,281,300
                  
                  
                  
                  3,400,793Due
      from ten to fifteen years
                  
                  
                  399,997
                  
                  
                  
                  403,192Mortgage-backed
      residential
                  
                  
                  4,252,658
                  
                  
                  
                  4,551,896$
                  9,142,587
                  
                  
                  $
                  9,614,215





At June
30, 2010, there were no securities that had been in a continuous unrealized loss
position for over twelve months.  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


June
30, 2010





NOTE
3 - LOANS





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





June
      30,
                  
                  
                  December
      31,2010
                  
                  
                  2009Commercial
      real estate
                  
                  $
                  106,716,541
                  
                  
                  $
                  105,923,291Commercial
      construction
                  
                  
                  5,319,009
                  
                  
                  
                  6,319,927Commercial
      business
                  
                  
                  34,133,288
                  
                  
                  
                  37,080,078Home
      equity
                  
                  
                  10,875,890
                  
                  
                  
                  10,211,566Residential
      mortgage and construction
                  
                  
                  841,018
                  
                  
                  
                  933,687Consumer
      and other loans
                  
                  
                  4,390,524
                  
                  
                  
                  4,096,687Purchased
      auto loans
                  
                  
                  2,009,752
                  
                  
                  
                  2,589,488Other
                  
                  
                  11,542
                  
                  
                  
                  22,121164,297,564
                  
                  
                  
                  167,176,845Less
      allowance for loan losses
                  
                  
                  3,058,200
                  
                  
                  
                  2,316,715$
                  161,239,364
                  
                  
                  $
                  164,860,130





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





Three
      months ended June 30,
                  
                  
                  Six
      months ended June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Beginning
      balance
                  
                  $
                  2,322,328
                  
                  
                  $
                  1,824,551
                  
                  
                  $
                  2,316,715
                  
                  
                  $
                  1,743,470Provision
      for loan losses
                  
                  
                  781,699
                  
                  
                  
                  344,000
                  
                  
                  
                  1,567,529
                  
                  
                  
                  482,000Loans
      charged off
                  
                  
                  (46,121
                  )
                  
                  
                  (82,391
                  )
                  
                  
                  (827,694
                  )
                  
                  
                  (140,330
                  )Recoveries
                  
                  
                  294
                  
                  
                  
                  2,409
                  
                  
                  
                  1,650
                  
                  
                  
                  3,429Ending
      balance
                  
                  $
                  3,058,200
                  
                  
                  $
                  2,088,569
                  
                  
                  $
                  3,058,200
                  
                  
                  $
                  2,088,569





At June
30, 2010 and December 31, 2009, loans totaling $4,234,446 and $3,698,621,
respectively, were in nonaccrual status.  There were no loans more
than 90 days past due and still accruing at June 30, 2010 or December 31,
2009.  At June 30, 2010 there were $3,654,542 in restructured loans
not included in nonaccrual loans, and $2,366,050 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.





Loans
individually considered impaired were as follows:





June
      30,
                  
                  
                  December
      31,2010
                  
                  
                  2009Loans
      considered impairedWith
      no allocated allowance for loan losses
                  
                  $
                  2,932,923
                  
                  
                  $
                  3,322,718With
      an allocated allowance for loan losses
                  
                  
                  4,940,124
                  
                  
                  
                  2,103,343$
                  7,873,047
                  
                  
                  $
                  5,426,061Amount
      of the allowance for loan losses allocated
                  
                  $
                  719,604
                  
                  
                  $
                  361,000


11





WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


June
30, 2010





NOTE
4 - DEPOSITS





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





June
      30,
                  
                  
                  December
      31,2010
                  
                  
                  2009Interest-bearing
      checking
                  
                  $
                  9,823,535
                  
                  
                  $
                  9,772,226Savings
                  
                  
                  39,751,864
                  
                  
                  
                  37,132,223Money
      market
                  
                  
                  32,646,909
                  
                  
                  
                  29,107,414Time
      under $100,000
                  
                  
                  32,637,925
                  
                  
                  
                  34,499,050Time
      $100,000 and over
                  
                  
                  49,403,635
                  
                  
                  
                  44,942,346$
                  164,263,868
                  
                  
                  $
                  155,453,259





At June
30, 2010 and December 31, 2009, the Bank had $18,636,124 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 June 30, 2010
and December 31, 2009, respectively.  The advances at June 30, 2010
are collateralized by approximately $54,644,000 of loans secured by real estate
and $488,000 of FHLB stock under a blanket lien agreement.  As of June
30, 2010 the Company’s available borrowing capacity with the FHLB was
$15,550,000, subject to the acquisition of additional shares of FHLB
stock.





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 $5,000,000 at June 30, 2010, with up to
$2,000,000 for the purpose of providing additional capital to the Bank as
needed, and up to $3,000,000 for liquidity purposes.  The interest
rate on the line is variable, at 75 basis points (bp) below the prime rate or
LIBOR plus 1.75%, at the Company’s option at the time the line is drawn, however
the interest rate shall not be less than 4.20%.  The line is secured
by 100% of the stock of the Bank.  In July 2009, the line was renewed
and modified, with a maturity of July 1, 2011.  There were no funds
drawn on the line of credit at June 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 of June 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 2.03% at June 30, 2010, above the covenant
of 1.50% or less.  The Company is in the process of renegotiating and
renewing the loan agreement including the reduction of the amount available on
the liquidity line from $3 million to $1 million, the revision of several
covenants and the waiver of all prior covenant exceptions.


12





WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


June
30, 2010





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





The
Company has the ability to borrow under various other credit facilities that
totaled $3,851,000 at June 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 $2,850,000 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:





Six
      months ended June 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





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 June 30, 2010;
therefore there was no intrinsic value of the options outstanding and
exercisable at June 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.


13





WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


June
30, 2010





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 adjust for differences between the comparable sales
and income data available.  Such adjustments are usually significant
and typically result in Level 3 classification of the inputs for determining
fair value.





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.


14





WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


June
30, 2010





NOTE 7 – FAIR VALUE(continued)





Assets
and liabilities measured at fair value are summarized below:





Fair Value Measurements
    UsingQuoted
      Prices in
                      
                      
                      SignificantActive
      Markets
                      
                      
                      Other
                      
                      
                      Significantfor
      Identical
                      
                      
                      Observable
                      
                      
                      UnobservableAssets
                      
                      
                      Inputs
                      
                      
                      Inputs(Level One)
                      
                      
                      (Level Two)
                      
                      
                      (Level Three)June 30,
      2010Assets
      and liabilities measured at fair value:·on a
      recurring basis:Investment
      securities available for saleMortgage-backed
      residential
                      
                      $
                      -
                      
                      
                      $
                      4,551,896
                      
                      
                      $
                      -Municipal
                      
                      
                      -
                      
                      
                      
                      5,062,319
                      
                      
                      
                      -·on a
      nonrecurring basis:Impaired
      loans
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,486,152Other
      real estate owned
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,019,583December 31, 2009Assets
      and liabilities measured at fair value·on a
      recurring basis:Investment
      securities available for saleMortgage-backed
      residential
                      
                      
                      -
                      
                      
                      
                      5,264,140
                      
                      
                      
                      -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 $3,199,240
with valuation allowances of $713,088 at June 30, 2010, resulting in an
additional provision for loan losses of approximately $487,000 for the six
months ending June 30, 2010.  At December 31, 2009, impaired loans had
a principal balance of $2,103,343, with a valuation allowance of
$361,000.  Impairment charges of $302,000 were recorded through the
provision for loan losses in the six months ended June 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
June 30, 2010, resulting in a write-down of $47,931 for the six months ended
June 30, 2010.


15





WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


June
30, 2010





NOTE 7 – FAIR VALUE(continued)





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





June 30, 2010
                  
                  
                  December 31, 2009Carrying
                    Amount
                  
                  
                  Estimated
                    Fair Value
                  
                  
                  Carrying
                    Amount
                  
                  
                  Estimated
                    Fair ValueCash
      and cash equivalents
                  
                  $
                  27,849,756
                  
                  
                  $
                  27,850,000
                  
                  
                  $
                  18,178,601
                  
                  
                  $
                  18,179,000Securities
      available for sale
                  
                  
                  9,614,215
                  
                  
                  
                  9,614,000
                  
                  
                  
                  10,019,225
                  
                  
                  
                  10,019,000Loans,
      net of allowance
                  
                  
                  161,239,364
                  
                  
                  
                  161,309,000
                  
                  
                  
                  164,860,130
                  
                  
                  
                  164,395,000Loans
      held for sale
                  
                  
                  1,069,273
                  
                  
                  
                  1,069,000
                  
                  
                  
                  690,000
                  
                  
                  
                  697,000Accrued
      interest receivable
                  
                  
                  483,596
                  
                  
                  
                  484,000
                  
                  
                  
                  491,845
                  
                  
                  
                  492,000Demand
      and savings deposits
                  
                  
                  (103,222,731
                  )
                  
                  
                  (103,223,000
                  )
                  
                  
                  (98,800,893
                  )
                  
                  
                  (98,801,000
                  )Time
      deposits
                  
                  
                  (82,041,560
                  )
                  
                  
                  (81,273,000
                  )
                  
                  
                  (79,441,396
                  )
                  
                  
                  (79,453,000
                  )Federal
      Home Loan Bank advances
                  
                  
                  (1,900,000
                  )
                  
                  
                  (1,931,000
                  )
                  
                  
                  (3,400,000
                  )
                  
                  
                  (3,401,000
                  )Short-term
      secured borrowings
                  
                  
                  (1,134,386
                  )
                  
                  
                  (1,134,386
                  )
                  
                  
                  -
                  
                  
                  
                  -Accrued
      interest payable
                  
                  
                  (115,832
                  )
                  
                  
                  (116,000
                  )
                  
                  
                  (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


June
30, 2010





NOTE
8 – REGULATORY CAPITAL MATTERS





During
the six months ended June 30, 2010 the Bank had two intercompany transactions
with its 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 and 2) of the $4.0 million repaid, the Holding Company downstreamed $3.5
million to the Bank as paid-in capital which qualified as Tier-one regulatory
capital on June 30, 2010.





At June
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 to be
                    considered
                  
                  
                  Minimum required
                    for capitalJune 30,
                    2010
                  
                  
                  December 31,
                    2009
                  
                  
                  well-
                    capitalized
                  
                  
                  adequacy
                    purposesTier
      1 “core” capital to risk-weighted assets
                  
                  
                  10.9
                  %
                  
                  
                  8.7
                  %
                  
                  
                  6.0
                  %
                  
                  
                  4.0
                  %Total
      capital to risk-weighted assets
                  
                  
                  12.1
                  %
                  
                  
                  12.3
                  %
                  
                  
                  10.0
                  %
                  
                  
                  8.0
                  %Tier
      1 leverage ratio
                  
                  
                  8.8
                  %
                  
                  
                  7.7
                  %
                  
                  
                  5.0
                  %
                  
                  
                  4.0
                  %


17


WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


June
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 June 30, 2010, to that of December 31, 2009, and the results
of operations for the three and six months ended June 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 June 30, 2010 increased 3.1% to $208,187,000 compared with
$201,933,000 at December 31, 2009.





Cash and
cash equivalents increased $9,671,000 to $27,850,000, or 53.2%, from $18,179,000
at year-end 2009.  This increase was the result of an increase in
deposits of $7,022,000 combined with a decrease in loans of $2,879,000 during
the same period.





As of
June 30, 2010, there were approximately $4,552,000 in mortgage-backed securities
and $5,062,000 in tax-exempt municipal bonds in the available-for-sale
securities portfolio.  These totals include the effect of unrealized
gains of $472,000 in the available-for-sale securities portfolio as of June 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


June
30, 2010





FINANCIAL CONDITION(continued)





Loans
before the allowance for loan losses decreased $2.9 million to $164,298,000 at
June 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 management expects the
Company’s focus on growth will be less than in prior years in response to the
continuing weak economy and its negative impact on some borrowers and potential
borrowers.





As of
June 30, 2010, commercial loans totaled $146,169,000, or 89.0% of total
loans.  Home equity lines and residential real estate loans totaled
$11,717,000, or 7.1% of total loans and consumer and other loans totaled
$6,412,000, or 3.9% of total loans.





The
Company’s loan-to-deposit ratio decreased to 88.7% at June 30, 2010, compared to
93.8% at December 31, 2009.  The Company’s loan-to-assets ratio also
decreased in the first six months of 2010, to 78.9% at June 30, 2010 from 82.8%
at December 31, 2009.  The growth in total assets of $6.3 million was
primarily due to an increase in interest bearing deposits at other financial
institutions of $9.7 million partially offset by a decrease in loans, net of the
allowance for loan losses of $3.6 million.  Management anticipates
that the loan-to-deposit ratio for the remainder of 2010 will be approximately
85% to 90% and the loan-to-assets ratio will be approximately 75% to
85%.





Of the
total loans at June 30, 2010, approximately $121,703,000 or 74.1% are at a
variable interest rate, and $42,595,000 or 25.9% are at a fixed interest
rate.  Including scheduled principal repayments, approximately
$107,469,000, or 65.4%, of loans mature or are scheduled to reprice within
twelve months.  An additional $55,190,000 or 33.6% 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 first half of 2010.  The sold portion of these loans is
carried as loans held for sale until the 90-day warranty period has expired in
accordance with accounting guidance on transfers of financial assets. The funds
received are carried as a secured liability. The Bank expects to recognize a
gain of approximately $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 $1,567,529 and $482,000 for the six months


19





WESTERN RESERVE BANCORP,
INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


June
30, 2010





FINANCIAL CONDITION(continued)





ended
June 30, 2010 and 2009, respectively, representing an increase of
$1,085,529.  Management believes the allowance for loan losses at June
30, 2010, is adequate to absorb probable incurred losses in the loan
portfolio.





The
allowance for loan losses and related information for the six months ended June
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
                  
                  
                  (29,305
                  )
                  
                  
                  (766,894
                  )
                  
                  
                  (6,785
                  )
                  
                  
                  (24,710
                  )
                  
                  
                  (827,694
                  )Recoveries
                  
                  
                  -
                  
                  
                  
                  294
                  
                  
                  
                  1,332
                  
                  
                  
                  24
                  
                  
                  
                  1,650Provisions
                  
                  
                  622,486
                  
                  
                  
                  906,224
                  
                  
                  
                  35,711
                  
                  
                  
                  3,108
                  
                  
                  
                  1,567,529Ending
      Balance
                  
                  $
                  2,265,256
                  
                  
                  $
                  669,847
                  
                  
                  $
                  83,919
                  
                  
                  $
                  39,178
                  
                  
                  $
                  3,058,200Components
      of the Allowance for Loan Losses:General
      allowance
                  
                  $
                  1,649,646
                  
                  
                  $
                  565,853
                  
                  
                  $
                  83,919
                  
                  
                  $
                  39,178
                  
                  
                  $
                  2,338,596Special
      allowance
                  
                  
                  615,610
                  
                  
                  
                  103,994
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  719,604Subtotal
                  
                  $
                  2,265,256
                  
                  
                  $
                  669,847
                  
                  
                  $
                  83,919
                  
                  
                  $
                  39,178
                  
                  
                  $
                  3,058,200Loans
      evaluated for impairment at period-end:Individually
                  
                  $
                  7,145,135
                  
                  
                  $
                  727,912
                  
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  $
                  7,873,047Collectively
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  -
                  
                  
                  
                  15,961
                  
                  
                  
                  15,961





In the
first six months of 2010, loans totaling $828,000 were charged off and $2,000
was recovered on loans previously charged off.  In the like period in
2009, loans totaling $140,000 were charged off and $3,000 was recovered on loans
previously charged off. The allowance for loan losses was 1.86% and 1.39% of
total loans at June 30, 2010 and December 31, 2009, respectively. At June 30, 2010,
$720,000 or 23.53% 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 June
30, 2010, thirty-seven loans to sixteen borrowers totaling $4,234,466 were in
nonaccrual status, compared to twenty-six loans to sixteen borrowers totaling
$3,698,621 at year-end 2009.  At June 30, 2010, there were ten loans
to five borrowers not on nonaccrual status totaling $3,654,542 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 $1.8 million
classified as TDRs.  The TDR loans were making payments in accordance
with their modified terms at June 30, 2010 and December 31,
2009.


20





WESTERN RESERVE BANCORP,
INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


June
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
June 30, 2010, is included in the following table.





Commercial
                    Real Estate
                  
                  
                  Commercial&
                    Industrial
                  
                  
                  Residential
                  
                  
                  Consumer
                  
                  
                  TotalGrade:Pass
                  
                  $
                  81,748,695
                  
                  
                  $
                  29,143,384
                  
                  
                  $
                  11,716,908
                  
                  
                  $
                  6,395,857
                  
                  
                  $
                  129,004,844Watch
                  
                  
                  8,450,691
                  
                  
                  
                  835,064
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  9,285,755Special
      mention
                  
                  
                  8,509,363
                  
                  
                  
                  797,014
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  9,306,377Substandard
                  
                  
                  6,181,666
                  
                  
                  
                  2,629,914
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  8,811,580Nonaccruing
      and troubled debt restructurings
                  
                  
                  7,145,135
                  
                  
                  
                  727,912
                  
                  
                  
                  -
                  
                  
                  
                  15,961
                  
                  
                  
                  7,889,008Total
                  
                  $
                  112,035,550
                  
                  
                  $
                  34,133,288
                  
                  
                  $
                  11,716,908
                  
                  
                  $
                  6,411,818
                  
                  
                  $
                  164,297,564





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
second quarter of 2010, compared to the first quarter of 2010, commercial real
estate loans graded lower than “pass” increased by $7.5 million, while
commercial and industrial loans graded lower than “pass” increased by $1.1
million.  During the second quarter, 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 past due loans are very low, with only $146,000 in delinquent loans
(excluding loans on nonaccrual status).  Delinquent loans by type and
number of days delinquent at June 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
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  38,251
                  
                  
                  $
                  38,25161
      to 90
                  
                  
                  107,711
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  107,711Over
      90
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -


21





WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


June
30, 2010





FINANCIAL CONDITION(continued)





At June
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 $32,553 and $12,100 in the first six 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 $185,264,000 at June 30, 2010, an increase of 3.9% from the $178,242,000 at
December 31, 2009.  Deposits at June 30, 2010 consisted
of:





Type of deposit
                
                Balance
                
                
                % TotalNoninterest-bearing
      checking
                
                $
                21,000,000
                
                
                
                11.3
                %Interest-bearing
      checking
                
                
                9,824,000
                
                
                
                5.3
                %Variable
      rate savings/money market (Market Rate Savings Accounts)
                
                
                72,399,000
                
                
                
                39.1
                %Time
      deposits
                
                
                82,041,000
                
                
                
                44.3
                %Total
                
                $
                185,264,000
                
                
                
                100.0
                %




Included
in the time deposits total at June 30, 2010 and December 31, 2009 were
$18,636,000 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 0.75% to 4.90%.  As of June 30, 2010, the weighted average
interest rate paid on these CDs was 2.05% and the weighted average remaining
maturity was 14.6 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.





The
Brecksville office, which opened in October 2004, continues to meet management’s
expectations in terms of loan and deposit growth.  At June 30, 2010,
that location’s total loans were $28,713,000 and total deposits were
$48,607,000.  Approximately 54% of Brecksville’s deposits are in lower
cost Market Rate Savings Accounts.





Federal
Home Loan Bank (FHLB) advances decreased to $1.9 million at June 30, 2010 from
$3.4 million at year-end 2009.  FHLB advances totaling $1,500,000
matured and were repaid in the first six months of 2010.   FHLB
advances are collateralized by loans secured by real estate under a blanket lien
agreement.  At June 30, 2010 the Company’s available borrowing
capacity with the FHLB was $15.6 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


June
30, 2010





Shareholders’
Equity





Total
shareholders’ equity decreased $384,000 to $19,099,000 at June 30, 2010, from
$19,483,000 at December 31, 2009.  This decrease was a result of net
loss of $377,000 for the first six months of 2010 and dividends on preferred
stock of $128,000, 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
$7,000 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
$78,000.





RESULTS
OF OPERATIONS – FOR THE SIX MONTHS ENDED JUNE 30, 2010





Overview





Net loss
for the first six months of 2010 was $377,000, a larger loss of $288,000 from
the $89,000 net loss in the same period in 2009 primarily due to an increase in
the provision for loan losses of $1,086,000, partially offset by a $641,000
increase in net interest income.  Net loss available to common
shareholders for the first six months of 2010 was $533,000, or $0.91 loss per
basic and diluted share after preferred stock dividends of $128,000 and the
amortization of premiums of $27,000 in the first six months of
2010.  Net loss available to common shareholders was $128,000 or $0.22
per basic and diluted share for the first six months of 2009.





Net
Interest Income





Net
interest income before the provision for loan losses in the first six months of
2010 was $3,366,000, an increase of $641,000, or 23.5%, from the $2,725,000
earned in the same period of 2009.  Net interest income increased for
the first six months of 2010 from the comparable period of 2009 primarily due to
the increase in loan volume combined with the decrease in interest rates on time
deposits.  Net interest margin was 3.49% for the six months ended June
30, 2010, representing an increase of 39 basis points (bp) from the 3.10% for
the like period in 2009.





The
following table illustrates the average balances and annualized interest rates
for the six months ended June 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


June
30, 2010





RESULTS OF
OPERATIONS – FOR THE SIX MONTHS ENDED JUNE 30, 2010(continued)


Six
      months ended
                        
                        
                        Six
      months endedJune
      30, 2010
                        
                        
                        June
      30, 2009Average
                        
                        
                        
                        
                        
                        Average
                        
                        
                        Average
                        
                        
                        
                        
                        
                        AverageBalance
                        
                        
                        Interest
                        
                        
                        Rate
                        
                        
                        Balance
                        
                        
                        Interest
                        
                        
                        Rate($
      in thousands)Interest-earning
      assets:Federal
      funds sold and other short term funds
                        
                        $
                        19,164
                        
                        
                        $
                        24
                        
                        
                        
                        0.25
                        %
                        
                        $
                        19,026
                        
                        
                        $
                        36
                        
                        
                        
                        0.38
                        %Securities
      — taxable
                        
                        
                        4,919
                        
                        
                        
                        112
                        
                        
                        
                        4.84
                        %
                        
                        
                        5,754
                        
                        
                        
                        140
                        
                        
                        
                        5.09
                        %Securities
      — tax exempt
                        
                        
                        4,787
                        
                        
                        
                        129
                        
                        
                        
                        5.63
                        %
                        
                        
                        4,417
                        
                        
                        
                        119
                        
                        
                        
                        5.64
                        %Restricted
      stock
                        
                        
                        897
                        
                        
                        
                        21
                        
                        
                        
                        4.83
                        %
                        
                        
                        761
                        
                        
                        
                        18
                        
                        
                        
                        4.88
                        %Loans
                        
                        
                        167,022
                        
                        
                        
                        4,283
                        
                        
                        
                        5.17
                        %
                        
                        
                        149,605
                        
                        
                        
                        3,938
                        
                        
                        
                        5.31
                        %Total
      interest-earning assets
                        
                        
                        196,789
                        
                        
                        
                        4,569
                        
                        
                        
                        4.68
                        %
                        
                        
                        179,563
                        
                        
                        
                        4,251
                        
                        
                        
                        4.77
                        %Noninterest
      earning assets
                        
                        
                        7,583
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        5,778Total
      assets
                        
                        $
                        204,372
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        185,341Interest-bearing
      liabilities:Checking
      accounts
                        
                        $
                        9,885
                        
                        
                        
                        25
                        
                        
                        
                        0.50
                        %
                        
                        $
                        7,889
                        
                        
                        
                        25
                        
                        
                        
                        0.63
                        %Market
      rate savings accounts
                        
                        
                        68,388
                        
                        
                        
                        265
                        
                        
                        
                        0.78
                        %
                        
                        
                        69,151
                        
                        
                        
                        342
                        
                        
                        
                        1.00
                        %Time
      deposits
                        
                        
                        82,333
                        
                        
                        
                        822
                        
                        
                        
                        2.01
                        %
                        
                        
                        69,195
                        
                        
                        
                        1,034
                        
                        
                        
                        3.01
                        %Federal
      Home Loan Bank advances and other borrowings
                        
                        
                        2,789
                        
                        
                        
                        51
                        
                        
                        
                        3.71
                        %
                        
                        
                        5,004
                        
                        
                        
                        89
                        
                        
                        
                        3.59
                        %Total
      interest-bearing liabilities
                        
                        
                        163,395
                        
                        
                        
                        1,163
                        
                        
                        
                        1.44
                        %
                        
                        
                        151,239
                        
                        
                        
                        1,490
                        
                        
                        
                        1.99
                        %Noninterest-bearing
      liabilities
                        
                        
                        21,686
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        18,154Shareholders'
      equity
                        
                        
                        19,291
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        15,948Total
      liabilities and shareholders' equity
                        
                        $
                        204,372
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        185,341Net
      interest income
                        
                        
                        
                        
                        
                        
                        3,406
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        2,761Tax
      equivalent adjustment
                        
                        
                        
                        
                        
                        
                        (40
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (36
                        )Net
      interest income per financial statements
                        
                        
                        
                        
                        
                        $
                        3,366
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        2,725Net
      interest margin(Net
      yield on average earning assets)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.49
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.10
                        %





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:


24


WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


June
30, 2010





RESULTS OF
OPERATIONS – FOR THE SIX MONTHS ENDED JUNE 30, 2010(continued)





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 inNet Interest IncomeSix
      months endedJune 30, 2010 vs. 2009Increase (Decrease) due toVolume
                        
                        
                        Rate
                        
                        
                        Net($ in thousands)Interest
      income:Federal
      funds sold and other short term funds
                        
                        $
                        -
                        
                        
                        $
                        (12
                        )
                        
                        $
                        (12
                        )Securities
      — taxable
                        
                        
                        (21
                        )
                        
                        
                        (7
                        )
                        
                        
                        (28
                        )Securities
      — tax exempt
                        
                        
                        10
                        
                        
                        
                        -
                        
                        
                        
                        10Restricted
      stock
                        
                        
                        3
                        
                        
                        
                        -
                        
                        
                        
                        3Loans
                        
                        
                        434
                        
                        
                        
                        (89
                        )
                        
                        
                        345Total
      interest-earning assets
                        
                        
                        426
                        
                        
                        
                        (108
                        )
                        
                        
                        318Interest
      expense:Transaction
      accounts (NOW)
                        
                        
                        (6
                        )
                        
                        
                        6
                        
                        
                        
                        -Market
      rate savings accounts
                        
                        
                        4
                        
                        
                        
                        73
                        
                        
                        
                        77Time
      deposits
                        
                        
                        (151
                        )
                        
                        
                        363
                        
                        
                        
                        212Federal
      Home Loan Bank advances and other borrowings
                        
                        
                        42
                        
                        
                        
                        (4
                        )
                        
                        
                        38Total
      interest-bearing liabilities
                        
                        
                        (111
                        )
                        
                        
                        438
                        
                        
                        
                        327Change
      in net interest income
                        
                        $
                        315
                        
                        
                        $
                        330
                        
                        
                        $
                        645





Interest
Income





Interest
and fee income on loans for the first six months of 2010 was $4,283,000, an
increase of $345,000 or 8.8% from $3,938,000 for the first six months of 2009
primarily due to the increase in loan volume, partially offset by lower interest
rates earned on loans.  Tax equivalent interest and dividend income
from securities and short-term funds decreased 8.6% to $286,000 through the
first six months of 2010, from $313,000 in the same period in 2009 primarily due
to lower rates earned on Federal funds sold and other short-term
funds.


25





WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


June
30, 2010





RESULTS OF
OPERATIONS – FOR THE SIX MONTHS ENDED JUNE 30, 2010(continued)





Interest
Expense





Interest
expense decreased 21.9% when comparing the six months ended June 30, 2010 with
the same period of 2009.  Total interest expense was $1,163,000 for
the first six months of 2010, compared to $1,490,000 in the same period of
2009.  Interest on deposits decreased $289,000, or 20.6%, to
$1,112,000 in the first six months of 2010, from $1,401,000 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 increasing CD volume.  Interest on
borrowings was $51,000 for the six months ending June 30, 2010 compared to
$89,000 for the first six months of 2009 primarily due to a decrease in the
average balance in FHLB advances in 2010 as compared to 2009.





Net
Interest Margin





Net
interest margin increased 39 bp to 3.49% in the first six months of 2010 from
3.10% in the like period of 2009 primarily due to the increase in loan volume
and the decrease in interest rates paid on deposits.





The yield
on earning assets decreased 9 bp to 4.68% for the first six months of 2010
compared to 4.77% in the same period of 2009.  In the first six months
of 2010, the yield on loans was 5.17%, down 14 bp from 5.31% in the first six
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 six months of 2010, the cost of interest-bearing deposits was 1.40%, down
54 bp from 1.94% 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 1.44% in the first six months of 2010, compared with 1.99% in
the same period of 2009.





Provision
for Loan Losses





The
provision for loan losses was $1,567,529 and $482,000 for the six months ended
June 30, 2010 and 2009, respectively, representing an increase of
$1,085,529.  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.





Noninterest
Income





Total
noninterest income for the first six months of 2010 was $280,000, an increase of
21.2% from $231,000 for the same period in 2009 primarily due to increases in
rental income of $21,000 and in gains on sales of loans of
$19,000.


26


WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


June
30, 2010





RESULTS OF
OPERATIONS – FOR THE SIX MONTHS ENDED JUNE 30, 2010(continued)





In the
first six months of 2010, rental income from leasing the Company’s two OREO
properties to three tenants totaled $33,000 while in the same period in 2009
rental income from OREO property leased to one tenant totaled $12,000. The
increase in gains on loan sales is due to the sale of eleven residential
mortgage loans totaling $1,816,000 for a total gain of $29,000 in the 2010 six
months compared to the sale of five mortgage loans totaling $574,000 for a total
gain of $10,000 in the 2009 six months.





Noninterest
Expenses





Noninterest
expenses were $2,717,000 for the first six months of 2010, an increase of 1.7%
over the $2,672,000 for the same period of 2009.  This increase is
mainly attributable to an increase in collection and OREO expense of $63,000
related to the cost to re-appraise properties securing nonaccrual and other
troubled loans and an increase in directors’ fees of $35,000 related to
extending stock options in the first quarter of 2010 that would have expired in
2010 and 2011 for an additional five years.  These increases are
partially offset by decreases of $35,000 in salaries and benefits related to a
reduction in the number of full-time-equivalent employees and a $66,000 decrease
in FDIC insurance.  However, in 2009 there was a special FDIC
assessment totaling $90,000, while regular premiums have increased $24,000 in
the current year due to the increase in the Company’s total
deposits.





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





Six
      months endedJune
      30,2010
                    
                    
                    2009Supplies,
      printing and postage
                    
                    $
                    40,360
                    
                    
                    $
                    39,157Loan
      expenses
                    
                    
                    25,442
                    
                    
                    
                    20,881Dues
      and memberships
                    
                    
                    14,297
                    
                    
                    
                    11,533Travel
      and entertainment
                    
                    
                    19,479
                    
                    
                    
                    19,538Insurance
                    
                    
                    15,399
                    
                    
                    
                    16,411Telephone
                    
                    
                    10,133
                    
                    
                    
                    12,661CDARS
      fees
                    
                    
                    11,466
                    
                    
                    
                    15,309Losses
      on other assets
                    
                    
                    31,339
                    
                    
                    
                    —Other
                    
                    
                    10,613
                    
                    
                    
                    14,650$
                    178,528
                    
                    
                    $
                    150,140





Total
income tax expense 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.


27


WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


June
30, 2010





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





The
Company’s net loss for the second quarter of 2010 was $161,000 down $41,000, or
34.2%, from the net loss of $120,000 in the same period in 2009.  The
decrease was primarily due to a $438,000 increase in the provision for loan
losses partially offset by an increase of $283,000 in net interest income and a
$70,000 decrease in noninterest expense.  Net loss available to common
shareholders was $238,000, or $0.41 loss per basic and diluted share after
dividends and amortization of premiums on preferred stock of $78,000 in the
second quarter of 2010. In the second quarter of 2009, net loss available to
common shareholders was $159,000, or $0.27 per basic and diluted
share.





Net
Interest Income





Net
interest income before the provision for loan losses in the second quarter of
2010 was $1,699,000, an increase of $283,000, or 20.0%, from the $1,416,000 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 $142,000
and interest expense decreased $140,000 in the second quarter 2010 as compared
to the second quarter of 2009.  In the second quarter of 2010, the net
interest margin increased to 3.45%, up 34 bp from 3.11% for the second quarter
of 2009.





The yield
on loans was 5.18% in the second quarter of 2010, down 10 bp from 5.28% for the
same quarter of 2009.  The overall cost of interest-bearing funds
(deposits and borrowings) was 1.39% for the second quarter of 2010, compared
with 1.86% for the second quarter of 2009.  The cost of
interest-bearing deposits was 1.37%, down 44 bp from 1.81% for the like quarter
of 2009.





Provision
for Loan Losses





The
provision for loan losses was $782,000 in the 2010 second quarter, an increase
of $438,000 from the $344,000 provision in the 2009 quarter.  The
increase in the provision for loan losses for the current quarter was due to
increases in classified assets.





Noninterest
Income





Total
noninterest income for the second quarter of 2010 was $135,000, an increase of
$20,000, or 17.3%, from $115,000 for the same period in 2009.  The
increase was primarily due to increases in gains on the sales of residential
mortgage loans of $14,000 and rental income of $33,000 on the OREO
property.


28


WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


June
30, 2010





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





Noninterest
Expense





In the
second quarter of 2010, total noninterest expense decreased $70,000, or 5.0%,
compared with the same quarter of 2009.  The decrease in noninterest
expense was primarily due to decreases in FDIC insurance of $79,000. The Company
accrued $90,000 for a special FDIC assessment in the second quarter of 2009,
which was not repeated in 2010.  There was also a decrease of $53,000
in salaries and benefits related to attrition.





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


Three
      months endedJune
      30,2010
                  
                  
                  2009Supplies,
      printing and postage
                  
                  $
                  20,228
                  
                  
                  $
                  18,187Loan
      expenses
                  
                  
                  12,797
                  
                  
                  
                  12,105Travel
      and entertainment
                  
                  
                  12,469
                  
                  
                  
                  12,425Insurance
                  
                  
                  10,692
                  
                  
                  
                  9,854CDARS
      fees
                  
                  
                  8,130
                  
                  
                  
                  11,466Telephone
                  
                  
                  5,072
                  
                  
                  
                  6,068Dues
      and subscriptions
                  
                  
                  6,717
                  
                  
                  
                  6,003Losses
      on other assets
                  
                  
                  31,339
                  
                  
                  
                  -Other
                  
                  
                  5,844
                  
                  
                  
                  7,644$
                  113,288
                  
                  
                  $
                  83,752


29





WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


June
30, 2010





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 $37,464,000
at June 30, 2010, compared to $28,888,000 at December 31, 2009.





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, and acquiring one-way buy CDARS, additional national
market CDs or brokered deposits.  The Company also can borrow under
various lines of credit.





As
discussed previously, total shareholders’ equity decreased $384,000, to
$19,099,000 at June 30, 2010 from $19,483,000 at December 31,
2009.  The decrease was due to net loss of $377,000 for the first six
months of 2010 and dividends on preferred stock of $128,000, partially offset by
the $35,000 impact on paid-in capital of the extension of the expiration date of
director stock options, proceeds of $7,000 from the Employee Stock Purchase Plan
(resulting in 692 shares issued), and an increase of $78,000 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 June 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


30





WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


June
30, 2010





LIQUIDITY AND CAPITAL RESOURCES(continued)





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 June 30, 2010, a total of 5,311 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.





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 June 30, 2010 the Company was
minimally liability sensitive in the one-year category, with $134.2 million in
assets and $135.2 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 six
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 from an increase in interest rates, since interest income will increase
more rapidly than interest expense.   The model indicates that if
market interest rates were to experience an immediate increase of 100 bp or 200
bp, the company’s net interest income would increase by approximately 1.3% and
2.6%, respectively.  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.


31


WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


June
30, 2010





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


June
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 June 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 June 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 six months ended June 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


June
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


June
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


June
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)
              
              *11
              
              Statement
      re: Computation of Per Share Earnings (incorporated by reference to the
      Company’s Report on Form 10-Q filed with the Commission on August 13,
      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


36





WESTERN
RESERVE BANCORP, INC.


FORM
10-Q


June
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


Six
months ended June 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:
      August 13, 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