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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-QSB þ
    
    Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarter ended March 31, 2005 o
    
    Transition Report Under Section 13 or 15(d) of the Exchange Act
 Commission file number 333-43361 WESTERN RESERVE BANCORP, INC. 
  Ohio
    
    31-1566623(State or other jurisdiction of
incorporation or organization)
    
    (IRS Employer
Identification No.)
 4015 Medina Road, Suite 100, P.O. Box 585, Medina, Ohio 44256 
  (330) 764-3131 
  Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 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. þ o
 State the number of shares outstanding of each of the issuers classes of common equity, as of the
latest practicable date. Common Stock, no par value, $1.00 stated value 
  456,382 common shares 
  Transitional Small Business Disclosure Format (Check one):                Yes  o   No  þ   Page 1




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WESTERN RESERVE BANCORP, INC.
FORM 10-QSB
Quarter ended March 31, 2005 PagePART IFinancial InformationITEM 1 FINANCIAL STATEMENTSConsolidated Balance Sheets as of March 31, 2005 and December 31, 2004
    
    
    3Consolidated Statements of Income for the three months ended March 31, 2005 and 2004
    
    
    4Consolidated Statements of Comprehensive Income for the three months ended March 31, 2005 and 2004
    
    
    5Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004
    
    
    6Notes to Consolidated Financial Statements
    
    
    7ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    13ITEM 3 CONTROLS AND PROCEDURES
    
    
    26PART IIOther Information
    
    
    27SIGNATURES
    
    
    30EX-4.2 Legend for CertificatesEX-10.10 First Amendment to Loan AgreementEX-31.1 Certification 302 - CEOEX-31.2 Certification 302 - CFOEX-32.1 Certification 906 - CEOEX-32.2 Certification 906 - CFO
  Page 2




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WESTERN RESERVE BANCORP, INC. 
  (Unaudited)March 31,
    
    
    December 31,2005
    
    
    2004AssetsCash and due from financial institutions
    
    $
    2,473,437
    
    
    $
    2,059,119Federal funds sold and other short-term funds
    
    
    2,798,000
    
    
    
    4,877,000Cash and cash equivalents
    
    
    5,271,437
    
    
    
    6,936,119Securities available for sale
    
    
    1,336,259
    
    
    
    1,204,686Loans held for sale
    
    
    
    
    
    
    250,835Loans
    
    
    107,788,154
    
    
    
    104,735,255Allowance for loan losses
    
    
    (1,630,833
    )
    
    
    (1,605,933
    )Loans, net
    
    
    106,157,321
    
    
    
    103,129,322Federal Reserve Bank stock
    
    
    198,300

    
    
    
    198,300Federal Home Loan Bank stock
    
    
    281,900
    
    
    
    278,900Premises and equipment, net
    
    
    1,397,791
    
    
    
    1,371,248Accrued interest receivable and other assets
    
    
    1,960,851
    
    
    
    1,880,740Total Assets
    
    $
    116,603,859
    
    
    $
    115,250,150Liabilities and Shareholders EquityDepositsNoninterest-bearing
    
    $
    12,802,380
    
    
    $
    12,668,555Interest-bearing
    
    
    90,199,659
    
    
    
    89,158,414Total deposits
    
    
    103,002,039
    
    
    
    101,826,969Federal Home Loan Bank advances
    
    
    2,500,000
    
    
    
    2,500,000Accrued interest payable and other liabilities
    
    
    314,772
    
    
    
    307,252Total Liabilities
    
    
    105,816,811
    
    
    
    104,634,221Shareholders EquityCommon stock, without par value, $1 stated value:750,000 shares authorized; 455,882 and
455,624 shares issued and outstanding as of
March 31, 2005 and December 31, 2004
    
    
    455,882
    
    
    
    455,624Additional paid-in capital
    
    
    9,491,313
    
    
    
    9,484,470Retained earnings
    
    
    853,811
    
    
    
    678,651Accumulated other comprehensive (loss)
    
    
    (13,958
    )
    
    
    (2,816
    )Total Shareholders Equity
    
    
    10,787,048
    
    
    
    10,615,929Total Liabilities and Shareholders Equity
    
    $
    116,603,859
    
    
    $
    115,250,150
 See accompanying notes to consolidated financial statements. Page 3




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WESTERN RESERVE BANCORP, INC. 
   Three months ended March 31,2005
    
    
    2004Interest incomeLoans, including fees
    
    $
    1,653,360
    
    
    $
    1,385,573Securities
    
    
    18,033
    
    
    
    21,553Federal funds sold and other
short-term funds
    
    
    27,170
    
    
    
    7,7311,698,563
    
    
    
    1,414,857Interest expenseDeposits
    
    
    562,144
    
    
    
    437,551Borrowings
    
    
    20,034
    
    
    
    42,116582,178
    
    
    
    479,667Net interest income
    
    
    1,116,385
    
    
    
    935,190Provision for loan losses
    
    
    28,900
    
    
    
    63,400Net interest income after
provision for loan losses
    
    
    1,087,485
    
    
    
    871,790Noninterest incomeService charges on deposit accounts
    
    
    28,551
    
    
    
    29,004Net gains on sales of loans
    
    
    77,839
    
    
    
    1,492Other
    
    
    41,306
    
    
    
    31,196147,696
    
    
    
    61,692Noninterest expenseSalaries and employee benefits
    
    
    484,804
    
    
    
    396,147Premises and equipment, net
    
    
    194,179
    
    
    
    95,772Data processing
    
    
    74,267
    
    
    
    56,973Professional fees
    
    
    79,831
    
    
    
    56,277Taxes other than income and payroll
    
    
    26,309
    
    
    
    24,232Community and shareholder relations
and contributions
    
    
    15,761
    
    
    
    17,822Supplies, printing and postage
    
    
    21,682
    
    
    
    16,541Other
    
    
    74,414
    
    
    
    64,102971,247
    
    
    
    727,866Income before income taxes
    
    
    263,934
    
    
    
    205,616Income tax expense
    
    
    88,773
    
    
    
    69,177Net income
    
    $
    175,161
    
    
    $
    136,439Average shares outstanding (basic)
    
    
    455,676
    
    
    
    388,052Average shares outstanding (diluted)
    
    
    470,948
    
    
    
    397,343Basic income per share
    
    $
    0.38
    
    
    $
    0.35Diluted income per share
    
    $
    0.37
    
    
    $
    0.34
 See accompanying notes to consolidated financial statements. Page 4




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WESTERN RESERVE BANCORP, INC. 
   Three months ended March 31,2005
    
    
    2004Net income
    
    $
    175,161
    
    
    $
    136,439Other comprehensive income, net of tax:Unrealized gains/(losses) on securities
arising during the period
    
    
    (11,142
    )
    
    
    (880
    )Comprehensive income
    
    $
    164,019
    
    
    $
    135,559
 See accompanying notes to consolidated financial statements. Page 5




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WESTERN RESERVE BANCORP, INC. 
   Three months ended March 31,2005
    
    
    2004Cash flows from operating activitiesNet income
    
    $
    175,161
    
    
    $
    136,439Adjustments to reconcile net income to net cash from operating activities:Provision for loan losses
    
    
    28,900
    
    
    
    63,400Depreciation
    
    
    43,349
    
    
    
    23,469Net amortization of securities
    
    
    1,742
    
    
    
    3,078Loans originated for sale
    
    
    (1,271,050
    )
    
    
    (850,311
    )Proceeds from sales of loan originations
    
    
    1,348,889
    
    
    
    374,692Gains on sales of loans
    
    
    (77,839
    )
    
    
    (1,492
    )Federal Home Loan Bank stock dividends
    
    
    (3,000
    )
    
    
    (2,000
    )Net change in:Interest receivable
    
    
    (15,766
    )
    
    
    (53,186
    )Interest payable
    
    
    (9,896
    )
    
    
    2,717Other assets
    
    
    (64,345
    )
    
    
    (210,012
    )Other liabilities
    
    
    17,416
    
    
    
    63,839Net cash from operating activities
    
    
    173,561
    
    
    
    (449,367
    )Cash flows from investing activitiesAvailable for sale securities:Purchases
    
    
    (437,447
    )
    
    
    Maturities, repayments and calls
    
    
    292,989
    
    
    
    40,682Purchase of Federal Home Loan Bank stock
    
    
    
    
    
    
    (42,200
    )Net increase in loans
    
    
    (2,806,064
    )
    
    
    (4,605,523
    )Purchases of premises and equipment
    
    
    (69,892
    )
    
    
    (10,271
    )Net cash from investing activities
    
    
    (3,020,414
    )
    
    
    (4,617,312
    )Cash flows from financing activitiesNet increase in deposits
    
    
    1,175,070
    
    
    
    5,597,978Proceeds from Federal Home Loan Bank advances
    
    
    
    
    
    
    2,500,000Proceeds from other borrowings
    
    
    
    
    
    
    300,000Proceeds from issuance of common stock
under Employee Stock Purchase Plan
    
    
    4,761
    
    
    
    Proceeds from exercise of stock options
    
    
    2,340
    
    
    
    Net cash from financing activities
    
    
    1,182,171
    
    
    
    8,397,978Change in cash and cash equivalents
    
    
    (1,664,682
    )
    
    
    3,331,299Cash and cash equivalents at beginning of period
    
    
    6,936,119
    
    
    
    6,289,363Cash and cash equivalents at end of period
    
    $
    5,271,437
    
    
    $
    9,620,662Supplemental cash flow information:Interest paid
    
    $
    583,074
    
    
    $
    476,950Income taxes paid
    
    
    
    
    
    
    116,000Supplemental disclosure of noncash investing activities:Non cash transfer from loans originated for sale to loans
    
    $
    250,835
    
    
    $
    
 See accompanying notes to consolidated financial statements. Page 6




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WESTERN RESERVE BANCORP, INC. 
 NOTES TO FINANCIAL STATEMENTS
 March 31, 2005
 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. Until November 6, 1998, the Company was a development stage
company and its efforts had been devoted to the offering of its common shares to the general public
and to obtaining regulatory approvals, recruiting personnel and financial planning relating to the
organization of Western Reserve Bank (the Bank). The Bank, which commenced operations on November 6, 1998, is chartered by the State of Ohio, and is
a member of the Federal Reserve System. The Bank operates full-service locations in Medina and
Brecksville, Ohio and two satellite offices in retirement communities in Medina. Customer deposits
are insured up to applicable limits by the Federal Deposit Insurance Corporation (FDIC). The
Company is a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended. Nature of Business: The Bank offers a full range of traditional banking services to consumers and
businesses located primarily in Medina, Cuyahoga and surrounding counties. All of the financial
service operations 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. Cash Equivalents: For purposes of the Statements of Cash Flows, cash equivalents include amounts
due from banks and Federal funds sold. Generally, Federal funds are sold for periods of less than
thirty days. Use of Estimates in Preparation of Financial Statements: In preparing financial statements in
conformity with accounting principles generally accepted in the United States, management makes
estimates and assumptions based on available information. These estimates and assumptions affect
the amounts reported in the financial statements and the disclosures provided, and future results
could differ. Areas involving the use of managements estimates and assumptions include the
allowance for loan losses, the realization of deferred tax assets and the depreciation of premises
and equipment. Page 7




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WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2005 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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-QSB. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted in the United States
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, 2004 contains consolidated
financial statements and related notes, which should be read in conjunction with the accompanying
consolidated financial statements. Stock Compensation: Employee compensation expense under stock options is reported using the
intrinsic value method. No stock-based compensation cost is reflected in net income, as all
options granted had an exercise price equal to or greater than the market price of the underlying
common stock at the date of grant. The following table illustrates the effect on net income and
earnings per share if expense was measured using the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock Based Compensation. Three months ended March 31,2005
    
    
    2004Net income as reported
    
    $
    175,161
    
    
    $
    136,439Deduct: stock based
compensation expense
determined under fair value
based method
    
    
    (720
    )
    
    
    (2,115
    )Pro forma net income
    
    $
    174,441
    
    
    $
    134,324Basic earnings per share
as reported
    
    $
    0.38
    
    
    $
    0.35Pro forma basic earnings
per share
    
    $
    0.38
    
    
    $
    0.35Diluted earnings per share
as reported
    
    $
    0.37
    
    
    $
    0.34Pro forma diluted earnings
per share
    
    $
    0.37
    
    
    $
    0.34
 No options were granted in 2004 or the first three months of 2005. Page 8




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WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2005 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Bank-Owned Life Insurance: The Bank has purchased a life insurance policy on a key executive.
Bank-owned life insurance is recorded at its cash surrender value, or the amount that can be
realized, and is included in other assets on the consolidated balance sheet. Earnings per Common Share: Basic earnings per common share equals net income divided by the
weighted average number of common shares outstanding during the period. Diluted earnings per
common share includes the dilutive effect of additional potential common shares issuable under
stock options. Stock options for 9,618 shares of common stock were not considered in computing
diluted earnings per common share in either period because they were antidilutive. Earnings per share are computed as follows: Three months ended March 31,2005
    
    
    2004Numerator:Net income
    
    $
    175,161
    
    
    $
    136,439Denominator:Denominator for basic
earnings per share
weighted average shares
    
    
    455,676
    
    
    
    388,052Effect of dilutive securities:Nonqualified stock options
    
    
    15,272
    
    
    
    9,291Denominator for diluted
earnings per share
    
    
    470,948
    
    
    
    397,343Basic earnings per share
    
    $
    0.38
    
    
    $
    0.35Diluted earnings per share
    
    $
    0.37
    
    
    $
    0.34
 Reclassifications: For comparative purposes, certain amounts in the 2004 consolidated financial
statements have been reclassified to conform to the 2005 presentation. Page 9




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WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2005 NOTE 2  LOANS Loans at March 31, 2005 and December 31, 2004, were as follows: March 31,
    
    
    December 31,2005
    
    
    2004Commercial real estate
    
    $
    56,072,103
    
    
    $
    51,972,391Commercial business
    
    
    16,144,971
    
    
    
    16,602,755Commercial lines of credit
    
    
    16,612,276
    
    
    
    16,981,850Commercial construction
    
    
    6,207,929
    
    
    
    6,898,890Home equity
    
    
    10,288,502
    
    
    
    9,857,867Residential mortgage
and construction
    
    
    958,348
    
    
    
    821,658Consumer installment
    
    
    1,229,392
    
    
    
    1,308,084Credit card and other
    
    
    274,633
    
    
    
    291,760$
    107,788,154
    
    
    $
    104,735,255
 Activity in the Allowance for Loan Losses for the three months ended March 31, 2005 and 2004, was
as follows: Three months ended March 31,2005
    
    
    2004Beginning balance
    
    $
    1,605,933
    
    
    $
    1,502,688Loans charged off
    
    
    (4,000
    )
    
    
    Recoveries
    
    
    
    
    
    
    Provision for loan losses
    
    
    28,900
    
    
    
    63,400Ending balance
    
    $
    1,630,833
    
    
    $
    1,566,088
 At March 31, 2005 and December 31, 2004, loans totaling $1,118,194 and $1,114,668 were in
nonaccrual status. There were no other loans more than 90 days past due. Impaired loans totaled
$1,259,412 at March 31, 2005 and $1,289,553 at December 31, 2004. Page 10




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WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2005 NOTE 3  DEPOSITS Deposits at March 31, 2005 and December 31, 2004, were as follows: March 31,
    
    
    December 31,2005
    
    
    2004Noninterest-bearing demand
    
    $
    12,802,380
    
    
    $
    12,668,555Interest-bearing demand
    
    
    5,777,629
    
    
    
    6,770,262Market Rate Savings
    
    
    35,300,089
    
    
    
    34,762,160Time under $100,000
    
    
    29,265,737
    
    
    
    29,027,314Time $100,000 and over
    
    
    19,856,204
    
    
    
    18,598,678$
    103,002,039
    
    
    $
    101,826,969
 At March 31, 2005, the Bank had $17,923,000 in national market certificates of deposit, primarily
in amounts of $99,000. As of December 31, 2004, the Bank had $19,136,000 in national market CDs. NOTE 4FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS At March 31, 2005 and December 31, 2004, advances from the Federal Home Loan Bank were as follows: March 31,
    
    
    December 31,2005
    
    
    2004Maturing March 2009, fixed rate advance at 3.25%
    
    $
    2,500,000
    
    
    $
    2,500,000$
    2,500,000
    
    
    $
    2,500,000
 Interest is payable monthly, and the advance is payable at its maturity date, with prepayment
penalties for early payment. The advance is collateralized by approximately $3,385,000 of loans
secured by first mortgages on 1-4 family residential properties and $281,900 of FHLB stock under a
blanket lien agreement. In May 2003, the Company entered into a line of credit agreement with another financial institution
to obtain funding to provide capital to the Bank as needed. The line allows the Company to borrow
up to $3,000,000 at 0.75% below the prime rate. In the first quarter of 2005, the lines maturity
date was extended to June 30, 2005. The line is secured by 100% of the stock of the Bank. Page 11




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WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2005 NOTE 4FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS (continued) There are certain covenants on the line relating to the Companys and the Banks operating
performance and capital status. As of December 31, 2004, the Company was in violation of the
covenant that requires that the annual net income of the Bank must not be less than $200,000. As a
result of the loan charge-off that was recorded as of December 31, 2004, the Banks net income for
2004 was $52,638. The lender has granted a waiver of this covenant violation. During 2003 and 2004, the Company borrowed a total of $800,000 against this line and invested the
proceeds in the Bank as additional paid in capital. In October 2004, the Company paid off the
outstanding balance, bringing the available balance to its original amount of $3,000,000 as of
December 31, 2004. The Company did not borrow against this line of credit during the first quarter
of 2005. Page 12




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WESTERN RESERVE BANCORP, INC. 
 MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS
 March 31, 2005
 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 March 31, 2005, to
that of December 31, 2004, and the results of operations for the three months ended March 31, 2005
and 2004. 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. Management and the Board, on an ongoing basis, evaluate selected growth opportunities, including
branching. Several criteria are considered to be essential for an expansion, including: the area
must have a large deposit base, the community must have a strong community identity; there should
not be another community bank located in the same area; and there must be significant opportunities
for profit. After extensive study and evaluation throughout 2003, the Board authorized the Bank to pursue
expansion into the Brecksville, Ohio market area. In December 2003, the Ohio Division of Financial
Institutions approved the Banks application to establish a banking office in Brecksville. The
City of Brecksville granted its approval for the project, and remodeling began in March 2004 of a
building located at 8751 Brecksville Road. The Bank became the anchor tenant of this building in
October 2004, leasing nearly half of the available square footage. This office has a Regional
President and offers all of the services and amenities that are offered in the Medina banking
office. There is also a local advisory board of directors that offers guidance and assistance. Page 13




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WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
March 31, 2005 FINANCIAL CONDITION Assets Total assets as of March 31, 2005 increased 1.2%, or $1,353,709, to $116,603,859, compared
with $115,250,150 at December 31, 2004. Cash and cash equivalents decreased $1,664,682 to $5,271,437 at March 31, 2005, from $6,936,119 at
December 31, 2004. The decrease is primarily due to the use of Federal funds sold to fund the
increase in loans. As of March 31, 2005, there were approximately $250,000 of securities of U.S. government-sponsored
enterprises, $662,000 of mortgage-backed securities and $423,000 of tax-exempt municipal bonds in
the available-for-sale securities portfolio. During the first quarter of 2005, the Bank purchased
two tax-exempt municipal bonds with the proceeds of a matured security and Fed funds sold. There
were gross unrealized gains of $1,476 and gross unrealized losses of $22,625 in the
available-for-sale securities portfolio as of March 31, 2005. None of the losses was judged to be
other than temporary. As of March 31, 2005, the maturity dates of the agency securities and
municipal bonds ranged from May 2005 to December 2020. The primary reason for the growth in total assets was an increase in loans. Total loans at March
31, 2005, were $107,788,154, an increase of $3,052,899, or 2.9% when compared to $104,735,255 at
December 31, 2004. Most of the net loan growth in the first three months of 2005 was in the
commercial loan sector. This growth was mainly attributable to commercial real estate loans, which
increased approximately $4,100,000, offset by minimal decreases in commercial lines of credit of
$370,000 and in commercial business loans of $458,000. As of March 31, 2005, commercial loans
totaled $95,037,000, or 88.2% of total loans. Home equity lines of credit also increased, by $460,635, or 4.4%, primarily due to a promotion of
home equity lines during the first quarter of 2005, as well as efforts to cross-sell home equity
lines when originating or refinancing first mortgage loans. At March 31, 2005, home equity lines
and residential real estate loans totaled $11,246,850, or 10.4% of total loans, and consumer
installment and credit card loans were $1,504,025, or 1.4% of the loan portfolio. As of March 31, 2005, there were no loans classified as held for sale. The commercial construction
loan that was designated as held for sale as of December 31, 2004 in the amount of $250,835 was
moved back into the Banks portfolio during the first quarter of 2005 due to the expiration of the
purchasers commitment as a result of the borrowers delay in construction due to the weather. Page 14




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WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
March 31, 2005 FINANCIAL CONDITION (continued) Management anticipates that loan demand will remain strong, especially in the commercial loan
segment. The loan-to-deposit ratio as of March 31, 2005, was 104.6%, compared to 102.9% at
December 31, 2004, and the loan-to-assets ratio was 92.4% at March 31, 2005, compared to 90.9% at
December 31, 2004. Management expects that the loan-to-deposit ratio throughout the rest of 2005
will remain in the range of 100%-105% and the loan-to-assets ratio will be between 90% to 95%. Of the total loans at March 31, 2005, approximately $96,750,000 or 89.8% are at a variable rate of
interest, and $11,038,000 or 10.2% are fixed rate. Including scheduled principal repayments,
approximately $75,053,000, or 69.6%, of loans mature or are scheduled to reprice within twelve
months. Only $791,372 of total loan principal matures or reprices in more than five years. The Bank owns a single-premium cash-surrender value life insurance policy on the Chief Executive
Officer. The Bank is the owner and sole beneficiary of this policy. This is a tax-advantaged
instrument in that the increases in cash surrender value and the eventual death benefit under the
policy are not taxable income to the Bank. The income from this policy is intended to help offset
the cost of providing a supplemental retirement plan for the Chief Executive Officer. As of March
31, 2005, the cash surrender value of the policy was $542,498. Liabilities Deposits increased to $103,002,039 at March 31, 2005, an increase of $1,175,070, or 1.2%, over
the $101,826,969 at December 31, 2004. Deposits at March 31, 2005 consisted of $12,802,380 or
12.4% in noninterest-bearing demand deposits, $5,777,629 or 5.6% in interest-bearing NOW accounts,
$35,300,089 or 34.3% in variable-rate savings and money market accounts (known as Market Rate
Savings Accounts), $44,188,668 or 42.9% in time deposits, and $4,933,273 or 4.8% in Individual
Retirement Arrangements. Included in the time deposits total is $17,922,815 of national market CDs, primarily from other
banks and credit unions, in increments of $99,000 or $100,000, with terms ranging from one year to
five years, and rates ranging from 2.05% to 5.25%. As of March 31, 2005, the weighted average rate
of these CDs was 3.58% and the weighted average remaining maturity was 22.9 months. At December
31, 2004, there was $19,136,337 in national market CDs. 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. Management expects deposits to grow at a faster rate in 2005 than in 2004, primarily because of the
opening in October 2004 of the Banks new-full service Brecksville location. By March 31, 2005,
Brecksville had a total of $12,497,870 in deposits, mostly in Market Rate Savings accounts. Page 15




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
March 31, 2005 FINANCIAL CONDITION (continued) The Bank has the ability to obtain additional funding through the Federal Home Loan Bank. In March
2004, the Bank obtained a $2,500,000, five-year fixed rate advance. The interest rate is 3.25%,
and the advance matures on March 10, 2009. Interest is payable monthly, and the advance is payable
at maturity, with prepayment penalties for early payment. The advance is collateralized by
approximately $3,385,000 of loans secured by first mortgages on 1-4 family residential properties
and $281,900 of FHLB stock under a blanket lien agreement. During 2004 the Bank repaid two fixed
rate FHLB advances at their maturity. In June 2004 the Bank repaid a $4.28% fixed rate FHLB
advance in the amount of $1,700,000 and in October 2004 it repaid a 4.15% fixed rate FHLB advance
in the amount of $1,500,000. In 2003, the Company obtained a $3,000,000 line of credit from an unaffiliated bank. Please refer
to Note 4 and the discussion beginning on page 21 of this report, under the caption Liquidity and
Capital Resources, for additional information. Shareholders Equity Total shareholders equity increased $171,119, to $10,787,048 at March 31, 2005, from
$10,615,929 at December 31, 2004. This increase was a result of net income of $175,161 for the
first three months of 2005, the issuance of common stock from the exercise of employee stock
options in the amount of $2,340 and the issuance of stock under the employee stock purchase plan
totaling $4,761, offset by the decrease in the fair value of available-for-sale securities, net of
tax, of $11,142. During 2004, the Company sold an additional 66,622 shares of common stock in an intra-state
offering of the Banks common stock. The offering resulted in net proceeds, net of offering costs,
of approximately $1,968,000. RESULTS OF OPERATIONS Overview Net income for the first three months of 2005 was up $38,722, to $175,161, or $.38 per basic
share, from the $136,439, or $.35 per basic share earned in the same period in 2004. The primary
reason for the increase was an increase in net interest income and noninterest income, as well as a
decrease in the provision for loan losses, offset by an increase in noninterest expenses. The
increase in noninterest expense was mainly due to higher premises and equipment expense and
increased salaries and employee benefits associated with the Brecksville office opened in October
2004, and is discussed in further detail on page 21. Page 16




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##### Table of Contents

\

WESTERN
RESERVE BANCORP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

March 31, 2005 RESULTS OF OPERATIONS (continued) Net Interest Income Net interest income before the provision for loan losses improved for the first three months
of 2005 over the comparable period of 2004. Net interest income before the provision for loan
losses was $1,116,385, for the period ending March 31, 2005, an increase of $181,195 or 19.4%,
compared to $935,190 earned in the same period of 2004. The increase in net interest income is attributable to both loan growth and higher interest rates
earned on loans. However, the effects of these positive factors were partially offset by higher
interest-bearing deposit balances, especially Market Rate Savings accounts, and higher rates paid
on deposits. The following table illustrates the average balances and annualized interest rates for the three
months ended March 31, 2005 and 2004: 2005
    
    
    2004Average
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/($ in thousands)
    
    Balance
    
    
    Expense
    
    
    Cost
    
    
    Balance
    
    
    Expense
    
    
    CostLoans
    
    $
    106,498
    
    
    $
    1,653
    
    
    
    6.30
    %
    
    $
    98,291
    
    
    $
    1,386
    
    
    
    5.66
    %Investment securities-taxable
    
    
    1,062
    
    
    
    10
    
    
    
    3.88
    %
    
    
    1,696
    
    
    
    17
    
    
    
    3.99
    %Investment securities-tax exempt
    
    
    219
    
    
    
    3
    
    
    
    5.10
    %
    
    
    
    
    
    
    
    
    
    
    Federal funds sold and other
short-term funds
    
    
    4,546
    
    
    
    27
    
    
    
    2.42
    %
    
    
    3,403
    
    
    
    8
    
    
    
    0.92
    %Federal Reserve Bank stock
    
    
    198
    
    
    
    3
    
    
    
    6.08
    %
    
    
    189
    
    
    
    2
    
    
    
    6.08
    %Federal Home Loan Bank stock
    
    
    279
    
    
    
    3
    
    
    
    4.50
    %
    
    
    206
    
    
    
    2
    
    
    
    4.02
    %Total interest earning assets
    
    
    112,802
    
    
    
    1,699
    
    
    
    6.11
    %
    
    
    103,785
    
    
    
    1,415
    
    
    
    5.53
    %Noninterest earning assets
    
    
    3,995
    
    
    
    
    
    
    
    
    
    
    
    2,258Total Assets
    
    $
    116,797
    
    
    
    
    
    
    
    
    
    
    $
    106,043Interest bearing deposits
    
    $
    90,193
    
    
    
    562
    
    
    
    2.53
    %
    
    $
    83,205
    
    
    
    438
    
    
    
    2.11
    %Borrowings
    
    
    2,500
    
    
    
    20
    
    
    
    3.25
    %
    
    
    4,280
    
    
    
    42
    
    
    
    3.99
    %Total interest bearing liabilities
    
    
    92,693
    
    
    
    582
    
    
    
    2.55
    %
    
    
    87,485
    
    
    
    480
    
    
    
    2.20
    %Noninterest bearing liabilities
    
    
    13,406
    
    
    
    
    
    
    
    
    
    
    
    9,883Shareholders equity
    
    
    10,698
    
    
    
    
    
    
    
    
    
    
    
    8,675Total Liabilities and
Shareholders Equity
    
    $
    116,797
    
    
    
    
    
    
    
    
    
    
    $
    106,043Net interest income/rate spread
    
    
    
    
    
    
    1,117
    
    
    
    3.56
    %
    
    
    
    
    
    
    935
    
    
    
    3.31
    %Tax equivalent adjustment
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Net interest income per financial
Statements
    
    
    
    
    
    $
    1,116
    
    
    
    3.56
    %
    
    
    
    
    
    $
    935
    
    
    
    3.31
    %Net yield on average earning assets
    
    
    
    
    
    
    
    
    
    
    4.02
    %
    
    
    
    
    
    
    
    
    
    
    3.62
    %
 Page 17




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
March 31, 2005 RESULTS OF OPERATIONS (continued) The table below analyzes changes in net interest income in terms of changes in the volumes and
rates of various categories of interest earning assets and interest bearing liabilities and is
presented on a tax-equivalent basis. Three months endedMarch 31, 2005 vs. 2004Increase (Decrease) Due to($ in thousands)
    
    Volume
    
    
    Rate
    
    
    NetInterest income:Loans
    
    $
    116
    
    
    $
    152
    
    
    $
    268Federal funds sold and
other short-term funds
    
    
    4
    
    
    
    16
    
    
    
    20Investment securities-taxable
    
    
    (6
    )
    
    
    (1
    )
    
    
    (7
    )Investment securities-tax exempt
    
    
    2
    
    
    
    
    
    
    
    2Federal Home Loan Bank stock
    
    
    1
    
    
    
    
    
    
    
    1Total interest-earning assets
    
    
    117
    
    
    
    167
    
    
    
    284Interest expense:Interest-bearing transaction
Accounts
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )Market rate savings accounts
    
    
    (23
    )
    
    
    (95
    )
    
    
    (118
    )Certificates of deposit and IRAs
    
    
    12
    
    
    
    (17
    )
    
    
    (5
    )FHLB advances
    
    
    11
    
    
    
    7
    
    
    
    18Other borrowings
    
    
    4
    
    
    
    
    
    
    
    4Total interest-bearing liabilities
    
    
    4
    
    
    
    (107
    )
    
    
    (103
    )Change in net interest income
    
    $
    121
    
    
    $
    60
    
    
    $
    181
 Interest Income Interest income increased $283,706, or 20.1% when comparing the three months ended March 31,
2005 with the same period of 2004. Interest and fee income on loans for the first three months of 2005 was $1,653,360, up 19.3% from
$1,385,573 in the first three months of 2004. Interest income from securities and short-term funds
increased to $45,203 through the first three months of 2005, from $29,284 in the same period in
2004. The increase in 2005 was primarily due to a higher average balance in Federal funds in 2005
and rates that have been gradually increasing since late 2004, offset by a decrease in the average
balance of securities for the first three months of 2005. Page 18




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
March 31, 2005 RESULTS OF OPERATIONS (continued) Interest Expense Interest expense increased $102,511 or 21.4% when comparing the three months ended March 31,
2005 with the same period of 2004. Total interest expense was $582,178 for the first three months of 2005, compared to $479,667 in the
same period of 2004. Interest on deposits increased $124,593, or 28.5%, to $562,144 in the first
three months of 2005, from $437,551 in the same period last year. The increase in deposit interest
expense was due to higher balances in interest-bearing deposits in addition to increases in the
average interest rates paid on those deposits. Interest on borrowings was $20,034 year-to-date in
2005, compared to $42,116 in the same period of 2004. This decrease is due to the payment of
$3,200,000 of Federal Home Loan Bank advances during 2004 as discussed in the Financial Condition
section of this report. Net Interest Margin Net interest income as well as the net interest margin have improved, due mainly to the
increases in prime rate beginning in mid-2004. In the first quarter of 2005, the net interest
margin was 4.02%, up when compared with 3.62% in the first quarter of 2004. The yield on earning assets has continued to increase, reflecting overall interest rate increases,
the scheduled repricing of existing loans and new loans being booked at current, higher rates,
although this is somewhat offset by competitive factors in the Banks market area. In the first
quarter of 2005, the yield on loans was 6.30%, up from 5.66% in the first quarter of 2004. In the first quarter of 2005, the cost of interest-bearing deposits was 2.53%, up from 2.11% in the
first quarter of 2004. This increase also reflects overall interest rate increases and competitive
factors present in the Banks expanding market area. The overall cost of interest-bearing funds
(deposits and borrowings) was 2.55% in the first quarter of 2005, compared with 2.20% in the same
quarter of 2004. Provision for Loan Losses The provision for loan losses represents the charge to income necessary to adjust the
allowance for loan losses to an amount that represents managements assessment of the estimated
probable credit losses inherent in the Companys loan portfolio which have been incurred at the
balance sheet date. The methodology used by management to perform this assessment is discussed in
Critical Accounting Policies. Consistent application of this methodology for the three months
ended March 31, 2005 and 2004 resulted in a decrease to the provision for loan losses of $34,500,
from $63,400 for the period ending March 31, 2004 to $28,900 for the period ending March, 31 2005. Page 19




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
March 31, 2005 RESULTS OF OPERATIONS (continued) At March 31, 2005 and December 31, 2004, loans totaling $1,118,194 and $1,114,668, respectively,
were in nonaccrual status (i.e., on which no interest income is being recorded). There were no
other loans more than 90 days past due. $149,448 and $150,103 of the nonaccrual loans were
guaranteed by the Small Business Administration as of March 31, 2005 and December 31, 2004. Managements determination of the appropriate level of the allowance for loan losses is based, in
part, on an evaluation of specific loans, as well as the consideration of historical loss
experiences of other similar community financial institutions which we believe are representative
of the probable loss experience of the Bank. Other factors considered include the composition of
the loan portfolio, current economic conditions, the creditworthiness of the Banks borrowers and
other related factors. The provision for loan losses has been impacted by the rapid loan growth
the Bank has experienced, as well as the effects of the loan portfolio maturing. Management and
the Board believe the allowance for loan losses at March 31, 2005, is adequate to absorb probable
losses in the loan portfolio. Noninterest Income Total noninterest income for the first three months of 2005 was $147,696, up $86,004 or 139.4%
from $61,692 for the same period in 2004. Service charges on deposit accounts decreased slightly, from $29,004 year-to-date in 2004, to
$28,551 for the same period of 2005, a decrease of 1.6%. The largest component of service charges
on deposit accounts is non-sufficient fund (NSF) and overdraft charges which declined, from $17,672
as of March 31, 2004 to $15,389 for the comparable period of 2005. The primary reason for the increase in noninterest income was the increase in gains on the sales of
loans. Three commercial real estate loans were sold during the first three months of 2005 for a
total gain of $77,839 compared to two residential mortgage loans sold in 2004 for a gain of $1,492. Other noninterest income includes fee income related to the Banks ATM program, which increased
over last year due to the addition of a second ATM machine as well as increased activity. Also, an
increase in the cash surrender value of the life insurance policy on the Companys Chief Executive
Officer was recorded for the first three months of 2005 in the amount of $5,478 compared to $5,013
for the same period of 2004. Page 20




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
March 31, 2005 RESULTS OF OPERATIONS (continued) Noninterest Expenses Noninterest expenses were $971,247 for the first three months of 2005, an increase of $243,381
or 33.4% over the $727,866 for the same period of 2004. Nearly half of this increase is
attributable to premises and equipment expense which significantly increased for the first three
months of 2005, to $194,179 from $95,772 for the period ending March 31, 2004, an increase of
$98,407 or 102.8%. This increase can be traced to the Brecksville facility which began operations
during the fourth quarter of 2004. Additionally, salaries and employee benefits increased $88,657
or 22.4% from the prior period, from $396,147 for the first three months of 2004 compared to
$484,804 for the first three months of 2005. The main reason for this increase is due to the
additional staffing for the Brecksville facility as well as the increased cost of employee
benefits. Total other noninterest expenses in the first three months of 2005 and 2004 consisted of the
following: Three months endedMarch 31,2005
    
    
    2004Marketing and advertising
    
    $
    18,174
    
    
    $
    11,440Loan expenses
    
    
    11,879
    
    
    
    12,487Insurance
    
    
    12,699
    
    
    
    10,503Travel and entertainment
    
    
    8,987
    
    
    
    9,843Telephone
    
    
    6,623
    
    
    
    5,888Other
    
    
    16,052
    
    
    
    13,941$
    74,414
    
    
    $
    64,102
 Management expects that the Brecksville location will continue to negatively affect results during
the next one to two years, until it grows to a size at which it can cover its overhead. Page 21




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
March 31, 2005 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 Consolidated Statements of Cash Flows, the
main sources of cash flows are receiving deposits from customers, and to a lesser extent, proceeds
from FHLB advances and borrowings, repayment of loan principal and interest income on loans and
investments. Assets available to satisfy liquidity 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 approximately
$6,608,000 at March 31, 2005, compared to $8,392,000 at December 31, 2004. To the extent that loan demand has outpaced local deposit growth, the Company has used other
sources of funding, including national market CDs and Federal Home Loan Bank advances (as
previously discussed). If additional liquidity is needed, there are several available sources,
including selling securities from the securities portfolio, selling loans, purchasing Federal
funds, obtaining additional Federal Home Loan Bank advances, acquiring additional national market
CDs or brokered deposits, issuing repurchase agreements, and using surety bonds to secure public
deposits. As the Brecksville office has added core deposits, the Company has been able to decrease its
reliance on these other sources of funding. As discussed previously, total shareholders equity increased $171,119, to $10,787,048 at March 31,
2005 from $10,615,929 at December 31, 2004. The increase was due to the net income of $175,161,
the issuance of common stock from the exercise of employee stock options in the amount of $2,340
and the issuance of stock under the Employee Stock Purchase Plan totaling $4,761, offset by the
decrease in the fair value of available-for-sale securities, net of tax, of $11,142. At March 31, 2005 and December 31, 2004, 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: Page 22




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
March 31, 2005 LIQUIDITY AND CAPITAL RESOURCES (continued) Minimum
    
    
    Minimumto be
    
    
    required forWestern Reserve Bank
    
    
    considered
    
    
    capitalMarch 31,
    
    
    December 31,
    
    
    well-
    
    
    adequacy2005
    
    
    2004
    
    
    capitalized
    
    
    purposesTier 1 core capital to
risk-weighted assets
    
    
    7.5
    %
    
    
    7.6
    %
    
    
    6.0
    %
    
    
    4.0
    %Total capital to
risk-weighted assets
    
    
    10.1
    
    
    
    10.2
    
    
    
    10.0
    %
    
    
    8.0
    %Tier 1 leverage ratio
    
    
    7.1
    
    
    
    6.9
    
    
    
    5.0
    %
    
    
    4.0
    %
 The Company has grown rapidly in its six-and-a-half years, and continued rapid growth has required
management and the Board to consider capital strategies to support that growth. In 2003, as discussed in Note 4, the Company obtained a line of credit through an unaffiliated
financial institution. By borrowing against the line of credit and then investing the funds into
the Bank as capital, the Bank is able to manage its capital ratios. The Company had a common stock offering in 2004. In this offering, a total of 66,622 shares of
common stock were sold, resulting in proceeds, net of offering costs, of $1,968,205. Of this
amount, $1,100,000 has been invested in the Bank as additional paid in capital. As of March 31,
2005, approximately $900,000 remains available to downstream to the Bank as paid in capital as
needed to support the Banks capital requirements as it grows. Other capital strategies that the Company continues to evaluate include selling more common stock,
issuing trust preferred securities, or additional borrowing. 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. 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 5,000 shares of authorized but unissued
shares of stock allocated to the Plan. Because the Plan has been registered with the SEC, there
will be 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 March 31, 2005, a total of
813 shares of common stock have been issued to 21 employee participants through the Plan. Page 23




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
March 31, 2005 INTEREST RATE SENSITIVITY In the past few years, interest rates had decreased significantly, to levels not seen in over 40
years. In 2001, there were 11 interest rate decreases totaling 475 basis points. In 2002, rates
seemed to have stabilized, and then there was another 50 basis point rate cut in November. Then,
in June 2003, short-term rates were decreased by another 25 basis points. As short-term rates
approached zero (the overnight Federal funds rate was as low as 1.00%), already-low deposit rates
could not be reduced as quickly or as deeply as loan rates. This caused downward pressure on most
banks net interest margins, including Western Reserve Banks. At year-end 2002, approximately 55.5% of the interest-bearing assets on the Companys balance sheet
matured or could reprice in one year or less. Nearly all of the interest-bearing liabilities were
variable-rate core deposits. As of December 31, 2002, there were approximately $44,355,000 of
assets and $45,126,000 of liabilities that matured or could be repriced within one year. The
one-year interest rate gap ratio was 98.3%. Therefore, the balance sheet was in a balanced, or
neutral, interest rate sensitivity position. By mid-2002, management believed that rates were at or near their low point, and began to change
its strategy to position the balance sheet to benefit when rates would begin to increase. In
implementing this strategy, management made more loans tied to the prime rate, which would reprice
higher when rates begin to rise, and, on the deposit side, emphasized longer-term CDs to lock in
funding at the historically low rates. The immediate impact of this strategy was to forgo some
interest income, since variable rate loans are generally offered at a lower rate than fixed rate
loans, and also to incur additional interest expense, since the Company had to pay depositors a
higher rate to accept longer-term deposits. By year-end 2003, approximately $74,010,000 of assets and $59,153,000 of liabilities matured or
could be repriced in one year. Thus the asset sensitivity, or GAP, in the balance sheet had
increased significantly, to $14,857,000, or 125.1%. By the end of 2004, the one-year interest rate
gap had decreased slightly, to 124.5% and as of March 31, 2005 was 129.8% and remains in a strong
asset-sensitive position. While this strategy is benefiting the Companys net interest income in a rising rate environment,
in the short term, the effect had been to compress the net interest margin while rates were low. Page 24




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
March 31, 2005 INTEREST RATE SENSITIVITY (continued) In June of 2004, the Federal Reserve changed its outlook and had increased its target overnight
Federal funds rate five times by year-end, by a total of 125 basis points, to 2.25%. In the first
quarter of 2005, there were two additional rate increases of 25 basis points each, and the target
Federal funds rate was at 2.75% as of March 31, 2005. Likewise, the Banks prime rate has
increased, to 5.75% as of March 31, 2005. Provided the Federal Reserve continues its bias toward
increasing interest rates, the Company should benefit from an increase in the net interest margin. 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 allowance balance by considering the nature and volume of the portfolio, information
about specific borrower situations 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.
Management considers various factors, including portfolio risk, economic environment and loan
delinquencies, when determining the level of the provision for loan losses. Loan quality is
monitored on a monthly basis by management and twice annually by an independent third party. Given
the fact that the Company began operations in 1998, there is not sufficient historical data on the
loan portfolio to identify consistent or significant trends in loan losses. Page 25




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WESTERN RESERVE BANCORP, INC. 
 CONTROLS AND PROCEDURES
 March 31, 2005
 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
March 31, 2005, 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 March 31, 2005, 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 quarter ended March 31, 2005, that has materially affected, or is reasonably
likely to materially affect, the Companys internal control over financial reporting. Page 26




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WESTERN RESERVE BANCORP, INC.
FORM 10-QSB
March 31, 2005 
 PART IIOTHER INFORMATION Items 1, 3, 4 and 5 are not applicable. Item 2  Unregistered Sales of Equity Securities and Use of Proceeds The Company filed a Registration Statement on Form 8-A with the SEC on April 29, 2005 to
register its common shares under Section 12(g) of the 1934 Act. The Company began an offering of up to 83,333 shares of its common stock on May 15, 2004.
The offering price was $30.00 per share. The offering closed on November 30, 2004. A total
of 66,622 shares were issued in the offering. The Company did not employ an underwriter or
broker to sell the shares. Instead, the shares were sold directly by the Company through
its officers and directors without the payment of any commissions. The shares were sold in reliance upon Section 3(a)(11) of the Securities Act of 1933 and
Rule 147 promulgated thereunder solely to residents of the State of Ohio. A registration
statement on Form 6(A)(1) was filed on May 3, 2004, with the Ohio Division of Securities
pursuant to Section 1707.06(A)(1) of the Ohio Revised Code. Because of the requirements of
Rule 147, the shares issued under the offering cannot be sold outside of the State of Ohio
for nine (9) months after issuance. The proceeds raised through the sale of the shares in the offering will be used for general
corporate purposes. The majority of the proceeds will be used to augment the capital of
Western Reserve Bank, the Companys wholly owned commercial bank subsidiary. The Company also has a nonqualified stock option plan, the Western Reserve Bancorp, Inc.
1998 Stock Option Plan, as Amended. During the first quarter of 2005, there were 100 shares
of the Companys common stock issued at $20.00 per share through the exercise of a stock
option under the Plan. The shares were issued in reliance upon Section 3(a)(11) of the Securities Act of 1933 and
Rule 147 promulgated thereunder. Because of the requirements of Rule 147, the shares issued
under the stock option plan cannot be sold outside of the State of Ohio for nine (9) months
after issuance. Page 27




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WESTERN RESERVE BANCORP, INC.
FORM 10-QSB
March 31, 2005 Item 6  Exhibits and Reports on Form 8-K: (a) Exhibits Exhibit No.
    
    Description of Exhibits3.1
    
    Articles of Incorporation 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)
    
    *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)
    
    *4.2
    
    Legend to be Placed on Certificates Representing Shares Issued in the Offering10.1
    
    Employment Agreement of Edward J. McKeon, Dated December 14, 2001.
(incorporated by reference to the Companys Report on Form 10-KSB filed with
the Commission on April 1, 2002)
    
    *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 April 20, 2000 (incorporated by reference to the Companys Report on Form
10-QSB filed with the Commission on August 13, 2000)
    
    *10.4
    
    Agreement by and between Western Reserve Bancorp, Inc. and Brian K. Harr,
dated June 18 2001, as amended February 20, 2002 (incorporated by reference to
the Companys Report on Form 10-KSB filed with the Commission on March 28,
2003)
    
    *10.5
    
    Agreement by and between Western Reserve Bancorp, Inc. and Cynthia A. Mahl,
dated June 18 2001, as amended February 20, 2002 (incorporated by reference to
the Companys Report on Form 10-KSB filed with the Commission on March 28,
2003)
    
    *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, dated May 15,
2003 (incorporated by reference to the Companys Report on Form 10-QSB filed
with the Commission on August 14, 2003)
    
    *10.8
    
    Western Reserve Bancorp, Inc. Employee Stock Purchase Plan (incorporated by
reference to the Companys Report on Form 10-QSB filed with the Commission on
November 14, 2003)
    
    *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)
    
    *
    Page 28




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WESTERN RESERVE BANCORP, INC.
FORM 10-QSB
March 31, 2005 Exhibit No.
    
    Description of Exhibits10.10
    
    First Amendment to Loan Agreement by and between
Western Reserve Bancorp, Inc. and TCF National
Bank, dated March 31, 200511
    
    Statement re: Computation of Per Share Earnings
(incorporated by reference to Note 1 of this
Form 10-QSB)
    
    *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, Senior
Vice President and Chief Financial Officer32.1
    
    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, Senior
Vice President and Chief Financial Officer
     (b) Reports on Form 8-KA report on Form 8-K was filed by the Company on March 18, 2005 under Item 2.06,
Material Impairments, related to the charge-off of a substantial loan relationship as of
December 31, 2004. Page 29




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WESTERN RESERVE BANCORP, INC.
FORM 10-QSB
Quarter ended March 31, 2005 
 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: May 16, 2005
    
    By: /s/ Edward J. McKeonEdward J. McKeonPresident and Chief Executive Officer(Principal Executive Officer)/s/ Cynthia A. MahlCynthia A. MahlSenior Vice President/Chief Financial Officer(Principal Financial Officer)
 Page 30