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 quarter ended March 31, 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 such items).


Yes x   No
 ̈





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


Large
      accelerated filer  ̈
            Accelerated
      filer  ̈Non-accelerated
      filer  ̈
            Smaller
      reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes  ̈   No
x





585,071
shares of common stock, no par value, $1.00 stated value as of May 17,
2010.





WESTERN
RESERVE BANCORP, INC.


FORM
10-Q


Quarter
ended March 31, 2010





PagePART
      I—Financial InformationITEM
      1
                FINANCIAL
      STATEMENTSConsolidated
      Balance Sheets as of March 31, 2010 and December 31, 2009
                3Consolidated
      Statements of Income for the three months ended March 31, 2010 and
      2009
                4Consolidated
      Statements of Comprehensive Income for the three months ended March 31,
      2010 and 2009
                5Consolidated
      Statements of Cash Flows for the three months ended March 31, 2010 and
      2009
                6Notes
      to Consolidated Financial Statements
                7ITEM
      2
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                17ITEM
      3
                QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                N/AITEM
      4T
                CONTROLS
      AND PROCEDURES
                30PART
      II—Other Information
                31SIGNATURES
                35




2





WESTERN
RESERVE BANCORP, INC.


CONSOLIDATED
BALANCE SHEETS





March 31,
                          
                          
                          December 31,2010
                          
                          
                          2009(Unaudited)ASSETSCash
      and due from financial institutions
                          
                          $
                          2,875,304
                          
                          
                          $
                          2,657,830Interest-bearing
      deposits in other financial institutions
                          
                          
                          18,102,101
                          
                          
                          
                          15,005,771Federal
      funds sold
                          
                          
                          257,000
                          
                          
                          
                          515,000Cash
      and cash equivalents
                          
                          
                          21,234,405
                          
                          
                          
                          18,178,601Securities
      available for sale
                          
                          
                          9,721,504
                          
                          
                          
                          10,019,225Loans
      held for sale
                          
                          
                          -
                          
                          
                          
                          690,000Loans,
      net of allowance of $2,322,328 and $2,316,715
                          
                          
                          164,714,199
                          
                          
                          
                          164,860,130Restricted
      stock
                          
                          
                          861,100
                          
                          
                          
                          826,900Other
      real estate owned
                          
                          
                          1,067,814
                          
                          
                          
                          1,067,814Premises
      and equipment, net
                          
                          
                          1,004,341
                          
                          
                          
                          950,848Bank
      owned life insurance
                          
                          
                          2,359,204
                          
                          
                          
                          2,334,187Prepaid
      Federal Deposit Insurance Corporation premiums
                          
                          
                          905,989
                          
                          
                          
                          971,938Accrued
      interest receivable and other assets
                          
                          
                          2,048,538
                          
                          
                          
                          2,033,310$
                          203,917,094
                          
                          
                          $
                          201,932,953LIABILITIES
      AND SHAREHOLDERS' EQUITYDepositsNoninterest-bearing
                          
                          $
                          19,892,283
                          
                          
                          $
                          22,789,030Interest-bearing
                          
                          
                          161,008,670
                          
                          
                          
                          155,453,259Total
      deposits
                          
                          
                          180,900,953
                          
                          
                          
                          178,242,289Federal
      Home Loan Bank advances
                          
                          
                          2,900,000
                          
                          
                          
                          3,400,000Accrued
      interest payable and other liabilities
                          
                          
                          823,296
                          
                          
                          
                          807,324Total
      Liabilities
                          
                          
                          184,624,249
                          
                          
                          
                          182,449,613Shareholders'
      EquityCumulative
      preferred stock, no par value, $1,000 liquidation value:Series
      A, fixed rate, 4,700 shares authorized and issuedat
      March 31, 2010 and December 31, 2009
                          
                          
                          4,700,000
                          
                          
                          
                          4,700,000Discount
      on Series A preferred stock
                          
                          
                          (249,800
                          )
                          
                          
                          (264,939
                          )Series
      B, fixed rate, 235 shares authorized and issuedat
      March 31, 2010 and December 31, 2009
                          
                          
                          235,000
                          
                          
                          
                          235,000Premium
      on Series B preferred stock
                          
                          
                          24,373
                          
                          
                          
                          25,850Common
      stock, no par value, $1 stated value, 1,500,000 sharesauthorized,
      585,071 and 584,727 shares issued andoutstanding
      as of March 31, 2010 and December 31, 2009
                          
                          
                          585,071
                          
                          
                          
                          584,727Additional
      paid-in capital
                          
                          
                          9,972,003
                          
                          
                          
                          9,933,257Retained
      earnings
                          
                          
                          3,742,051
                          
                          
                          
                          4,036,186Accumulated
      other comprehensive income
                          
                          
                          284,147
                          
                          
                          
                          233,259Total
      Shareholders' Equity
                          
                          
                          19,292,845
                          
                          
                          
                          19,483,340$
                          203,917,094
                          
                          
                          $
                          201,932,953





See
accompanying notes to consolidated financial statements.


3





WESTERN
RESERVE BANCORP, INC.


CONSOLIDATED
STATEMENTS OF INCOME


(UNAUDITED)





Quarter ended March 31,2010
                
                
                2009Interest
      and dividend incomeLoans,
      including fees
                
                $
                2,131,924
                
                
                $
                1,941,754Taxable
      securities
                
                
                58,028
                
                
                
                70,737Tax
      exempt securities
                
                
                44,383
                
                
                
                41,545Dividends
      on restricted stock
                
                
                10,354
                
                
                
                9,127Federal
      funds sold and other short term funds
                
                
                9,359
                
                
                
                19,3112,254,048
                
                
                
                2,082,474Interest
      expenseDeposits
                
                
                555,610
                
                
                
                718,159Borrowings
                
                
                30,869
                
                
                
                55,167586,479
                
                
                
                773,326Net
      interest income
                
                
                1,667,569
                
                
                
                1,309,148Provision
      for loan losses
                
                
                785,830
                
                
                
                138,000Net
      interest income after provision for loan losses
                
                
                881,739
                
                
                
                1,171,148Noninterest
      incomeService
      charges on deposit accounts
                
                
                51,064
                
                
                
                49,081Net
      gains on sales of loans
                
                
                14,305
                
                
                
                9,043Other
                
                
                80,169
                
                
                
                58,326145,538
                
                
                
                116,450Noninterest
      expenseSalaries
      and employee benefits
                
                
                634,946
                
                
                
                616,671Occupancy
      and equipment
                
                
                215,472
                
                
                
                224,464Federal
      deposit insurance
                
                
                71,845
                
                
                
                58,934Data
      processing
                
                
                93,654
                
                
                
                93,907Professional
      fees
                
                
                67,249
                
                
                
                56,656Taxes
      other than income and payroll
                
                
                50,165
                
                
                
                48,494Directors'
      fees
                
                
                69,135
                
                
                
                33,800Collection
      and other real estate owned
                
                
                81,315
                
                
                
                33,088Marketing
      and advertising
                
                
                24,248
                
                
                
                27,637Community
      relations and contributions
                
                
                14,940
                
                
                
                12,538Other
                
                
                65,240
                
                
                
                66,3881,388,209
                
                
                
                1,272,577Income
      (loss) before income taxes
                
                
                (360,932
                )
                
                
                15,021Income
      tax  (benefit)
                
                
                (144,497
                )
                
                
                (15,642
                )Net
      income (loss)
                
                $
                (216,435
                )
                
                $
                30,663Preferred
      stock dividends and amortization, net
                
                
                77,700
                
                
                
                -Net
      income (loss) available to common shareholders
                
                $
                (294,135
                )
                
                $
                30,663Earnings
      (loss)  per common share:Basic
                
                $
                (0.50
                )
                
                $
                0.05Diluted
                
                $
                (0.50
                )
                
                $
                0.05Average
      shares outstanding (basic)
                
                
                584,731
                
                
                
                583,337Average
      shares outstanding (diluted)
                
                
                584,731
                
                
                
                583,337





See
accompanying notes to consolidated financial statements.


4





WESTERN
RESERVE BANCORP, INC.


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME


(UNAUDITED)





Quarter ended March 31,2010
                    
                    
                    2009Net
      income (loss)
                    
                    $
                    (216,435
                    )
                    
                    $
                    30,663Other
      comprehensive income, net of tax:Unrealized
      gains on securitiesarising
      during the period
                    
                    
                    50,888
                    
                    
                    
                    51,020Comprehensive
      income (loss)
                    
                    $
                    (165,547
                    )
                    
                    $
                    81,683





See
accompanying notes to consolidated financial statements.




5





WESTERN RESERVE BANCORP, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





Quarter ended March 31,2010
                    
                    
                    2009Cash
      flows from operating activitiesNet
      income
                    
                    $
                    (216,435
                    )
                    
                    $
                    30,663Adjustments
      to reconcile net income to net cashfrom
      operating activities:Provision
      for loan losses
                    
                    
                    785,830
                    
                    
                    
                    138,000Depreciation
                    
                    
                    38,855
                    
                    
                    
                    46,312Net
      accretion of securities
                    
                    
                    (2,153
                    )
                    
                    
                    (3,463
                    )Stock-based
      compensation
                    
                    
                    35,391
                    
                    
                    
                    600Loans
      originated for sale
                    
                    
                    (383,000
                    )
                    
                    
                    (489,800
                    )Proceeds
      from sales of loan originations
                    
                    
                    1,087,305
                    
                    
                    
                    498,843Gains
      on sales of loans
                    
                    
                    (14,305
                    )
                    
                    
                    (9,043
                    )Increase
      in cash surrender value of bank owned life insurance
                    
                    
                    (25,017
                    )
                    
                    
                    (25,981
                    )Net
      change in other assets and other liabilities
                    
                    
                    122,976
                    
                    
                    
                    (170,076
                    )Net
      cash from operating activities
                    
                    
                    1,429,447
                    
                    
                    
                    16,055Cash
      flows from investing activitiesAvailable
      for sale securities:Purchases
                    
                    
                    -
                    
                    
                    
                    -Maturities,
      repayments and calls
                    
                    
                    376,978
                    
                    
                    
                    235,664Purchase
      of restricted stock
                    
                    
                    (34,200
                    )
                    
                    
                    (53,500
                    )Net
      increase in interest-bearing deposits in other banks
                    
                    
                    -
                    
                    
                    
                    (3,000,000
                    )Net
      increase in loans
                    
                    
                    (722,399
                    )
                    
                    
                    (7,376,571
                    )Purchases
      of premises and equipment
                    
                    
                    (92,348
                    )
                    
                    
                    (56,475
                    )Net
      cash from investing activities
                    
                    
                    (471,969
                    )
                    
                    
                    (10,250,882
                    )Cash
      flows from financing activitiesNet
      increase in deposits
                    
                    
                    2,658,664
                    
                    
                    
                    7,500,758Net
      repayment of FHLB advances
                    
                    
                    (500,000
                    )
                    
                    
                    (3,100,000
                    )Dividends
      on preferred stock
                    
                    
                    (64,037
                    )
                    
                    
                    -Proceeds
      from issuance of common stock under ESPP
                    
                    
                    3,699
                    
                    
                    
                    9,255Net
      cash from financing activities
                    
                    
                    2,098,326
                    
                    
                    
                    4,410,013Change
      in cash and cash equivalents
                    
                    
                    3,055,804
                    
                    
                    
                    (5,824,814
                    )Cash
      and cash equivalents at beginning of period
                    
                    
                    18,178,601
                    
                    
                    
                    21,302,463Cash
      and cash equivalents at end of period
                    
                    $
                    21,234,405
                    
                    
                    $
                    15,477,649Supplemental
      cash flow information:Interest
      paid
                    
                    $
                    556,709
                    
                    
                    $
                    783,509Income
      taxes paid
                    
                    
                    -
                    
                    
                    
                    -Supplemental
      disclosure of noncash investing activities:Transfer
      from loans to other real estate owned
                    
                    $
                    -
                    
                    
                    $
                    -Transfer
      from loans to other repossessed assets
                    
                    
                    82,500
                    
                    
                    
                    -





See
accompanying notes to consolidated financial statements.


6


WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


March
31, 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 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


March
31, 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 March 31,2010
                              
                              
                              2009Numerator:Net
      income (loss)
                              
                              $
                              (216,435
                              )
                              
                              $
                              30,663Preferred
      stock dividends and amortization, net
                              
                              
                              (77,700
                              )
                              
                              
                              -Net
      income (loss) available to common shareholders
                              
                              
                              (294,135
                              )
                              
                              
                              30,663Denominator:Denominator
      for basic earnings (loss) per share availableto
      common shareholders-weighted average shares
                              
                              
                              584,731
                              
                              
                              
                              583,337Effect
      of dilutive shares:Nonqualified
      stock options
                              
                              
                              -
                              
                              
                              
                              -Denominator
      for diluted earnings (loss) per share availableto
      common shareholders
                              
                              
                              584,731
                              
                              
                              
                              583,337Basic
      earnings per common share
                              
                              $
                              (0.50
                              )
                              
                              $
                              0.05Diluted
      earnings per common share
                              
                              $
                              (0.50
                              )
                              
                              $
                              0.05Stock
      options not considered in computingdiluted
      earnings per common share becausethey
      were antidilutive
                              
                              
                              98,137
                              
                              
                              
                              106,136





Income
Taxes:  The provision for income tax for the first quarter of
2010 was a benefit of $144,497 on pre-tax loss of $360,932 as compared to a
benefit of $15,642 on pre-tax income of $15,012 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 prior
quarters.  The tax benefit in the year-ago quarter, despite pre-tax
net income, was also due to the Company’s tax exempt income.  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


March
31, 2010





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





Adoption
of New Accounting Standards:  In June 2009, the FASB
amended previous guidance relating to transfers of financial assets and
eliminated the concept of a qualifying special purpose entity.  This
guidance was adopted, effective January 1, 2010 and for interim periods within
annual reporting periods thereafter. This guidance must be applied to transfers
occurring on or after the effective date. Additionally, on and after the
effective date, the concept of a qualifying special-purpose entity is no longer
relevant for accounting purposes. Therefore, formerly qualifying special-purpose
entities should be evaluated for consolidation by reporting entities on and
after the effective date in accordance with the applicable consolidation
guidance. The disclosure provisions were also amended and apply to transfers
that occurred both before and after the effective date of this
guidance.  The effect of adopting this new guidance was not
material.





NOTE
2 - SECURITIES





The
amortized cost and fair value of available for sale securities and the related
gross unrealized gains and losses recognized in accumulated other comprehensive
income were as follows:





Gross
                    
                    
                    GrossAmortized
                    
                    
                    Unrealized
                    
                    
                    UnrealizedCost
                    
                    
                    Gains
                    
                    
                    Losses
                    
                    
                    Fair ValueMarch
      31, 2010Mortgage-backed
                    
                    $
                    4,672,961
                    
                    
                    $
                    256,425
                    
                    
                    $
                    -
                    
                    
                    $
                    4,929,386Municipal
                    
                    
                    4,618,017
                    
                    
                    
                    174,101
                    
                    
                    
                    -
                    
                    
                    
                    4,792,118$
                    9,290,978
                    
                    
                    $
                    430,526
                    
                    
                    $
                    -
                    
                    
                    $
                    9,721,504December
      31, 2009Mortgage-backed
                    
                    $
                    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.




9


WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


March
31, 2010





NOTE 2 – SECURITIES(continued)





The fair
values of debt securities at March 31, 2010 by contractual maturity were as
follows.  Mortgage backed securities which are not due at a single
maturity date are shown separately.  Actual maturities may differ from
contractual maturities because issuers may have the right to call or prepay
obligations.





Amortized
                    Cost
                  
                  
                  Fair ValueDue
      in less than one year
                  
                  $
                  -
                  
                  
                  $
                  -Due
      from one to five years
                  
                  
                  584,988
                  
                  
                  
                  619,380Due
      from five to ten years
                  
                  
                  3,371,530
                  
                  
                  
                  3,501,742Due
      from ten to fifteen years
                  
                  
                  661,499
                  
                  
                  
                  670,996Mortgage-backed
                  
                  
                  4,672,961
                  
                  
                  
                  4,929,386$
                  9,290,978
                  
                  
                  $
                  9,721,504





At March
31, 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 has the
intent and ability to hold the security that was in an unrealized loss position
at year-end for the foreseeable future and does not believe it is likely the
Company will be required to sell the security before recovery.  Timely
repayment of principal and interest on mortgage-backed securities held by the
Company is guaranteed by the U. S. government sponsored enterprise
issuers.





NOTE
3 - LOANS





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





March 31,
                    
                    
                    December 31,2010
                    
                    
                    2009Commercial
      real estate
                    
                    $
                    106,625,452
                    
                    
                    $
                    105,923,291Commercial
      construction
                    
                    
                    6,537,509
                    
                    
                    
                    6,319,927Commercial
      business
                    
                    
                    36,048,782
                    
                    
                    
                    37,080,078Home
      equity
                    
                    
                    10,305,068
                    
                    
                    
                    10,211,566Residential
      mortgage and construction
                    
                    
                    919,261
                    
                    
                    
                    933,687Consumer
      and other loans
                    
                    
                    4,303,957
                    
                    
                    
                    4,096,687Purchased
      auto loans
                    
                    
                    2,275,767
                    
                    
                    
                    2,589,488Other
                    
                    
                    20,731
                    
                    
                    
                    22,121167,036,527
                    
                    
                    
                    167,176,845Less
      allowance for loan losses
                    
                    
                    2,322,328
                    
                    
                    
                    2,316,715$
                    164,714,199
                    
                    
                    $
                    164,860,130




Activity
in the Allowance for Loan Losses for the three months ended March 31, 2010 and
2009 was as follows:


10


WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


March
31, 2010





NOTE 3 – LOANS(continued)


Three Months Ended March 31,2010
                  
                  
                  2009Beginning
      balance
                  
                  $
                  2,316,715
                  
                  
                  $
                  1,743,470Provision
      for loan losses
                  
                  
                  785,830
                  
                  
                  
                  138,000Loans
      charged off
                  
                  
                  (781,573
                  )
                  
                  
                  (57,939
                  )Recoveries
                  
                  
                  1,356
                  
                  
                  
                  1,020Ending
      balance
                  
                  $
                  2,322,328
                  
                  
                  $
                  1,824,551








At March
31, 2010 and December 31, 2009, loans totaling $4,490,229 and $3,698,621,
respectively, were in nonaccrual status.  There were no loans more
than 90 days past due and still accruing at March 31, 2010 or December 31,
2009.  At March 31, 2010 there were $2,809,576 in restructured loans
not included in nonaccrual loans, and $2,661,007 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 were performing in
accordance with their modified terms.





Loans
individually considered impaired were as follows:





March 31,
                  
                  
                  December 31,2010
                  
                  
                  2009Loans
      considered impairedWith
      no allocated allowance for loan losses
                  
                  $
                  4,943,890
                  
                  
                  $
                  3,322,718With
      an allocated allowance for loan losses
                  
                  
                  2,262,357
                  
                  
                  
                  2,103,343$
                  7,206,247
                  
                  
                  $
                  5,426,061Amount
      of the allowance for loan losses allocated
                  
                  $
                  368,064
                  
                  
                  $
                  361,000





NOTE
4 - DEPOSITS





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





March 31,
                  
                  
                  December 31,2010
                  
                  
                  2009Interest-bearing
      checking
                  
                  $
                  9,914,025
                  
                  
                  $
                  9,772,226Savings
                  
                  
                  37,824,218
                  
                  
                  
                  37,132,223Money
      market
                  
                  
                  29,676,236
                  
                  
                  
                  29,107,414Time
      under $100,000
                  
                  
                  35,356,011
                  
                  
                  
                  34,499,050Time
      $100,000 and over
                  
                  
                  48,238,180
                  
                  
                  
                  44,942,346$
                  161,008,670
                  
                  
                  $
                  155,453,259





At March
31, 2010 and December 31, 2009, the Bank had $20,205,725 and $19,356,801,
respectively, in national market certificates of deposit, primarily in amounts
that qualify for FDIC insurance coverage.


11


WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


March
31, 2010





NOTE
5—FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS





Federal
Home Loan Bank (FHLB) advances were $2,900,000 and $3,400,000 at March 31, 2010
and December 31, 2009, respectively.  The advances at March 31, 2010
are collateralized by approximately $53,808,000 of loans secured by real estate
and $488,000 of FHLB stock under a blanket lien agreement.  As of
March 31, 2010 the Company’s available borrowing capacity with the FHLB was
$14,764,000, 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 March 31, 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 March 31, 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 March 31, 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 2.20% at March 31, 2010, above the covenant
of 1.50% or less.  The Company expects the loan agreement to be
renegotiated including revised covenants and the waiver of any prior covenant
exceptions.





The
Company has the ability to borrow under various other credit facilities that
totaled $3,534,000 at March 31, 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 $2,534,000 is available on
lines from two correspondent banks secured by the Company’s unpledged
securities.


12


WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


March
31, 2010





NOTE
6 – STOCK COMPENSATION PLAN





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





Three Months Ended March 31, 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 March 31, 2010;
therefore there was no intrinsic value of the options outstanding and
exercisable at quarter-end.





In the
first quarter of 2010, the Company extended the expiration date of 31,500 stock
options expiring on April 11, 2010 and 10,000 stock options expiring March 15,
2011 issued to directors for an additional five years.  The Company
accounted for the extensions under the guidance for stock-based compensation and
recognized a charge to income of $35,035. The related income tax benefit was
$11,912.  The impact of the extension of the expiration date of
director options also increased paid-in capital by $35,000.





NOTE
7- FAIR VALUE





Fair
value is the exchange price that would be received for an asset or paid to
transfer a liability (exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants
on the measurement date. There are three levels of inputs that may be used to
measure fair values:





Level 1:
Quoted prices (unadjusted) for identical assets or liabilities in active markets
that the entity has the ability to access as of the measurement
date.





Level 2:
Significant other observable inputs other than Level 1 prices such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable
market data.





Level 3:
Significant unobservable inputs that reflect a reporting entity’s own
assumptions about the assumptions that market participants would use in pricing
an asset or liability.


13


WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


March
31, 2010





NOTE 7 – FAIR VALUE(continued)





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
inputs).





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.





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)March 31, 2010Assets
      and liabilities measured at fair value:·on a
      recurring basis:Investment
      securities available for saleMortgage-backed
                    
                    $
                    -
                    
                    
                    $
                    4,929,386
                    
                    
                    $
                    -Municipal
                    
                    
                    -
                    
                    
                    
                    4,792,118
                    
                    
                    
                    -·on a
      nonrecurring basis:Impaired
      loans
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,894,293December 31, 2009Assets
      and liabilities measured at fair value·on a
      recurring basis:Investment
      securities available for saleMortgage-backed
                    
                    
                    -
                    
                    
                    
                    5,264,140
                    
                    
                    
                    -Municipal
                    
                    
                    -
                    
                    
                    
                    4,755,085
                    
                    
                    
                    -·on a
      nonrecurring basis:Impaired
      loans
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,742,343




14





WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


March
31, 2010





NOTE 7 – FAIR VALUE(continued)





Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had an unpaid principal balance of $2,262,357
with valuation allowances of $368,064 at March 31, 2010, resulting in an
additional provision for loan losses of approximately $170,000 for the quarter
ending March 31, 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 $60,000 were recorded through the
provision for loan losses in the quarter ended March 31, 2009.





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





March 31, 2010
                  
                  
                  December 31, 2009Carrying
                    Amount
                  
                  
                  Estimated
                    Fair Value
                  
                  
                  Carrying
                    Amount
                  
                  
                  Estimated
                    Fair ValueCash
      and cash equivalents
                  
                  $
                  21,234,405
                  
                  
                  $
                  21,234,000
                  
                  
                  $
                  18,178,601
                  
                  
                  $
                  18,179,000Securities
      available for sale
                  
                  
                  9,721,504
                  
                  
                  
                  9,722,000
                  
                  
                  
                  10,019,225
                  
                  
                  
                  10,019,000Loans,
      net of allowance
                  
                  
                  164,714,199
                  
                  
                  
                  162,788,000
                  
                  
                  
                  164,860,130
                  
                  
                  
                  164,395,000Loans
      held for sale
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  690,000
                  
                  
                  
                  697,000Accrued
      interest receivable
                  
                  
                  510,298
                  
                  
                  
                  510,000
                  
                  
                  
                  491,845
                  
                  
                  
                  492,000Demand
      and savings deposits
                  
                  
                  (97,306,762
                  )
                  
                  
                  (97,307,000
                  )
                  
                  
                  (98,800,893
                  )
                  
                  
                  (98,801,000
                  )Time
      deposits
                  
                  
                  (83,594,191
                  )
                  
                  
                  (82,872,000
                  )
                  
                  
                  (79,441,396
                  )
                  
                  
                  (79,453,000
                  )Federal
      Home Loan Bank advances
                  
                  
                  (2,900,000
                  )
                  
                  
                  (2,967,000
                  )
                  
                  
                  (3,400,000
                  )
                  
                  
                  (3,401,000
                  )Accrued
      interest payable
                  
                  
                  (145,843
                  )
                  
                  
                  (146,000
                  )
                  
                  
                  (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.




15


WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


March
31, 2010





NOTE
8 – REGULATORY CAPITAL MATTERS





During
the quarter ended March 31, 2010 the Bank repaid to the Holding Company the
entire $4.0 million in subordinated debt which qualified as Tier-two regulatory
capital at December 31, 2009.  Of the amount repaid, the Holding
Company downstreamed $3.5 million to the Bank as paid-in capital which qualified
as Tier-one regulatory capital on March 31, 2010.





At March
31, 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 capitalMarch 31,
                    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
                  
                  
                  9.1
                  %
                  
                  
                  7.7
                  %
                  
                  
                  5.0
                  %
                  
                  
                  4.0
                  %




16


WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


March
31, 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 March 31, 2010, to that of December 31, 2009, and the results
of operations for the three months ended March 31, 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 March 31, 2010 increased 1.0% to $203,917,000 compared with
$201,933,000 at December 31, 2009.





As of
March 31, 2010, there were approximately $4,929,000 in mortgage-backed
securities and $4,793,000 in tax-exempt municipal bonds in the
available-for-sale securities portfolio.  These totals include the
effect of unrealized gains of $431,000 in the available-for-sale securities
portfolio as of March 31, 2010.  Municipal bonds generally have
maturities of up to fifteen years.




17


WESTERN RESERVE BANCORP,
INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


March
31, 2010





FINANCIAL CONDITION(continued)





Loans
decreased $140,000 to $167,037,000 at March 31, 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
March 31, 2010, commercial loans totaled $149,212,000, or 89.3% of total
loans.  Home equity lines and residential real estate loans totaled
$11,224,000, or 6.7% of total loans and consumer and other loans totaled
$6,600,000, or 4.0% of total loans.





The
Company’s loan-to-deposit ratio decreased to 92.3% at March 31, 2010, compared
to 93.8% at December 31, 2009.  The Company’s loan-to-assets ratio
also decreased in the 2010 quarter as compared to the 2009 quarter (to 81.9% at
March 31, 2010 from 82.8% at December 31, 2009).  The decrease in
these ratios is because loans decreased slightly while deposits grew ($2.7
million).The growth in total assets ($2.0 million) was primarily due to an
increase in interest bearing deposits at other financial
institutions.  Management anticipates that the loan-to-deposit ratio
for the remainder of 2010 will remain over 90% and the loan-to-assets ratio will
be approximately 80% to 85%.





Of the
total loans at March 31, 2010, approximately $123,762,000 or 74.1% are at a
variable interest rate, and $43,275,000 or 25.9% are at a fixed interest
rate.  Including scheduled principal repayments, approximately
$104,252,000, or 62.4%, of loans mature or are scheduled to reprice within
twelve months.  An additional $61,128,000 or 36.6% of loans mature or
are scheduled to reprice within five years.





The
allowance for loan losses is maintained at a level considered by management to
be adequate to cover probable incurred credit losses in the loan
portfolio.  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 $785,830 and $138,000 for the quarters ended March 31, 2010 and 2009,
respectively, representing an increase of $647,830.  Management
believes the allowance for loan losses at March 31, 2010, is adequate to absorb
probable incurred losses in the loan portfolio.




18


WESTERN RESERVE BANCORP,
INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


March
31, 2010





FINANCIAL CONDITION(continued)





The
allowance for loan losses and related information for the three months ended
March 31, 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
                  
                  
                  -
                  
                  
                  
                  (767,775
                  )
                  
                  
                  (6,600
                  )
                  
                  
                  (7,198
                  )
                  
                  
                  (781,573
                  )Recoveries
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,332
                  
                  
                  
                  24
                  
                  
                  
                  1,356Provisions
                  
                  
                  175,173
                  
                  
                  
                  609,372
                  
                  
                  
                  5,713
                  
                  
                  
                  (4,428
                  )
                  
                  
                  785,830Ending
      Balance
                  
                  $
                  1,847,248
                  
                  
                  $
                  371,820
                  
                  
                  $
                  54,106
                  
                  
                  $
                  49,154
                  
                  
                  $
                  2,322,328Loans
      evaluated for impairment at period-end:Individually
                  
                  $
                  6,612,344
                  
                  
                  $
                  593,903
                  
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  $
                  7,206,247Collectively
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  59,099
                  
                  
                  
                  34,459
                  
                  
                  
                  93,558





In the
first quarter of 2010, loans totaling $782,000 were charged off and $1,000 was
recovered on loans previously charged off.  In the like period in
2009, loans totaling $58,000 were charged off and $1,000 was recovered on loans
previously charged off. The allowance for loan losses was 1.39% and 1.38% of
total loans at March 31, 2010 and December 31, 2009, respectively. At March 31, 2010,
$368,000 or 15.85% 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. During the first quarter of 2010, the Company accepted marketable
security collateral valued at $83,000 and charged off the remaining balance
($195,000) on a commercial and industrial loan (the Company had a specific
reserve of $166,000 for this loan at December 31, 2009).  On May 12,
2010, the Company learned that a borrower with two loans totaling $572,000 had
misrepresented the existence of the collateral and these loans were charged off
effective March 31, 2010.  The Company is pursuing all avenues of
collection with respect to this borrower.  The Company routinely and
carefully monitors borrowers’ financial reports
and believes this is an isolated incident; however, there is no guarantee that
additional instances of misrepresentation may not occur in the
future.





At March
31, 2010, thirty-nine loans to seventeen borrowers totaling $4,490,229 were in
nonaccrual status, compared to twenty-six loans to sixteen borrowers totaling
$3,698,621 at year-end 2009.  At March 31, 2010, there were six loans
to three borrowers not on nonaccrual status totaling $2,809,576 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 performing in accordance with
their modified terms at March 31, 2010 and December 31, 2009.





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.  The
Company’s underwriting standards have been prudent throughout its
history.


19





WESTERN RESERVE BANCORP,
INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


March
31, 2010





FINANCIAL CONDITION(continued)





Information
related to the Company’s credit risk profile by internally assigned grade at
March 31, 2010, is included in the following table.





Commercial
                    Real Estate
                  
                  
                  Commercial &
                    Industrial
                  
                  
                  Residential
                  
                  
                  Consumer
                  
                  
                  TotalGrade:Pass
                  
                  $
                  90,369,786
                  
                  
                  $
                  32,181,051
                  
                  
                  $
                  11,165,230
                  
                  
                  $
                  6,565,996
                  
                  
                  $
                  140,282,063Watch
                  
                  
                  5,425,426
                  
                  
                  
                  800,491
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  6,225,917Special
      mention
                  
                  
                  6,465,967
                  
                  
                  
                  1,589,544
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  8,055,511Substandard
                  
                  
                  4,289,438
                  
                  
                  
                  883,793
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  5,173,231Nonaccruing
      and troubled debt restructurings
                  
                  
                  6,612,344
                  
                  
                  
                  593,903
                  
                  
                  
                  59,099
                  
                  
                  
                  34,459
                  
                  
                  
                  7,299,805Total
                  
                  $
                  113,162,961
                  
                  
                  $
                  36,048,782
                  
                  
                  $
                  11,224,329
                  
                  
                  $
                  6,600,455
                  
                  
                  $
                  167,036,527





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.





The
Company’s past due loans are very low, with only $124,000 in delinquent loans
(excluding loans on nonaccrual status).  Delinquent loans by type and
number of days delinquent at March 31, 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
                  
                  $
                  -
                  
                  
                  $
                  93,883
                  
                  
                  $
                  -
                  
                  
                  $
                  30,552
                  
                  
                  $
                  124,43561
      to 90
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -





At March
31, 2010, the Company’s other real estate owned (OREO) totaled $1,068,000 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 $21,800 and $3,025 in the first quarter 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.


20





WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


March
31, 2010





FINANCIAL CONDITION(continued)





Deposits
were $180,901,000 at March 31, 2010, an increase of 1.5% from the $178,242,000
at December 31, 2009.  Deposits at March 31, 2010 consisted
of:





Type of deposit
                
                Balance
                
                
                % TotalNoninterest-bearing
      checking
                
                $
                19,892,000
                
                
                
                11.0
                %Interest-bearing
      checking
                
                
                9,914,000
                
                
                
                5.5
                %Variable
      rate savings/money market (Market Rate Savings Accounts)
                
                
                67,501,000
                
                
                
                37.3
                %Time
      deposits
                
                
                83,594,000
                
                
                
                46.2
                %Total
                
                $
                180,901,000
                
                
                
                100.0
                %





Liabilities





Included
in the time deposits total at March 31, 2010 and December 31, 2009 were
$20,206,000 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 six months to five years, and rates ranging
from 0.65% to 4.90%.  As of March 31, 2010, the weighted average
interest rate paid on these CDs was 2.11% and the weighted average remaining
maturity was 15.6 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 March 31, 2010,
that location’s total loans were $26,986,000 and total deposits were
$45,683,000.  Approximately 54% of Brecksville’s deposits are in lower
cost Market Rate Savings Accounts.





Federal
Home Loan Bank (FHLB) advances decreased to $2.9 million at March 31, 2010 from
$3.4 million at year-end 2009.  FHLB advances totaling $500,000
matured and were repaid in March 2010.   FHLB advances are
collateralized by loans secured by real estate under a blanket lien
agreement.  At March 31, 2010 the Company’s available borrowing
capacity with the FHLB was $14.8 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.





Shareholders’
Equity





Total
shareholders’ equity decreased $190,000 to $19,293,000 at March 31, 2010, from
$19,483,000 at December 31, 2009.  This decrease was a result of net
loss of $216,000 for the first quarter of 2010 and dividends on preferred stock
of $64,000, 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
$4,000 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
$51,000.


21





WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


March
31, 2010





RESULTS
OF OPERATIONS – FOR THE THREE MONTHS ENDED MARCH 31, 2010





Overview




Net loss
for the first three months of 2010 was $216,000, a negative swing of $247,000
from the $31,000 net income in the same period in 2009 primarily due to an
increase in the provision for loan losses of $648,000, partially offset by a
$359,000 increase in net interest income and a $19,000 increase in rent
income.  Other items impacting the Company’s results include a $48,000
increase in collection expense and a $35,000 increase in directors’
fees.  Net loss available to common shareholders for the first three
months of 2010 was $294,000, or $0.50 loss per basic and diluted share after
preferred stock dividends of $64,000 and the amortization of premiums of $14,000
in the first quarter of 2010.  Net income available to common
shareholders was $31,000 or $0.05 per basic and diluted share for the first
quarter of 2009.





Net
Interest Income





Net
interest income increased for the first three 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 income
before the provision for loan losses in the first three months of 2010 was
$1,668,000, an increase of $359,000, or 27.4%, from the $1,309,000 earned in the
same period of 2009.  Net interest margin was 3.52% for the quarter
ended March 31, 2010, representing an increase of 43 bp from the 3.09% for the
like period in 2009.





The
following table illustrates the average balances and annualized interest rates
for the quarters ended March 31, 2010 and 2009.  Loans on nonaccrual
status are included in the average loan balance.


22


WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


March
31, 2010





RESULTS OF
OPERATIONS – FOR THE THREE MONTHS ENDED MARCH 31, 2010(continued)


Quarter ended
                            
                            
                            Quarter endedMarch 31, 2010
                            
                            
                            March 31, 2009Average
                            
                            
                            
                            
                            
                            Average
                            
                            
                            Average
                            
                            
                            
                            
                            
                            AverageBalance
                            
                            
                            Interest
                            
                            
                            Rate
                            
                            
                            Balance
                            
                            
                            Interest
                            
                            
                            Rate($
      in thousands)Interest-earning
      assets:Federal
      funds sold and othershort
      term funds
                            
                            $
                            15,467
                            
                            
                            $
                            9
                            
                            
                            
                            0.25
                            %
                            
                            $
                            15,519
                            
                            
                            $
                            19
                            
                            
                            
                            0.50
                            %Securities
      — taxable
                            
                            
                            5,117
                            
                            
                            
                            58
                            
                            
                            
                            4.83
                            %
                            
                            
                            5,800
                            
                            
                            
                            71
                            
                            
                            
                            5.12
                            %Securities
      — tax exempt
                            
                            
                            4,776
                            
                            
                            
                            64
                            
                            
                            
                            5.64
                            %
                            
                            
                            4,404
                            
                            
                            
                            59
                            
                            
                            
                            5.64
                            %Restricted
      stock
                            
                            
                            830
                            
                            
                            
                            10
                            
                            
                            
                            5.06
                            %
                            
                            
                            740
                            
                            
                            
                            9
                            
                            
                            
                            5.00
                            %Loans
                            
                            
                            168,188
                            
                            
                            
                            2,132
                            
                            
                            
                            5.14
                            %
                            
                            
                            147,558
                            
                            
                            
                            1,942
                            
                            
                            
                            5.34
                            %Total
      interest-earning assets
                            
                            
                            194,378
                            
                            
                            
                            2,273
                            
                            
                            
                            4.75
                            %
                            
                            
                            174,021
                            
                            
                            
                            2,100
                            
                            
                            
                            4.89
                            %Noninterest
      earning assets
                            
                            
                            7,066
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            5,722Total
      assets
                            
                            $
                            201,444
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            179,743Interest-bearing
      liabilities:Checking
      accounts
                            
                            $
                            9,780
                            
                            
                            
                            12
                            
                            
                            
                            0.52
                            %
                            
                            $
                            7,498
                            
                            
                            
                            12
                            
                            
                            
                            0.65
                            %Market
      rate savings accounts
                            
                            
                            65,952
                            
                            
                            
                            129
                            
                            
                            
                            0.79
                            %
                            
                            
                            67,658
                            
                            
                            
                            183
                            
                            
                            
                            1.10
                            %Time
      deposits
                            
                            
                            81,631
                            
                            
                            
                            414
                            
                            
                            
                            2.06
                            %
                            
                            
                            66,245
                            
                            
                            
                            523
                            
                            
                            
                            3.20
                            %Federal
      Home Loan Bankadvances
      and other borrowings
                            
                            
                            3,367
                            
                            
                            
                            31
                            
                            
                            
                            3.72
                            %
                            
                            
                            6,377
                            
                            
                            
                            55
                            
                            
                            
                            3.51
                            %Total
      interest-bearing liabilities
                            
                            
                            160,730
                            
                            
                            
                            586
                            
                            
                            
                            1.48
                            %
                            
                            
                            147,778
                            
                            
                            
                            773
                            
                            
                            
                            2.12
                            %Noninterest-bearing
      liabilities
                            
                            
                            21,126
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            17,209Shareholders'
      equity
                            
                            
                            19,588
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            14,756Total
      liabilities and shareholders' equity
                            
                            $
                            201,444
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            179,743Net
      interest income
                            
                            
                            
                            
                            
                            
                            1,687
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            1,327Tax
      equivalent adjustment
                            
                            
                            
                            
                            
                            
                            (19
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (18
                            )Net
      interest income per
                            
                            
                            
                            
                            
                            $
                            1,668
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            1,309financial
      statementsNet
      interest margin(Net
      yield on average earning assets)
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            3.52
                            %
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            3.09
                            %




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:




23


WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


March
31, 2010





RESULTS OF
OPERATIONS – FOR THE THREE MONTHS ENDED MARCH 31, 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 IncomeThree Months EndedMarch 31, 2010 vs. 2009Increase (Decrease) due toVolume
                          
                          
                          Rate
                          
                          
                          Net($ in thousands)Interest
      income:Federal
      funds sold and othershort
      term funds
                          
                          $
                          -
                          
                          
                          $
                          (10
                          )
                          
                          $
                          (10
                          )Securities
      — taxable
                          
                          
                          (9
                          )
                          
                          
                          (4
                          )
                          
                          
                          (13
                          )Securities
      — tax exempt
                          
                          
                          5
                          
                          
                          
                          -
                          
                          
                          
                          5Restricted
      stock
                          
                          
                          1
                          
                          
                          
                          -
                          
                          
                          
                          1Loans
                          
                          
                          270
                          
                          
                          
                          (80
                          )
                          
                          
                          190Total
      interest-earning assets
                          
                          
                          267
                          
                          
                          
                          (94
                          )
                          
                          
                          173Interest
      expense:Transaction
      accounts (NOW)
                          
                          
                          (3
                          )
                          
                          
                          3
                          
                          
                          
                          -Market
      rate savings accounts
                          
                          
                          4
                          
                          
                          
                          50
                          
                          
                          
                          54Time
      deposits
                          
                          
                          (74
                          )
                          
                          
                          183
                          
                          
                          
                          109Federal
      Home Loan Bankadvances
      and other borrowings
                          
                          
                          28
                          
                          
                          
                          (4
                          )
                          
                          
                          24Total
      interest-bearing liabilities
                          
                          
                          (45
                          )
                          
                          
                          232
                          
                          
                          
                          187Change
      in net interest income
                          
                          $
                          222
                          
                          
                          $
                          138
                          
                          
                          $
                          360





Interest
Income





Tax
equivalent interest income increased 8.2% when comparing the quarter ended March
31, 2010 with the same period of 2009.





Interest
and fee income on loans for the first quarter of 2010 was $2,132,000, an
increase of $190,000 or 9.8% from $1,942,000 for the first quarter 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 10.8% to $141,000 through the
first quarter of 2010, from $158,000 in the same period in 2009 primarily due to
lower rates earned on Federal funds sold and other short-term
funds.




24





WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


March
31, 2010





RESULTS OF
OPERATIONS – FOR THE THREE MONTHS ENDED MARCH 31, 2010(continued)





Interest
Expense





Interest
expense decreased 24.2% when comparing the quarter ended March 31, 2010 with the
same period of 2009.  Total interest expense was $586,000 for the
first quarter of 2010, compared to $773,000 in the same period of
2009.  Interest on deposits decreased 22.6%, to $556,000 in the first
three months of 2010, from $718,000 in the same period of 2009.  The
decrease in deposit interest expense was primarily due to lower rates paid on
CDs, partially offset by increasing CD volume.  Interest on borrowings
was $31,000 for the quarter ending March 31, 2010 compared to $55,000 for the
first quarter 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 43 bp to 3.52% in the first quarter of 2010 from 3.09%
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 14 bp to 4.75% for the first quarter of 2010
compared to 4.89% in the same period of 2009.  In the first quarter of
2010, the yield on loans was 5.14%, down 20 bp from 5.34% in the first quarter
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 quarter of 2010, the cost of interest-bearing deposits was 1.43%, down 63
bp from 2.06% in the like period in 2009.  This decrease reflects
overall market interest rate decreases.  The overall cost of
interest-bearing funds (deposits and borrowings) was 1.48% in the first quarter
of 2010, compared with 2.12% in the same period of 2009.





Provision
for Loan Losses





The
provision for loan losses was $785,830 and $138,000 for the quarters ended March
31, 2010 and 2009, respectively, representing an increase of
$647,830.  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.


25


WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


March
31, 2010





RESULTS OF
OPERATIONS – FOR THE THREE MONTHS ENDED MARCH 31, 2010(continued)





Noninterest
Income





Total
noninterest income for the first quarter of 2010 was $145,000, an increase of
25.0% from $116,000 for the same period in 2009 primarily due to increases in
rental income of $19,000 and in gains on sales of loans of $5,000.





In the
2010 quarter, the Company leased OREO properties to three tenants and rent
income totaled $22,000 while in the 2009 quarter the Company leased OREO
property to one tenant and rent income totaled $3,000. The increase in gains on
loan sales is due to the sale of five mortgage loans totaling $1,073,000 for a
total gain of $14,000 in the 2010 quarter compared to the sale of three mortgage
loans totaling $490,000 for a total gain of $9,000 in the 2009
quarter.





Noninterest
Expenses





Noninterest
expenses were $1,388,000 for the first quarter of 2010, an increase of 9.1% over
the $1,273,000 for the same period of 2009.  This increase is mainly
attributable to an increase in collection and OREO expense of $48,000 related to
the increase in nonaccrual loans and the cost to re-appraise properties securing
such loans and the increase in directors fees of $35,000 related to extending
stock options that would have expired in 2010 and 2011 for an additional five
years.  Other, smaller increases in expenses related to growth and
general price increases included salaries and benefits of $18,000, federal
deposit insurance of $13,000 and professional fees of $11,000.  These
increases were partially offset by a decrease in occupancy expense of
$9,000.





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





Three months endedMarch 31,2010
                  
                  
                  2009Supplies,
      printing and postage
                  
                  $
                  20,000
                  
                  
                  $
                  21,000Loan
      expenses
                  
                  
                  13,000
                  
                  
                  
                  9,000Dues
      and subscriptions
                  
                  
                  8,000
                  
                  
                  
                  6,000Travel
      and entertainment
                  
                  
                  7,000
                  
                  
                  
                  7,000Insurance
                  
                  
                  5,000
                  
                  
                  
                  7,000Telephone
                  
                  
                  5,000
                  
                  
                  
                  7,000Other
                  
                  
                  7,000
                  
                  
                  
                  9,000$
                  65,000
                  
                  
                  $
                  66,000





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.


26


WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


March
31, 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, proceeds from FHLB advances, borrowings,
and repayment of principal and interest on loans and investments.  The
primary uses of cash are lending 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 $30,955,909 at March 31, 2010,
compared to $28,887,826 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 $190,000, to
$19,293,000 at March 31, 2010 from $19,483,000 at December 31,
2009.  The decrease was due to net loss of $216,000 for the first
quarter of 2010 and dividends on preferred stock of $64,000, partially offset by
the $35,000 impact on paid-in capital of the extension of the expiration date of
director stock options, proceeds of $4,000 from the Employee Stock Purchase Plan
(resulting in 344 shares issued), and an increase of $51,000 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 March 31, 2010 and December 31,
2009.





In 2003,
the Board of Directors approved The Western Reserve Bancorp, Inc. Employee Stock
Purchase Plan.  A Form S-8 Registration Statement was filed with the
SEC on April 1, 2004, and the Plan became effective on that date.  The
Company filed an amended form S-8 Registration Statement on March 23, 2010 to
increase the number of shares of authorized but unissued shares of stock
allocated to the Plan. Under this Plan, each employee is eligible to purchase,
through payroll deduction or direct payment to the Company, up to $3,000 worth
of common stock per year at market prices and without brokerage
commissions.  There are 16,250 shares of authorized but unissued
shares of stock allocated to the Plan.  Because the Plan has been
registered with the SEC, there are no restrictions on the resale of the stock,
other than those applicable to “affiliates” as defined in Rule 144 of the
Securities and Exchange Commission.  As of March 31, 2010, a total of
4,963 shares of common stock are held by 28 participants through the
Plan.


27


WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


March
31, 2010




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 March 31, 2010 the Company was in
a liability sensitive position in the one-year category, with $123.0 million in
assets and $135.5 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 quarter
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 3.7% and
7.3%, 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.




28


WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


March
31, 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.


29


WESTERN
RESERVE BANCORP, INC.


CONTROLS
AND PROCEDURES


March
31, 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 March 31, 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 March 31, 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 quarter ended March 31, 2010, that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.


30


WESTERN
RESERVE BANCORP, INC.


FORM
10-Q


March
31, 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




31


Item 6 –
Exhibits





WESTERN
RESERVE BANCORP, INC.


FORM
10-Q


March
31, 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.


32





WESTERN
RESERVE BANCORP, INC.


FORM
10-Q


March
31, 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 May 17,
      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


33





WESTERN
RESERVE BANCORP, INC.


FORM
10-Q


March
31, 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.


34


WESTERN
RESERVE BANCORP, INC.


FORM
10-Q


Quarter
ended March 31, 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:
      May 17, 2010
            By:
            /s/ Edward J. McKeonEdward
      J. McKeonPresident
      and Chief Executive Officer(Principal
      Executive Officer)/s/ Cynthia A. MahlCynthia
      A. MahlExecutive
      Vice President/Chief FinancialOfficer(Principal
      Financial Officer)




35