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 September 30, 2009





 ̈
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





The
number of common shares of the registrant outstanding on November 16, 2009 was
584,502.





WESTERN
RESERVE BANCORP, INC.


FORM
10-Q


Quarter
ended September 30, 2009





PagePART
      I—Financial InformationITEM
      1
                                                  FINANCIAL
      STATEMENTSConsolidated
      Balance Sheets as of September 30, 2009and
      December 31, 2008
                                                  3Consolidated
      Statements of Income for the three and nine monthperiods
      ended September 30, 2009 and 2008
                                                  4Consolidated
      Statements of Comprehensive Income for the threeand
      nine month periods ended September 30, 2009 and 2008
                                                  5Consolidated
      Statements of Cash Flows for the Nine months endedSeptember
      30, 2009 and 2008
                                                  6Notes
      to Consolidated Financial Statements
                                                  7ITEM
      2
                                                  MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                                                  20ITEM
      3
                                                  QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                                                  N/AITEM
      4T
                                                  CONTROLS
      AND PROCEDURES
                                                  36PART
      II—Other Information
                                                  37SIGNATURES
                                                  41


2


WESTERN
RESERVE BANCORP, INC.


CONSOLIDATED
BALANCE SHEETS





September
      30,
                
                
                December
      31,2009
                
                
                2008(Unaudited)ASSETSCash
      and due from financial institutions
                
                $
                2,553,051
                
                
                $
                2,302,786Interest-bearing
      deposits in other financial institutions
                
                
                7,794,801
                
                
                
                18,908,677Federal
      funds sold and other short-term funds
                
                
                104,000
                
                
                
                91,000Cash
      and cash equivalents
                
                
                10,451,852
                
                
                
                21,302,463Time
      deposits in other banks
                
                
                2,000,000
                
                
                
                -Securities
      available for sale
                
                
                11,000,968
                
                
                
                10,214,322Restricted
      stock
                
                
                781,900
                
                
                
                728,400Loans
                
                
                161,080,458
                
                
                
                143,625,431Allowance
      for loan losses
                
                
                (2,250,259
                )
                
                
                (1,743,470
                )Loans,
      net
                
                
                158,830,199
                
                
                
                141,881,961Premises
      and equipment, net
                
                
                960,846
                
                
                
                1,006,081Bank
      owned life insurance
                
                
                2,308,001
                
                
                
                2,231,665Other
      real estate owned
                
                
                701,334
                
                
                
                290,000Accrued
      interest receivable and other assets
                
                
                1,798,419
                
                
                
                1,457,347$
                188,833,519
                
                
                $
                179,112,239LIABILITIES
      AND SHAREHOLDERS' EQUITYDepositsNoninterest-bearing
                
                $
                18,685,671
                
                
                $
                16,942,194Interest-bearing
                
                
                146,175,962
                
                
                
                139,775,662Total
      deposits
                
                
                164,861,633
                
                
                
                156,717,856Other
      borrowings
                
                
                -
                
                
                
                500,000Federal
      Home Loan Bank advances
                
                
                3,400,000
                
                
                
                6,500,000Accrued
      interest payable and other liabilities
                
                
                1,069,994
                
                
                
                683,663Total
      Liabilities
                
                
                169,331,627
                
                
                
                164,401,519Shareholders'
      EquityFixed
      rate cumulative preferred stock, no par value, $1,000 liquidaton
      value:Series
      A, 4,700 and 0 shares authorized and issued at September 30, 2009 and
      December 31, 2009
                
                
                4,700,000
                
                
                
                -Discount
      on Series A preferred stock
                
                
                (280,078
                )
                
                
                -Series
      B, 235 and 0 shares authorized and issued at September 30, 2009 and
      December 31, 2009
                
                
                235,000
                
                
                
                -Premium
      on Series B preferred stock
                
                
                27,327
                
                
                
                -Common
      stock, no par value, $1 stated value, 1,500,000 shares authorized, 584,502
      and 583,330 shares issued and outstanding as of September 30, 2009 and
      December 31, 2008
                
                
                584,502
                
                
                
                583,330Additional
      paid-in capital
                
                
                9,930,340
                
                
                
                9,912,293Retained
      earnings
                
                
                3,981,663
                
                
                
                4,041,215Accumulated
      other comprehensive income
                
                
                323,138
                
                
                
                173,882Total
      Shareholders' Equity
                
                
                19,501,892
                
                
                
                14,710,720$
                188,833,519
                
                
                $
                179,112,239





See
accompanying notes to consolidated financial statements.


3





WESTERN
RESERVE BANCORP, INC.


CONSOLIDATED
STATEMENTS OF INCOME


(UNAUDITED)


Three
      months Ended
                
                
                Nine
      months endedSeptember
      30,
                
                
                September
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Interest
      and dividend incomeLoans,
      including fees
                
                $
                2,100,245
                
                
                $
                2,176,366
                
                
                $
                6,037,808
                
                
                $
                6,659,567Securities:Taxable
                
                
                72,327
                
                
                
                82,308
                
                
                
                212,172
                
                
                
                250,848Tax
      exempt
                
                
                44,367
                
                
                
                43,451
                
                
                
                127,541
                
                
                
                130,390Dividends
      on restricted stock
                
                
                10,504
                
                
                
                8,875
                
                
                
                28,908
                
                
                
                25,132Federal
      funds sold and short-term investments
                
                
                11,061
                
                
                
                46,847
                
                
                
                47,355
                
                
                
                241,1552,238,504
                
                
                
                2,357,847
                
                
                
                6,453,784
                
                
                
                7,307,092Interest
      expenseDeposits
                
                
                638,454
                
                
                
                805,943
                
                
                
                2,039,118
                
                
                
                2,737,384Borrowings
                
                
                31,744
                
                
                
                60,964
                
                
                
                120,935
                
                
                
                145,038670,198
                
                
                
                866,907
                
                
                
                2,160,053
                
                
                
                2,882,422Net
      interest income
                
                
                1,568,306
                
                
                
                1,490,940
                
                
                
                4,293,731
                
                
                
                4,424,670Provision
      for loan losses
                
                
                186,700
                
                
                
                258,500
                
                
                
                668,700
                
                
                
                398,800Net
      interest income after provision for loan losses
                
                
                1,381,606
                
                
                
                1,232,440
                
                
                
                3,625,031
                
                
                
                4,025,870Noninterest
      incomeService
      charges on deposit accounts
                
                
                50,547
                
                
                
                49,300
                
                
                
                149,998
                
                
                
                132,894Net
      gains on sales of loans
                
                
                9,646
                
                
                
                -
                
                
                
                19,542
                
                
                
                1,446Increase
      in cash surrender value life insurance
                
                
                25,242
                
                
                
                25,071
                
                
                
                76,336
                
                
                
                63,181Other
                
                
                44,168
                
                
                
                27,175
                
                
                
                115,151
                
                
                
                89,511129,603
                
                
                
                101,546
                
                
                
                361,027
                
                
                
                287,032Noninterest
      expenseSalaries
      and employee benefits
                
                
                640,860
                
                
                
                533,551
                
                
                
                1,900,677
                
                
                
                1,734,526Premises
      and equipment, net
                
                
                228,076
                
                
                
                232,359
                
                
                
                680,397
                
                
                
                695,494FDIC
      insurance
                
                
                73,078
                
                
                
                29,261
                
                
                
                287,095
                
                
                
                81,302Data
      processing
                
                
                94,987
                
                
                
                93,746
                
                
                
                279,487
                
                
                
                278,007Professional
      fees
                
                
                41,936
                
                
                
                58,692
                
                
                
                147,899
                
                
                
                161,181Taxes
      other than income and payroll
                
                
                46,893
                
                
                
                36,414
                
                
                
                142,147
                
                
                
                112,706Directors'
      fees
                
                
                35,800
                
                
                
                35,725
                
                
                
                107,850
                
                
                
                109,800Collection
      and other real estate owned
                
                
                39,702
                
                
                
                37,445
                
                
                
                90,374
                
                
                
                85,331Marketing
      and advertising
                
                
                12,162
                
                
                
                18,152
                
                
                
                58,551
                
                
                
                64,776Community
      relations and contributions
                
                
                13,563
                
                
                
                16,417
                
                
                
                54,442
                
                
                
                70,092Other
                
                
                95,430
                
                
                
                112,117
                
                
                
                245,570
                
                
                
                271,1431,322,487
                
                
                
                1,203,879
                
                
                
                3,994,489
                
                
                
                3,664,358Income
      (loss) before income taxes
                
                
                188,722
                
                
                
                130,107
                
                
                
                (8,431
                )
                
                
                648,544Income
      tax expense (benefit)
                
                
                42,286
                
                
                
                22,568
                
                
                
                (65,428
                )
                
                
                162,318Net
      income
                
                $
                146,436
                
                
                $
                107,539
                
                
                $
                56,997
                
                
                $
                486,226Dividends
      and amortization on preferred stock
                
                
                77,700
                
                
                
                -
                
                
                
                116,549
                
                
                
                -Net income (loss) available
      to common
      shareholders
                
                $
                68,736
                
                
                $
                107,539
                
                
                $
                (59,552
                )
                
                $
                486,226Earnings
      (loss) per common share:Basic
                
                $
                0.12
                
                
                $
                0.18
                
                
                $
                (0.10
                )
                
                $
                0.84Diluted
                
                $
                0.12
                
                
                $
                0.18
                
                
                $
                (0.10
                )
                
                $
                0.82





See
accompanying notes to consolidated financial statements.


4





WESTERN
RESERVE BANCORP, INC.


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME


(UNAUDITED)





Three
      Months Ended September 30,
                  
                  
                  Nine
      months ended September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Net
      income
                  
                  $
                  146,436
                  
                  
                  $
                  107,539
                  
                  
                  $
                  56,997
                  
                  
                  $
                  486,226Other
      comprehensive income, net of tax:Unrealized
      gains (losses) on securities arising during the period
                  
                  
                  147,683
                  
                  
                  
                  34,578
                  
                  
                  
                  149,256
                  
                  
                  
                  (85,850
                  )Other
      comprehensive income
                  
                  $
                  294,119
                  
                  
                  $
                  142,117
                  
                  
                  $
                  206,253
                  
                  
                  $
                  400,376





See
accompanying notes to consolidated financial statements.


5




WESTERN
RESERVE BANCORP, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





Nine
      Months Ended September 30,2009
                
                
                2008Cash
      flows from operating activitiesNet
      income
                
                $
                56,997
                
                
                $
                486,226Adjustments
      to reconcile net income to net cash from operating
    activities:Provision
      for loan losses
                
                
                668,700
                
                
                
                398,800Depreciation
                
                
                139,982
                
                
                
                141,240Net
      accretion of securities
                
                
                (9,109
                )
                
                
                (9,879
                )Stock-based
      compensation
                
                
                1,643
                
                
                
                2,337Loans
      originated for sale
                
                
                (1,110,100
                )
                
                
                (97,500
                )Proceeds
      from sales of loan originations
                
                
                1,129,642
                
                
                
                98,946Gains
      on sales of loans
                
                
                (19,542
                )
                
                
                (1,446
                )Federal
      Home Loan Bank stock dividends
                
                
                -
                
                
                
                (14,500
                )Increase
      in cash surrender value of bank owned life insurance
                
                
                (76,336
                )
                
                
                (63,181
                )Net
      change in other assets and other liabilities
                
                
                (53,349
                )
                
                
                (216,597
                )Net
      cash from operating activities
                
                
                728,528
                
                
                
                724,446Cash
      flows from investing activitiesAvailable
      for sale securities:Purchases
                
                
                (1,540,746
                )
                
                
                (2,020,806
                )Maturities,
      repayments and calls
                
                
                989,354
                
                
                
                2,041,509Purchase
      of restricted stock
                
                
                (53,500
                )
                
                
                (69,500
                )Net
      increase in interest-bearing deposits in other banks
                
                
                (2,000,000
                )
                
                
                -Net
      increase in loans
                
                
                (18,038,572
                )
                
                
                (14,885,923
                )Purchase
      of auto loan portfolio
                
                
                -
                
                
                
                (4,693,630
                )Purchases
      of Bank Owned Life Insurance
                
                
                -
                
                
                
                (1,000,000
                )Purchases
      of premises and equipment
                
                
                (94,747
                )
                
                
                (52,372
                )Net
      cash from investing activities
                
                
                (20,738,211
                )
                
                
                (20,680,722
                )Cash
      flows from financing activitiesNet
      increase in deposits
                
                
                8,143,777
                
                
                
                1,173,428Repayments
      on line of credit
                
                
                (500,000
                )
                
                
                -Proceeds
      from FHLB advances
                
                
                -
                
                
                
                5,500,000Repayments
      of FHLB advances
                
                
                (3,100,000
                )
                
                
                -Net
      proceeds from issuance of preferred stock
                
                
                4,661,756
                
                
                
                -Dividends
      on preferred stock
                
                
                (64,037
                )Proceeds
      from issuance of common stock under ESPP
                
                
                17,576
                
                
                
                15,881Proceeds
      and income tax benefit from exercise of stock options
                
                
                -
                
                
                
                57,418Net
      cash from financing activities
                
                
                9,159,072
                
                
                
                6,746,727Change
      in cash and cash equivalents
                
                
                (10,850,611
                )
                
                
                (13,209,549
                )Cash
      and cash equivalents at beginning of period
                
                
                21,302,463
                
                
                
                23,818,528Cash
      and cash equivalents at end of period
                
                $
                10,451,852
                
                
                $
                10,608,979Supplemental
      cash flow information:Interest
      paid
                
                $
                2,121,629
                
                
                $
                2,879,607Income
      taxes paid
                
                
                10,000
                
                
                
                197,461Supplemental
      disclosure of noncash investing activities:Non
      cash transfer from loans to other real estate owned
                
                $
                411,334
                
                
                $
                -Non
      cash transfer from loans to other assets owned
                
                
                10,300
                
                
                
                -Non
      cash transfer from other real estate owned to other
      liabilities
                
                
                -
                
                
                
                -





See
accompanying notes to consolidated financial statements.


6


WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2009





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 two satellite offices
in retirement communities 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, 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.  Management has evaluated events occurring subsequent to
the balance sheet date through November 16, 2009, determining no events require
adjustment to or additional disclosure in the consolidated 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, 2008 contains consolidated financial statements and
related notes, which should be read in conjunction with the accompanying
consolidated financial statements.


7


WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2009





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





Earnings
per Common Share:
Basic earnings per common share equal net income (loss) available to common
shareholders divided by the weighted average number of common shares outstanding
during the period.  Diluted earnings per common share include the
dilutive effect of additional potential common shares issuable under stock
options.  Earnings per common share are computed as
follows:


Three
      months ended
                      
                      
                      Nine
      months endedSeptember
      30,
                      
                      
                      September
      30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Numerator:Net
      income
                      
                      $
                      146,436
                      
                      
                      $
                      107,539
                      
                      
                      $
                      56,997
                      
                      
                      $
                      486,226Amortization
      and dividends on preferred stock
                      
                      
                      77,700
                      
                      
                      
                      -
                      
                      
                      
                      116,549
                      
                      
                      
                      -Net
      income (loss) available to common shareholders
                      
                      $
                      68,736
                      
                      
                      $
                      107,539
                      
                      
                      $
                      (59,552
                      )
                      
                      $
                      486,226Demoninator:Denominator
      for basic earnings per share available to common shareholders-weighted
      average shares
                      
                      
                      584,260
                      
                      
                      
                      582,657
                      
                      
                      
                      583,852
                      
                      
                      
                      581,986Effect
      of dilutive shares:Nonqualified
      stock options
                      
                      
                      -
                      
                      
                      
                      4,096
                      
                      
                      
                      -
                      
                      
                      
                      11,683Denominator
      for diluted earnings per share available to common
      shareholders
                      
                      
                      584,260
                      
                      
                      
                      586,753
                      
                      
                      
                      583,852
                      
                      
                      
                      593,669Basic
      earnings (loss) per common share
                      
                      $
                      0.12
                      
                      
                      $
                      0.18
                      
                      
                      $
                      (0.10
                      )
                      
                      $
                      0.84Diluted
      earnings (loss) per common share
                      
                      $
                      0.12
                      
                      
                      $
                      0.18
                      
                      
                      $
                      (0.10
                      )
                      
                      $
                      0.82Stock
      options not considered in computing diluted earnings per common share
      because they were anitdilutive
                      
                      
                      104,387
                      
                      
                      
                      26,770
                      
                      
                      
                      104,387
                      
                      
                      
                      13,958





After
filing the Company’s June 30, 2009 Form 10-Q, the Company realized that it had
not considered dividends on its preferred stock for the period from May 15, 2009
through June 30, 2009 as a reduction in income available to common shareholders
for the three months and six months ended June 30, 2009.  Even though
under current accounting guidance, the dividend is not recorded on the Company’s
balance sheet until it is actually declared by its Board of Directors, the
portion of the dividend that relates to the income statement periods presented
should be deducted from earnings available to common
shareholders.  Income available to common shareholders for the three
and nine months ended September 30, 2009 has been presented
accordingly.  Had the dividend on the preferred stock for the period
from May 15, 2009 through June 30, 2009 been deducted from income available to
common shareholders, income available to common shareholders would have been
reduced by $32,019 and totaled $(157,996) and $(127,333) for the three and six
months ended June 30, 2009 rather than the amounts reported in our report on
Form 10-Q of $(125,977) and $(95,314).  Basic and diluted earnings per
share would have been $(0.27) and $(0.22) for the three and six months ended
June 30, 2009 rather than the reported amounts of $(0.22) and
$(0.16).


8


WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2009





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





Income
Taxes:  The provision for income tax for the first nine months
of 2009 was a benefit of $65,428 on pre-tax loss of $8,431 as compared to an
expense of $162,318 on pre-tax income of $648,544 for the same period a year
ago.  The tax benefit is due to the Company’s pre-tax net loss and to tax
exempt income.  The Company has net taxable income in prior years to
which a net tax operating loss would be eligible to be carried back.  The
Company and its subsidiaries file consolidated income tax returns.





Reclassifications: For comparative purposes,
certain amounts in the 2008 consolidated financial statements have been
reclassified to conform to the 2009 presentation.





Adoption
of New Accounting Standards:  On June 30, 2009 the FASB
released FASB Statement No. 168, “The FASB Accounting Standards
CodificationTM(ASC)
and the Hierarchy of Generally Accepted Accounting Principles”, that created
Codification Topic 105, Generally Accepted Accounting Principles, and
established that the Codification is effective for interim and annual periods
ending after September 15, 2009. All existing accounting standard documents are
superseded. All other accounting literature not included in the Codification
will be considered nonauthoritative.





In
December 2007, the Financial Accounting Standards Board (FASB) issued ASC
Topic 805, formerly known as Statement of Financial Accounting Standards (SFAS)
No. 141(R), “Business Combinations”, with the objective to improve the
comparability of information that a company provides in its financial statements
related to a business combination.  ASC Topic 805 establishes
principles and requirements for how the acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in an acquiree, including the recognition and
measurement of goodwill acquired in a business combination or a gain from a
bargain purchase and what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination.  ASC Topic 805 was effective for fiscal
years beginning on or after December 15, 2008.  The adoption of this
standard did not have a material effect on the Company’s results of operations
or financial position.





In
December 2007, the FASB issued ASC Topic 810, formerly known as SFAS
No. 160,“Noncontrolling
Interest in Consolidated Financial Statements,” which amends Accounting Research
Bulletin No. 51.  A noncontrolling interest, also known as a
“minority interest,” is the portion of equity in a subsidiary not attributable
to a parent.  The objective of this statement is to improve upon the
consistency of financial information that a company provides in its consolidated
financial statements.  ASC Topic 810 was effective for fiscal years
beginning on or after December 15, 2008.  Adoption of ASC Topic
810 did not have a significant impact on the Company’s results of operations or
financial position.


9


WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2009





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





In March
2008, the FASB issued ASC Topic 815, formerly known as SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging Activities,” an amendment
to SFAS No. 133. ASC Topic 815 requires enhanced disclosures about an entity’s
derivative instruments and hedging activities and therefore should improve the
transparency of financial reporting. ASC Topic 815 was effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008.  The adoption of this standard did not have a material
effect on the Company’s results of operations or financial
position.





In May
2009, FASB issued ASC Topic 855, formerly known as SFAS No. 165 “Subsequent
Events,” with the objective to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.  ASC
Topic 855 sets forth: (1) the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements; (2)
the circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements; and (3) the
disclosure that an entity should make about events or transactions that occurred
after the balance sheet date.  ASC Topic 855 is effective for
financial statements issued for fiscal years and interim periods ending after
June 15, 2009.  The adoption of this standard did not have a material
effect on the Company’s results of operations or financial
position.





On April
9, 2009, the FASB issued ASC Topic 820, formerly known as FASB Staff Position
(FSP) 157-4, “Determining Fair Value When the Volume and Level of Activity for
the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly.”  ASC Topic 820 provides additional guidance for
estimating fair value in accordance with SFAS No.157, “Fair Value Measurements,”
when the volume and level of activity for the asset or liability have
significantly decreased. ASC Topic 820 also includes guidance on identifying
circumstances that indicate a transaction is not orderly. Further, the FSP
emphasizes that even if there has been a significant decrease in the volume and
level of activity for the asset or liability and regardless of the valuation
technique(s) used, the objective of a fair value measurement remains the
same.  Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement
date under current market conditions.  ASC Topic 820 amends SFAS No.
157 to require certain additional disclosures in interim and annual periods to
discuss the inputs and valuation technique(s) used to measure fair
value.  ASC Topic 820 is effective for interim and annual reporting
periods ending after June 15, 2009, and shall be applied
prospectively.  The adoption of ASC Topic 820 did not have a material
effect on the Company’s results of operations or financial position other than
additional disclosures in the Company’s quarterly financial
statements.





On April
9, 2009, the FASB issued ASC Topic 825, formerly known as FSP 107-1 and APB
28-1, “Interim Disclosures about Fair Value of Financial Instruments.” ASC Topic
825 amends SFAS No.


10





WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2009





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





107,
“Disclosures about Fair Value of Financial Instruments,” to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. ASC Topic
825 also amends APB Opinion No. 28, “Interim Financial Reporting,” to require
those disclosures in summarized financial information at interim reporting
periods.  ASC Topic 825 is effective for interim reporting periods
ending after June 15, 2009.  The adoption ASC Topic 825 did not have a
material effect on the Company’s results of operations or financial
position.





On April
9, 2009, the FASB issued ASC Topic 320, formerly known as FSP 115-2 and 124-2,
“Recognition and Presentation of Other-Than-Temporary Impairments.” ASC Topic
825 amends the other-than-temporary impairment guidance for debt securities to
make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in
the financial statements. ASC Topic 825 does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity
securities. ASC Topic 825 is effective for interim and annual reporting periods
ending after June 15, 2009. The adoption of ASC Topic 825 did not have a
material effect on the Company’s results of operations or financial
position.





Recently
Issued but not yet effective Accounting Pronouncements:  In
June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets – an amendment of SFAS No. 140”.  The objective of SFAS No. 166
is to improve the relevance, representational faithfulness, and comparability of
the information that a reporting entity provides in its financial reports about
a transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferor’s continuing
involvement in transferred financial assets.  SFAS No. 166 shall be
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods
thereafter.  Management is evaluating the impact of this accounting
standard.





In June
2009, FASB issued SFAS No. 167 “Amendments to FASB Interpretation No.
46(R).”  The objective of SFAS No. 167 is to amend certain
requirements of FASB Interpretation No. 46 (revised December 2003),
“Consolidation of Variable Interest Entities”, to improve financial reporting by
enterprises involved with variable interest entities and to provide more
relevant and reliable information to users of financial
statements.  SFAS No. 167 shall be effective as of the beginning of
each reporting entity’s first annual reporting period that begins after November
15, 2009, for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter. Earlier application is
prohibited.  Management is evaluating the impact of this accounting
standard.


11


WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2009





NOTE
2 - SECURITIES





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





Gross
                  
                  
                  GrossAmortized
                  
                  
                  Unrealized
                  
                  
                  UnrealizedCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  Fair ValueSeptember
      30, 2009U.S.
      Government-sponsored entities
                  
                  $
                  500,000
                  
                  
                  $
                  4,810
                  
                  
                  $
                  -
                  
                  
                  $
                  504,810Mortgage-backed
                  
                  
                  5,395,356
                  
                  
                  
                  265,565
                  
                  
                  
                  (1,431
                  )
                  
                  
                  5,659,490Municipal
                  
                  
                  4,616,009
                  
                  
                  
                  220,659
                  
                  
                  
                  -
                  
                  
                  
                  4,836,668$
                  10,511,365
                  
                  
                  $
                  491,034
                  
                  
                  $
                  (1,431
                  )
                  
                  $
                  11,000,968December
      31, 2008U.S.
      Government-sponsored entities
                  
                  $
                  500,000
                  
                  
                  $
                  16,032
                  
                  
                  $
                  -
                  
                  
                  $
                  516,032Mortgage-backed
                  
                  
                  5,188,992
                  
                  
                  
                  191,220
                  
                  
                  
                  (1,884
                  )
                  
                  
                  5,378,328Municipal
                  
                  
                  4,261,872
                  
                  
                  
                  75,183
                  
                  
                  
                  (17,093
                  )
                  
                  
                  4,319,962$
                  9,950,864
                  
                  
                  $
                  282,435
                  
                  
                  $
                  (18,977
                  )
                  
                  $
                  10,214,322





The fair
values of debt securities at September 30, 2009 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.








Due
      in less than one year
                  
                  $
                  -Due
      from one to five years
                  
                  
                  507,526Due
      from five to ten years
                  
                  
                  3,177,314Beyond
      ten years
                  
                  
                  1,656,638Mortgage-backed
                  
                  
                  5,659,490$
                  11,000,968





At
September 30, 2009, four mortgage-backed securities with a combined fair value
of $123,924 and gross unrealized losses totaling $1,431 had been in a continuous
unrealized loss position for over twelve months.  At December 31,
2008, one municipal security with a value of $208,969 and an unrealized loss of
$15,114 had been in a continuous unrealized loss position for less than twelve
months and two municipal securities with a combined fair value of $629,768 and
four mortgage-backed securities with a combined fair value of $96,270 with gross
unrealized losses totaling $1,979 and $1,884, respectively, had been in a
continuous unrealized loss position for over twelve
months.  Unrealized losses on these securities have not been
recognized in income because the issuers’ securities are of high credit quality
and management has the intent and ability to hold for the foreseeable future or
until recovery.  The fair value is expected to recover as the
securities approach maturity.  In addition, timely repayment of
principal and interest on mortgage-backed securities is guaranteed by the U. S.
government sponsored enterprise issuer.


12


WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2009





NOTE
3 – LOANS





The loan
portfolio at September 30, 2009 and December 31, 2008 was as
follows:





September
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008Commercial
      real estate
                  
                  $
                  94,761,927
                  
                  
                  $
                  83,252,004Commercial
      business
                  
                  
                  43,679,283
                  
                  
                  
                  40,538,308Commercial
      construction
                  
                  
                  5,350,188
                  
                  
                  
                  3,917,279Home
      equity lines of credit (HELOC)
                  
                  
                  10,610,557
                  
                  
                  
                  7,734,516Residential
      mortgage and construction
                  
                  
                  1,018,372
                  
                  
                  
                  1,277,501Consumer
      installment
                  
                  
                  2,816,840
                  
                  
                  
                  3,298,283Purchased
      auto loans
                  
                  
                  2,824,213
                  
                  
                  
                  3,577,953Other
                  
                  
                  19,078
                  
                  
                  
                  29,587$
                  161,080,458
                  
                  
                  $
                  143,625,431





Activity
in the Allowance for Loan Losses for the three and nine month periods ended
September 30, 2009 and 2008 was as follows:


Three
      Months Ended
                  
                  
                  Nine
      Months EndedSeptember
      30,
                  
                  
                  September
      30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Beginning
      balance
                  
                  $
                  2,088,569
                  
                  
                  $
                  1,419,639
                  
                  
                  $
                  1,743,470
                  
                  
                  $
                  1,605,766Loans
      charged off
                  
                  
                  (27,602
                  )
                  
                  
                  (38,947
                  )
                  
                  
                  (167,932
                  )
                  
                  
                  (367,580
                  )Recoveries
                  
                  
                  2,592
                  
                  
                  
                  265
                  
                  
                  
                  6,021
                  
                  
                  
                  2,471Provision
      for loan losses
                  
                  
                  186,700
                  
                  
                  
                  258,500
                  
                  
                  
                  668,700
                  
                  
                  
                  398,800$
                  2,250,259
                  
                  
                  $
                  1,639,457
                  
                  
                  $
                  2,250,259
                  
                  
                  $
                  1,639,457





At
September 30, 2009 and December 31, 2008, loans totaling $3,019,927 and
$1,657,328 were in nonaccrual status.  There were no loans more than
90 days past due and still accruing at September 30, 2009 or December 31,
2008.





Loans
individually considered impaired were as follows:





September
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008With
      no allocated allowance for loan losses
                  
                  $
                  522,752
                  
                  
                  $
                  1,108,795With
      an allocated allowance for loan losses
                  
                  
                  2,383,108
                  
                  
                  
                  393,835$
                  2,905,860
                  
                  
                  $
                  1,502,630Allowance
      for loan losses allocated
                  
                  $
                  349,000
                  
                  
                  $
                  69,766


13


WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2009





NOTE
4 - DEPOSITS





At
September 30, 2009 and December 31, 2008, the Bank had approximately $13,618,000
and $14,562,000, respectively, in national market certificates of deposit,
primarily in amounts that qualify for FDIC insurance coverage.





NOTE
5—FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS





Federal
Home Loan Bank (FHLB) advances were $3,400,000 and $6,500,000 at September 30,
2009 and December 31, 2008, respectively.  The advances are
collateralized by approximately $5,100,000 of loans secured by real estate and
$454,000 of FHLB stock under a blanket lien agreement.  As of
September 30, 2009, the Company’s available borrowing capacity with the FHLB was
$12,778,000.





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 September 30, 2009, 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 was no balance
drawn on the line at September 30, 2009; at December 31, 2008 the balance on the
line of credit was $500,000.





The
Company has the ability to borrow under various other credit facilities that
totaled $3,955,000 at September 30, 2009.  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 $2,955,000 is
available on a line from a correspondent bank secured by the Company’s unpledged
securities.





NOTE
6 – STOCK COMPENSATION PLAN





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





Nine
      Months Ended September 30, 2009Shares
                    
                    
                    Weighted Average
                      Exercise PriceOptions
      outstanding, beginning of period
                    
                    
                    106,136
                    
                    
                    $
                    18.70Forfeited
                    
                    
                    (1,749
                    )
                    
                    
                    23.61Exercised
                    
                    
                    -
                    
                    
                    
                    -Granted
                    
                    
                    -
                    
                    
                    
                    -Options
      outstanding, end of period
                    
                    
                    104,387
                    
                    
                    $
                    18.62Options
      exercisable, end of period
                    
                    
                    103,262
                    
                    
                    $
                    18.54


14


WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2009





NOTE 6 – STOCK COMPENSATION PLAN(continued)





Intrinsic
value is defined as the excess of the price of the Company’s stock over the
exercise price of the option.  The market price of the Company’s stock
was less than the exercise price of the options outstanding at September 30,
2009; therefore there was no intrinsic value of the options outstanding and
exercisable at quarter-end.





NOTE
7 – FAIR VALUE





SFAS 157
defines fair value as 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 assets or liability in an orderly transaction between market
participants on the measurement date.  SFAS 157 also establishes a
fair value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair
value:





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





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





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





The
Company used the following methods and significant assumptions to estimate fair
value:





Investment
Securities:  The fair values of securities are determined by
quoted market prices, if available (Level 1). For securities where quoted 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 similar quoted
securities (Level 2).  For securities where quoted prices or market
prices of similar securities are not available, fair values are calculated using
discounted cash flows or other market indicators (Level 3).





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 typically significant and result in a Level 3
classification of the inputs for determining fair value.





Other real estate
owned:  Other real estate owned is recorded at fair value based
on property appraisals, less estimated selling costs, at the date of
transfer.  The carrying value of other real estate
owned  is  not measured  to  fair value
on  a  recurring basis,  but is  subject
to fair value adjustments


when the
carrying value exceeds the fair value, less estimated selling
costs.


15


WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2009





NOTE 7 – FAIR VALUE(continued)





Assets
and liabilities measured at fair value are summarized below:





Fair Value Measurements
    UsingQuoted
      Prices in
                    
                    
                    SignificantActive
      Markets
                    
                    
                    Other
                    
                    
                    Significantfor
      Identical
                    
                    
                    Observable
                    
                    
                    UnobservableAssets
                    
                    
                    Inputs
                    
                    
                    Inputs(Level One)
                    
                    
                    (Level Two)
                    
                    
                    (Level Three)September 30, 2009Assets
      measured at fair value on a recurring basis:Investment
      securities available for saleU.S.
      Government-sponsored entities
                    
                    $
                    -
                    
                    
                    $
                    504,810
                    
                    
                    $
                    -Mortgage-backed
                    
                    
                    -
                    
                    
                    
                    5,659,490
                    
                    
                    
                    -Municipal
                    
                    
                    -
                    
                    
                    
                    4,836,668
                    
                    
                    
                    -Assets
      measured at fair value on a nonrecurring basis:Impaired
      loans
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,034,108December 31, 2008Assets
      measured at fair value on a recurring basis:Investment
      securities available for saleU.S.
      Government-sponsored entities
                    
                    $
                    -
                    
                    
                    $
                    516,032
                    
                    
                    $
                    -Mortgage-backed
                    
                    
                    -
                    
                    
                    
                    5,378,328
                    
                    
                    
                    -Municipal
                    
                    
                    -
                    
                    
                    
                    4,319,962
                    
                    
                    
                    -Assets
      measured at fair value on a nonrecurring basis:Impaired
      loans
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    324,069





Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had principal balances of $2,383,108 and
$393,835 and valuation allowances of $349,000 and $69,766 at September 30, 2009
and December 31, 2008, respectively.  The Company recorded an
additional provision for loan losses on impaired loans of approximately $319,000
for the first nine months of 2009.  There were no liabilities measured
at fair value at September 30, 2009 or December 31, 2008.





NOTE
8 – PARTICIPATION IN THE TREASURY CAPITAL PURCHASE PROGRAM





On May
15, 2009, the Company completed the sale to the United States Department of the
Treasury (U.S. Treasury) of $4.7 million of newly-issued non-voting preferred
shares as a part of the U.S. Treasury’s Capital Purchase Program (CPP) enacted
as part of the Troubled Assets Relief Program (TARP) under the Emergency
Economic Stabilization Act of 2008 (EESA).  To finalize the Company’s
participation in the CPP, the Company and the U.S. Treasury entered into a
Letter


16


WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2009





NOTE
8 – PARTICIPATION IN THE TREASURY CAPITAL PURCHASE PROGRAM


(continued)





Agreement,
dated May 15, 2009, including the related Securities Purchase Agreement –
Standard Terms attached thereto (together these agreements shall be referred to
as the UST Agreement).  Pursuant to the UST Agreement, the Company
issued and sold to the U.S. Treasury (1) 4,700 of the Company’s Fixed Rate
Cumulative Perpetual Preferred Shares, Series A, each without par value and
having a liquidation preference of $1,000 per share (Series A Preferred Shares),
and (2) a warrant to purchase 235 of the Company’s Fixed Rate Cumulative
Perpetual Preferred Shares, Series B, each without par value and having a
liquidation preference of $1,000 per share (Series B Preferred Shares) for $0.01
per share which the U.S. Treasury exercised immediately, for an aggregate
purchase price of $4.7 million.  Of the proceeds from the sale of the
Preferred Stock to the U.S. Treasury under the CPP, $2.0 million was
downstreamed to the Bank as Subordinated Debt on September 30, 2009 and
qualifies as Tier 2 capital for regulatory purposes.





The
Company has an additional $2.2 million that is eligible to qualify as Tier 1
capital for regulatory purposes if it is downstreamed to the Bank as additional
paid in capital or as Tier 2 capital for regulatory purposes if it is
downstreamed as subordinated debt in the future.  The issuance and
sale to the U.S. Treasury of the Series A and Series B Preferred Shares was a
private placement exempt from the registration requirements of the Securities
Act of 1933, as amended, pursuant to Section 4(2) thereof.





Under
standardized CPP terms, cumulative dividends on the Series A Preferred Shares
will accrue on the liquidation preference at a rate of 5% per annum from May 15,
2009 to May 14, 2014 and at a rate of 9% per annum after May 14, 2014, but will
be paid only if, as and when declared by the Company’s Board of
Directors.  Under standardized CPP terms, cumulative dividends on the
Series B Preferred Shares will accrue on the liquidation preference at a rate of
9% per annum from May 15, 2009, but will be paid only if, as and when declared
by the Company’s Board of Directors.  Both the Series A and Series B
Preferred Shares have no maturity and rank senior to the Company’s common shares
with respect to the payment of dividends and distributions and amounts payable
upon liquidation, dissolution or winding up of the Company.





The terms
of the UST Agreement provide that, subject to the approval of the Board of
Governors of the Federal Reserve System (Federal Reserve Board), the Series A
and Series B Preferred Shares are redeemable at the option of the Company at
100% of their liquidation preference plus any accrued and unpaid
dividends.





The
Company may not pay dividends on the Company’s common shares under the terms of
the UST Agreement.  Further, Common Shares may not be repurchased by
the Company if it is in arrears on the payment of Series A and Series B
Preferred Share dividends.


17


WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2009





NOTE 9 – FEDERAL DEPOSIT
INSURANCE





During
2008, there were higher levels of bank failures which dramatically increased
resolution costs of the Federal Deposit Insurance Corporation (FDIC) and
depleted the deposit insurance fund (DIF).


In order
to maintain a strong funding position and restore reserve ratios of the DIF, the
FDIC voted to increase assessment rates of insured institutions uniformly with
riskier institutions required to pay a larger share of premiums by factoring in
rate adjustments based on secured liabilities and unsecured debt
levels.  The Bank’s FDIC premiums increased to nearly 16 bp of
quarterly average domestic deposits in 2009, up from approximately 6 bp in the
first nine months of 2008.





In 2008
the FDIC increased federal deposit insurance to $250,000 per insured account (up
from $100,000) effective through December 31, 2009 and, in 2009, further
extended the increase to December 31, 2013.  The Company participates
in the Transaction Account Guarantee Program (TAGP) in which non-interest
bearing transactional accounts are fully insured (unlimited coverage) through
December 31, 2009.  The Company pays additional FDIC premiums to
provide this TAGP to its customers.





On
February 27, 2009, the FDIC embarked on a restoration plan and imposed a special
assessment of 20 additional bp on insured institution domestic deposits on
September 30, 2009, to be collected on September 30, 2009.  On May 22,
2009, the FDIC reduced the special assessment to 5 bp of adjusted total assets
at June 30, 2009, to be collected on September 30, 2009. The Company paid
$89,000 related to the special assessment.





The
FDIC’s losses have continued to grow resulting in the FDIC requiring additional
immediate funding. On November 12, 2009, the FDIC adopted a final rule requiring
insured depository institutions to prepay their estimated quarterly risk-based
assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012,
on December 30, 2009, along with each institution's risk-based deposit insurance
assessment for the third quarter of 2009.  The Bank estimates its
payment to be approximately $1 million which will be amortized against earnings
over three years ending December 31, 2012.


18


WESTERN
RESERVE BANCORP, INC.


NOTES
TO FINANCIAL STATEMENTS


September
30, 2009





NOTE
10 – FAIR VALUES OF FINANCIAL INSTRUMENTS





Carrying
amounts and estimated fair values of financial instruments at September 30, 2009
and December 31, 2008 are as follows:





September 30, 2009
                  
                  
                  December 31, 2008Carrying
                  
                  
                  Estimated
                  
                  
                  Carrying
                  
                  
                  EstimatedAmount
                  
                  
                  Fair Value
                  
                  
                  Amount
                  
                  
                  Fair ValueCash
      and cash equivalents
                  
                  $
                  10,451,852
                  
                  
                  $
                  10,452,000
                  
                  
                  $
                  21,302,463
                  
                  
                  $
                  21,302,000Interest-bearing
      deposits in other banks
                  
                  
                  2,000,000
                  
                  
                  
                  2,000,000
                  
                  
                  
                  -
                  
                  
                  
                  -Securities
      available for sale
                  
                  
                  11,000,968
                  
                  
                  
                  11,001,000
                  
                  
                  
                  10,214,322
                  
                  
                  
                  10,214,000Loans,
      net of allowance
                  
                  
                  158,830,199
                  
                  
                  
                  158,515,000
                  
                  
                  
                  141,881,961
                  
                  
                  
                  141,702,000Accrued
      interest receivable
                  
                  
                  511,694
                  
                  
                  
                  512,000
                  
                  
                  
                  490,783
                  
                  
                  
                  491,000Demand
      and savings deposits
                  
                  
                  (93,509,828
                  )
                  
                  
                  (93,511,000
                  )
                  
                  
                  (90,783,194
                  )
                  
                  
                  (90,783,000
                  )Time
      deposits
                  
                  
                  (71,351,805
                  )
                  
                  
                  (71,371,000
                  )
                  
                  
                  (65,934,662
                  )
                  
                  
                  (66,530,000
                  )Federal
      Home Loan Bank advances
                  
                  
                  (3,400,000
                  )
                  
                  
                  (3,403,000
                  )
                  
                  
                  (6,500,000
                  )
                  
                  
                  (6,632,000
                  )Other
      borrowings
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (500,000
                  )
                  
                  
                  (500,000
                  )Accrued
      interest payable
                  
                  
                  (195,107
                  )
                  
                  
                  (195,000
                  )
                  
                  
                  (156,683
                  )
                  
                  
                  (157,000
                  )





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 borrowings, and variable loans and deposits that reprice
frequently and fully.  Securities available for sale are carried at
their fair value.  It is not practical to estimate the fair value of
restricted stock due to restrictions on its transferability.  These
securities have been omitted from this disclosure.





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 debt is based on current rates for similar
financing.  Fair values of unrecorded commitments were not
material.


19


WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


September
30, 2009





OVERVIEW





The
following discussion compares the financial condition of Western Reserve
Bancorp, Inc. (the Company) and its wholly-owned subsidiary, Western Reserve
Bank (the Bank) at September 30, 2009, to that of December 31, 2008, and the
results of operations for the nine and three month periods ended September 30,
2009 and 2008.  You should read this discussion in conjunction with
the interim financial statements and footnotes included herein.





The
Company’s objective is to build long-term shareholder value and management
believes that the Company has and will continue to achieve growth in shareholder
value as demonstrated by the general trend of increases in the Company’s common
equity per share throughout the Company’s history.  During a period
characterized by losses and declining values in the banking industry, the
Company’s common equity per share increased in the first nine months of 2009 to
$25.35 at September 30, 2009 from $25.22 at December 31, 2008.  Common
equity per share was $24.05 at December 31, 2007.





Certain
statements contained in this report that are not historical facts are forward
looking statements subject to certain risks and uncertainties.  When
used herein, the terms “anticipates,” “plans,” “expects,” “believes,” and
similar expressions as they relate to the Company or its management are intended
to identify such forward looking statements.  The Company’s actual
results, performance or achievements may materially differ from those expressed
or implied in the forward-looking statements.  Risks and uncertainties
that could cause or contribute to such material differences include, but are not
limited to, general economic conditions, the interest rate environment,
competitive conditions in the financial services industry, changes in law,
governmental policies and regulations, and rapidly changing technology affecting
financial services.





FINANCIAL
CONDITION





Assets





Total
assets as of September 30, 2009 increased 5.4% to $188,834,000, compared with
$179,112,000 at December 31, 2008.





Loans
increased $17,455,000 or 12.2%, to $161,080,000 at September 30, 2009, compared
with $143,625,000 at December 31, 2008.





As of
September 30, 2009, there were approximately $505,000 of securities of U.S.
government-sponsored enterprises, $5,659,000 of mortgage-backed securities and
$4,837,000 of tax-exempt municipal bonds in the available-for-sale securities
portfolio.  These totals include the effect of unrealized gains of
$490,000 in the available-for-sale securities portfolio as of September 30,
2009.


20


WESTERN RESERVE BANCORP,
INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


September
30, 2009





FINANCIAL CONDITION(continued)





Maturities
of securities of U.S. government-sponsored enterprises generally are of a
short-term nature, between three to five years, and municipal bonds generally
have maturities of a longer-term, not to exceed fifteen years.





Most of
the net loan growth in the first nine months of 2009 was in the commercial loan
sector.  This growth was mainly attributable to commercial real estate
loans, which increased approximately $11.5 million and to a lesser extent to
other commercial business and commercial construction loans, which increased in
total $4.6 million during the first nine months of 2009.





As of
September 30, 2009, commercial loans totaled $143,791,000, or 89.3% of total
loans.  Home equity lines and residential real estate loans totaled
$11,629,000, or 7.2% of total loans and consumer and other loans totaled
$5,660,000, or 3.5% of total loans.





The
Company’s loan-to-deposit ratio increased to 97.7% at September 30, 2009,
compared to 91.6% at December 31, 2008.  The increase in loans was
responsible for the increase in the Company’s loan-to-assets ratio to 84.1% at
September 30, 2009 from 79.2% at December 31, 2008.  Management
anticipates that the loan-to-deposit ratio for the remainder of 2009 will remain
over 90% and the loan-to-assets ratio will be approximately 80% to
85%.





Of the
total loans at September 30, 2009, approximately $115,050,000 or 71.4% are at a
variable rate of interest, and $46,030,000 or 28.6% are fixed
rate.    Including scheduled principal repayments,
approximately $91,543,000, or 56.8%, of loans mature or are scheduled to reprice
within twelve months and $65,960,000 or 41.0% mature or are scheduled to reprice
within one to five years.





At
September 30, 2009, the Company had two properties in other real estate owned
consisting of one property carried at $411,334 acquired in September 2009 and
one property carried at $290,000 acquired in 2007.  The carrying
amounts represent the fair market value of the properties reduced by
management’s estimate of anticipated costs to market and sell the
properties.  The property acquired in 2007 is currently leased to a
third party with an option to purchase the property throughout the thirty-six
month lease term expiring in February, 2012.


21


WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


September
30, 2009





FINANCIAL CONDITION(continued)





Liabilities





Deposits
were $164,862,000 at September 30, 2009, an increase of 5.2% from $156,718,000
at December 31, 2008.  Deposits at September 30, 2009 and December 31,
2008 consisted of:





September
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008Noninterest-bearing
      demand
                  
                  $
                  18,685,671
                  
                  
                  $
                  16,942,194Interest-bearing
      demand
                  
                  
                  8,669,138
                  
                  
                  
                  6,958,911Savings
                  
                  
                  38,755,168
                  
                  
                  
                  41,734,003Money
      market
                  
                  
                  27,399,851
                  
                  
                  
                  25,148,086Time
      under $100,000
                  
                  
                  37,292,328
                  
                  
                  
                  35,433,397Time
      $100,000 or more
                  
                  
                  34,059,477
                  
                  
                  
                  30,501,265$
                  164,861,633
                  
                  
                  $
                  156,717,856





Included
in the time deposits total at September 30, 2009 and December 31, 2008 were
$13,618,000 and $14,562,000, 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 5.00%.  As of September 30, 2009, the weighted average
interest rate paid on these CDs was 3.57% and the weighted average remaining
maturity was 11.7 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 Bank
participates in the Certificate of Deposit Account Registry Service® (CDARS)
program which enables customers to retain their account relationship with the
Bank and still enjoy the security of FDIC insurance on deposits exceeding the
applicable insurance limit.  At September 30, 2009 and December 31,
2008, the Bank’s time deposits included CDARS deposits of $18,200,000 and
$10,420,978, respectively, with original terms ranging from six months to five
years, and rates ranging from 0.20% to 4.50%. As of September 30, 2009, the
weighted average interest rate paid on these CDs was 2.05% and the weighted
average remaining maturity was 8.3 months.





The
Brecksville office, which opened in October 2004, continues to meet management’s
expectations in terms of deposit growth.  At September 30, 2009, that
location’s total deposits were $42,881,000, representing a year-to-date increase
of $1.8 million.  The majority of these deposits (57.4%) were in
Market Rate Savings Accounts.





Federal
Home Loan Bank (FHLB) advances decreased to $3.4 million at September 30, 2009
from $6.5 million at year-end 2008.  FHLB advances totaling $3.1
million matured and were repaid in March 2009.  FHLB advances are
collateralized by loans secured by real estate under a blanket lien
agreement.  At September 30, 2009 the Company’s available borrowing
capacity with the FHLB was $13.0 million.


22


WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS


September
30, 2009





FINANCIAL CONDITION(continued)





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 increased $4,791,000 to $19,502,000 at September 30, 2009,
from $14,711,000 at December 31, 2008.  This increase was primarily a
result of net proceeds from preferred stock issued to the U.S. Treasury under
the CPP of $4,662,000, an increase in the unrealized gain on available-for-sale
securities of $149,000, net income of $57,000 and the issuance of $18,000 of
common stock under the Employee Stock Purchase Plan partially offset by
dividends on preferred stock of $96,000.





On May
15, 2009, the Company issued and sold to the U.S. Treasury 4,700 of the
Company’s Fixed Rate Cumulative Perpetual Preferred Shares, Series A and a
warrant to purchase the Company’s Fixed Rate Cumulative Perpetual Preferred
Shares, Series B for an aggregate purchase price of $4.7 million.  The
Company capitalized costs of $38,000 related to the issuance of the Series A and
Series B Preferred Shares. Please refer to Note 8 for more information related
to the terms of the Series A and Series B Preferred Shares.





RESULTS
OF OPERATIONS – FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009





Overview





Net
income for the first nine months of 2009 was $57,000 down $429,000 from the
$486,000 net income in the same period in 2008 primarily due to a $131,000
reduction in net interest income, a $270,000 increase in the provision for loan
losses and a $206,000 increase in FDIC premiums.  Net loss available
to common shareholders for the first nine months of 2009 was $60,000, or $0.10
loss per basic and diluted share after dividends of $96,000 and the amortization
of premiums on preferred stock of $21,000 in the first three quarters of
2009.  Net income available to common shareholders was $486,000 or
$0.84 per basic share and $0.82 per diluted share for the first nine months of
2008.





Net
Interest Income





Net
interest income decreased for the first nine months of 2009 from the comparable
period of 2008 as declining market interest rates resulted in lower income on
earning assets that was only partially offset by lower costs of interest-bearing
liabilities.  Net interest income before the provision for loan losses
in the first nine months of 2009 was $4,294,000, a decrease of $131,000, or
3.0%, from the $4,425,000 earned in the same period of 2008.  Net
interest margin was 3.20% for the nine months ended September 30, 2009,
representing a decrease of 64 bp from the 3.84% for the like period in
2008.


23


WESTERN
RESERVE BANCORP, INC.
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND
RESULTS OF OPERATIONS
 September
30, 2009
 
 RESULTS OF
OPERATIONS – FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009(continued)
 
 The
following table illustrates the average balances and annualized interest rates
for the nine month periods ended September 30, 2009 and 2008:
 
 Nine Months Ended
                      
                      
                      Nine Months EndedSeptember 30, 2009
                      
                      
                      September 30, 2008Average
                      
                      
                      
                      
                      
                      Average
                      
                      
                      Average
                      
                      
                      
                      
                      
                      Average($ in thousands)
                      
                      Balance
                      
                      
                      Interest
                      
                      
                      Rate
                      
                      
                      Balance
                      
                      
                      Interest
                      
                      
                      RateInterest-earning
      assets:Loans
      (1)
                      
                      $
                      152,649
                      
                      
                      $
                      6,038
                      
                      
                      
                      5.29
                      %
                      
                      $
                      133,252
                      
                      
                      $
                      6,660
                      
                      
                      
                      6.68
                      %Securities:Taxable
                      
                      
                      5,933
                      
                      
                      
                      212
                      
                      
                      
                      4.96
                      %
                      
                      
                      6,609
                      
                      
                      
                      251
                      
                      
                      
                      5.10
                      %Tax
      exempt
                      
                      
                      4,529
                      
                      
                      
                      183
                      
                      
                      
                      5.59
                      %
                      
                      
                      4,558
                      
                      
                      
                      186
                      
                      
                      
                      5.52
                      %Restricted
      stock
                      
                      
                      768
                      
                      
                      
                      29
                      
                      
                      
                      5.03
                      %
                      
                      
                      628
                      
                      
                      
                      25
                      
                      
                      
                      5.35
                      %Federal
      funds sold and other short-term funds
                      
                      
                      17,722
                      
                      
                      
                      47
                      
                      
                      
                      0.36
                      %
                      
                      
                      10,971
                      
                      
                      
                      241
                      
                      
                      
                      2.94
                      %Total
      interest-earning assets
                      
                      
                      181,601
                      
                      
                      
                      6,509
                      
                      
                      
                      4.77
                      %
                      
                      
                      156,018
                      
                      
                      
                      7,363
                      
                      
                      
                      6.31
                      %Noninterest-earning
      assets
                      
                      
                      7,654
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      5,628Total
      assets
                      
                      $
                      189,255
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      161,646Interest-bearing
      liabilities:Transaction
      accounts
                      
                      $
                      8,045
                      
                      
                      
                      36
                      
                      
                      
                      0.59
                      %
                      
                      $
                      6,963
                      
                      
                      
                      52
                      
                      
                      
                      1.00
                      %Market
      rate savings accounts
                      
                      
                      68,660
                      
                      
                      
                      477
                      
                      
                      
                      0.93
                      %
                      
                      
                      78,302
                      
                      
                      
                      1,555
                      
                      
                      
                      2.65
                      %Time
      deposits
                      
                      
                      70,092
                      
                      
                      
                      1,526
                      
                      
                      
                      2.91
                      %
                      
                      
                      39,671
                      
                      
                      
                      1,130
                      
                      
                      
                      3.81
                      %Borrowings
                      
                      
                      4,464
                      
                      
                      
                      121
                      
                      
                      
                      3.62
                      %
                      
                      
                      5,717
                      
                      
                      
                      145
                      
                      
                      
                      3.39
                      %Total
      interest-bearing liabilities
                      
                      
                      151,261
                      
                      
                      
                      2,160
                      
                      
                      
                      1.91
                      %
                      
                      
                      130,653
                      
                      
                      
                      2,882
                      
                      
                      
                      2.95
                      %Noninterest-bearing
      liabilities
                      
                      
                      20,888
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      16,101Shareholders'
      equity
                      
                      
                      17,106
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      14,892Total
      liabilities and shareholders' equity
                      
                      $
                      189,255
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      161,646Net
      interest income
                      
                      
                      
                      
                      
                      
                      4,349
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4,481Tax
      equivalent adjustment
                      
                      
                      
                      
                      
                      
                      (55
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (56
                      )Net
      interest income per financial statements
                      
                      
                      
                      
                      
                      $
                      4,294
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      4,425Net
      interest margin (Net yield on average interest-earning
    assets)
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.20
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.84
                      %
 
 (1)
Average balance includes loans on nonaccrual status.
  24
  WESTERN
RESERVE BANCORP, INC.
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND
RESULTS OF OPERATIONS
 September
30, 2009
 
 RESULTS OF
OPERATIONS – FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009(continued)
 
 The
following table sets forth on a fully taxable-equivalent basis the effect of
volume and rate changes on interest income and expense for the periods
indicated.  For purposes of these tables, changes in interest due to
volume and rate were determined as follows:
 
 Volume
Variance is a change in volume multiplied by the previous year's
rate.  Rate Variance is a change in rate multiplied by the previous
year's volume.  Rate/Volume Variance is a change in volume multiplied
by the change in rate.  This variance was allocated to volume variance
and rate variance in proportion to the relationship of the absolute dollar
amount of the change in each.
 
 Summary of Changes inNet Interest Income for theNine Months EndedSeptember 30, 2009 vs. 2008Increase (Decrease) Due to($
      in thousands)
                          
                          Volume
                          
                          
                          Rate
                          
                          
                          NetInterest
      income:Loans
                          
                          $
                          866
                          
                          
                          $
                          (1,488
                          )
                          
                          $
                          (622
                          )Securities:Taxable
                          
                          
                          (32
                          )
                          
                          
                          (7
                          )
                          
                          
                          (39
                          )Tax
      exempt
                          
                          
                          (5
                          )
                          
                          
                          2
                          
                          
                          
                          (3
                          )Restricted
      stock
                          
                          
                          5
                          
                          
                          
                          (1
                          )
                          
                          
                          4Federal
      funds sold and other short-term funds
                          
                          
                          53
                          
                          
                          
                          (247
                          )
                          
                          
                          (194
                          )Total
      interest-earning assets
                          
                          
                          887
                          
                          
                          
                          (1,741
                          )
                          
                          
                          (854
                          )Interest
      expense:Transaction
      accounts
                          
                          
                          (7
                          )
                          
                          
                          23
                          
                          
                          
                          16Market
      rate savings accounts
                          
                          
                          172
                          
                          
                          
                          906
                          
                          
                          
                          1,078Time
      deposits
                          
                          
                          (702
                          )
                          
                          
                          306
                          
                          
                          
                          (396
                          )Federal
      Home Loan Bank advances and other borrowings
                          
                          
                          32
                          
                          
                          
                          (8
                          )
                          
                          
                          24Total
      interest-bearing liabilities
                          
                          
                          (505
                          )
                          
                          
                          1,227
                          
                          
                          
                          722Change
      in net interest income
                          
                          $
                          382
                          
                          
                          $
                          (514
                          )
                          
                          $
                          (132
                          )
 
 Interest
Income
 
 Tax
equivalent interest income decreased $854,000 or 11.6% when comparing the nine
months ended September 30, 2009 with the same period of 2008.
  25
  WESTERN
RESERVE BANCORP, INC.
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND
RESULTS OF OPERATIONS
 September
30, 2009
 
 RESULTS OF
OPERATIONS – FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009(continued)
 
 Interest
and fee income on loans for the first nine months of 2009 was $6,038,000, down
$622,000 or 9.3% from $6,660,000 for the first nine months of 2008 primarily due
to the negative effect of declining interest rates partially offset by the
positive effect of increasing loan volume.  Tax equivalent interest
and dividend income from securities and short-term funds decreased 33.0% to
$471,000 through the first nine months of 2009, from $703,000 in the same period
in 2008 primarily due to lower rates earned on Federal funds sold and other
short-term funds.
 
 Interest
Expense
 
 Interest
expense decreased 25.1% when comparing the nine months ended September 30, 2009
with the same period of 2008. Total interest expense was $2,160,000 for the
first nine months of 2009, compared to $2,882,000 in the same period of 2008.
Interest on deposits decreased 25.5%, to $2,039,000 in the first nine months of
2009, from $2,737,000 in the same period of 2008. The decrease in deposit
interest expense was primarily due to lower rates paid on interest-bearing
deposits, mainly Market Rate Savings accounts, partially offset by increasing
volume in CDs.
 
 Net
Interest Margin
 
 Net
interest margin decreased 64 bp to 3.20% in the first nine months of 2009 from
3.84% in the like period of 2008 primarily due to the decrease in interest rates
earned on loans partially offset by the decrease in interest rates paid on
deposits.
 
 The yield
on earning assets decreased 154 bp to 4.77% for the first nine months of 2009
compared to 6.31% in the same period of 2008. This decrease reflects overall
market interest rate decreases initiated by the Federal Reserve Board through
December 2008.  In the first nine months of 2009, the yield on loans was
5.29%, down 139 bp from 6.68% in the first nine months of 2008.
 
 In the
first nine months of 2009, the cost of interest-bearing deposits was 1.86%, down
107 bp from 2.93% in the like period in 2008.  This decrease also
reflects overall market interest rate decreases.  The overall cost of
interest-bearing funds (deposits and borrowings) was 1.91% in the first nine
months of 2009, compared with 2.95% in the same period of 2008.
 
 Provision
for Loan Losses
 
 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
credit-
  26
  WESTERN
RESERVE BANCORP, INC.
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND
RESULTS OF OPERATIONS
 September
30, 2009
 
 RESULTS OF
OPERATIONS – FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009(continued)
 
 worthiness
of the Company’s borrowers and other related factors.  The provision
for loan losses was $669,000 in the first nine months of 2009 and $399,000 for
the like period in 2008, representing an increase of $270,000 or
67.7%.
 
 In the
first nine months of 2009, eight loans totaling $168,000 were charged off and
$6,000 was recovered on loans previously charged off.  In the like
period in 2008, six loans totaling $368,000 were charged off and $2,000 was
recovered on loans previously charged off.   At September 30,
2009 and December 31, 2008, the ratio of the allowance for loan losses to total
loans was 1.40% and 1.21%, respectively. Management allocated
approximately 95.6% of the allowance at September 30, 2009 to commercial loans,
3.4% to residential mortgage and home equity loans and 1.0% to consumer
loans.  At September 30, 2009, $349,000 or 15.5% of the allowance for
loan losses was allocated to impaired loan balances individually.  At
December 31, 2008, $70,000 or 4.00% of the allowance for loan losses was
allocated to impaired loan balances individually.  At September 30,
2009, nineteen loans to ten borrowers totaling $3,019,000 were in nonaccrual
status, compared to ten loans totaling $1,657,000 at year-end
2008.  There were no other loans more than 90 days delinquent as of
September 30, 2009 or December 31, 2008.  Management believes the
allowance for loan losses at September 30, 2009 is adequate to absorb probable
incurred losses in the loan portfolio.
 
 Noninterest
Income
 
 Total
noninterest income for the first nine months of 2009 was $361,000, an increase
of 25.8% from $287,000 for the same period in 2008 primarily due to an increase
in gains on sales of loans of $18,000 in 2009 and increases in service charges
on deposit accounts of $17,000, cash surrender value of life insurance contracts
of $13,000 and rental income of $21,000.
 
 The
increase in cash surrender value of life insurance is due to an increase in the
average balance of life insurance contracts outstanding in 2009 as compared to
2008.  The increase in gains on loan sales is due to the sale of six
mortgage loans totaling $1.1 million for a total gain of $19,000 in the first
nine months of 2009 while in the like period in 2008 one loan for $97,000 was
sold with a gain of $1,000.  Service charges on deposit accounts
increased to $150,000 in the first nine months of 2009, from $133,000 for the
same period of 2008, an increase of 12.9%. The largest components of service
charges on deposit accounts are checking account service charges and
non-sufficient fund fees which increased to $130,000 as of September 30, 2009,
from $115,000 for the comparable period of 2008.
  27
  WESTERN
RESERVE BANCORP, INC.
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND
RESULTS OF OPERATIONS
 September
30, 2009
 
 RESULTS OF
OPERATIONS – FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009(continued)
 
 Noninterest
Expenses
 
 Noninterest
expenses were $3,994,000 for the first nine months of 2009, an increase of
$330,000, or 9.0% over the $3,664,000 for the same period of
2008.  This increase is mainly attributable to an increase in FDIC
insurance of $206,000. Regular FDIC insurance premiums were raised throughout
the banking industry as the FDIC struggled with increasing problem and failed
financial institutions and other negative economic issues.  In
addition, the FDIC charged all banks a special assessment of 5 bp of adjusted
total assets as of June 30, 2009.  The special assessment resulted in
an $89,000 charge to the company’s earnings in 2009.   Other,
smaller increases in expenses related to growth included salaries and benefits
of $166,000 and franchise tax of $29,000.  These increases were
partially offset by decreases in community relations and contributions of
$16,000, occupancy of $15,000 and other expenses of $26,000.
 
 Total
other noninterest expense for the first nine months of 2009 and 2008 consisted
of the following:
 
 Nine months endedSeptember 30,2009
                      
                      
                      2008Supplies
                      
                      $
                      60,000
                      
                      
                      $
                      54,000Loan
      expenses
                      
                      
                      37,000
                      
                      
                      
                      24,000Travel
      and entertainment
                      
                      
                      32,000
                      
                      
                      
                      32,000Insurance
                      
                      
                      26,000
                      
                      
                      
                      25,000CDARS
      fees
                      
                      
                      18,000
                      
                      
                      
                      3,000Telephone
                      
                      
                      19,000
                      
                      
                      
                      19,000Dues
      and subscriptions
                      
                      
                      20,000
                      
                      
                      
                      22,000Other
                      
                      
                      34,000
                      
                      
                      
                      14,000Reversal
      of prior year interest income on a nonaccrual loan
                      
                      
                      -
                      
                      
                      
                      78,000$
                      246,000
                      
                      
                      $
                      271,000
 
 Total
income tax expense (benefit) differs from amounts computed by applying the
federal income tax rate of 34% of pre-tax income (loss) 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.
  28
  WESTERN
RESERVE BANCORP, INC.
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND
RESULTS OF OPERATIONS
 September
30, 2009
 
 RESULTS
OF OPERATIONS – FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009
 
 The
Company’s net income for the third quarter of 2009 was $146,000 up $39,000, or
36.2%, from net income of $107,000 in the same period in 2008 primarily due to a
$77,000 increase in net interest income, a $72,000 decrease in the provision for
loan losses and a $28,000 increase in noninterest income partially offset by
increases in compensation expense of $107,000 and in FDIC premiums of
$44,000.  Net income available to common shareholders was $69,000 or
$0.12 per basic and diluted share after dividends and the amortization of
premiums on preferred stock of $78,000 in the third quarter of
2009.  Net income per common share was $0.18 per basic and diluted
share for the third quarter of 2008.
 
 Net
Interest Income
 
 Net
interest income before the provision for loan losses in the third quarter of
2009 was $1,568,000, an increase of $77,000, or 5.2%, from the $1,491,000 for
the same quarter of 2008.  The increase in net interest income is due
to both the increase in loan volume and the impact of decreasing market interest
rates which resulted in rates on deposits decreasing at a faster pace than rates
on loans during the third quarter of 2009.  The average loan portfolio
balance in the third quarter of 2009 was $151.6 million, an increase of $12.8
million over the $138.8 million in the third quarter of
2008.  Interest expense decreased $196,000 while interest income
decreased only $119,000 in the third quarter of 2009 as compared to third
quarter of 2008.
 
 The yield
on loans was 5.25% in the third quarter of 2009, down 97 bp from 6.22% for the
same quarter of 2008.  The overall cost of interest-bearing funds
(deposits and borrowings) was 1.76% for the third quarter of 2009, compared with
2.58% for the third quarter of 2008.  The cost of interest-bearing
deposits was 1.71%, down 83 bp from 2.54% for the like quarter of
2008.  These combined to decrease net interest margin 39 bp to 3.39%
in the 2009 quarter from 3.78% in the 2008 quarter.
 
 Provision
for Loan Losses
 
 The
provision for loan losses was $187,000 in the 2009 quarter, a decrease of
$72,000 from the $259,000 provision in the 2008 quarter.  In the third
quarter of 2009 the Bank recognized net charge offs totaling $25,000, recorded
impairment allowances totaling $92,000 on two loans, and added approximately
$70,000 for loan portfolio growth.
 
 Noninterest
Income
 
 Total
noninterest income for the third quarter of 2009 was $130,000, an increase of
$28,000, or 27.6%, from $102,000 for the same period in 2008.  The
increase was primarily due to increases in gains on loans sales of $10,000 and
to rental income of $9,000 on the OREO property in the 2009 quarter as compared
to the 2008 quarter.
  29
  WESTERN
RESERVE BANCORP, INC.
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND
RESULTS OF OPERATIONS
 September
30, 2009
 
 RESULTS OF OPERATIONS – FOR THE THREE
MONTHS ENDED SEPTEMBER 30, 2009(continued)
 
 Noninterest
Expense
 
 In the
third quarter of 2009, total noninterest expense increased $118,000, or 9.9%,
compared with the same quarter of 2008.  The increase in noninterest
expense was primarily due to increases in salaries and benefits of $107,000, in
FDIC insurance of $44,000 and in franchise tax of
$10,000   partially offset by decreases in professional fees of
$17,000 and other noninterest expenses of $17,000.  The increase in
salaries is primarily due to lending growth and general increases.
 
 Total
other noninterest expense for the three months ended September 30, 2009 and
September 30, 2008 consisted of the following:
 Three months endedSeptember 30,2009
                      
                      
                      2008Supplies
                      
                      $
                      21,000
                      
                      
                      $
                      17,000Loan
      expenses
                      
                      
                      16,000
                      
                      
                      
                      8,000Travel
      and entertainment
                      
                      
                      13,000
                      
                      
                      
                      10,000Insurance
                      
                      
                      10,000
                      
                      
                      
                      12,000CDARS
      fees
                      
                      
                      2,000
                      
                      
                      
                      1,000Telephone
                      
                      
                      6,000
                      
                      
                      
                      6,000Dues
      and subscriptions
                      
                      
                      8,000
                      
                      
                      
                      8,000Other
                      
                      
                      19,000
                      
                      
                      
                      5,000Reversal
      of prior year interest income on a nonaccrual loan
                      
                      
                      -
                      
                      
                      
                      45,000$
                      95,000
                      
                      
                      $
                      112,000
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 Liquidity
refers to the ability to fund loan demand, meet deposit customers’ withdrawal
needs and provide for operating expenses.  As summarized in the
Consolidated Statements of Cash Flows, the main sources of cash flows are
receiving deposits from customers, and to a lesser extent, proceeds from FHLB
advances, repayment of loan principal and interest income on loans and
investments.
 
 Assets
available to satisfy liquidity needs include cash and due from banks, Federal
funds sold, interest-bearing deposits in other banks, loans held for sale and
available-for-sale securities.  These assets are commonly referred to
as liquid assets.  Liquid assets were approximately $23.5 million at
September 30, 2009, compared to $31.5 million at December 31,
2008.
  30
  WESTERN
RESERVE BANCORP, INC.
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND
RESULTS OF OPERATIONS
 September
30, 2009
 
 LIQUIDITY AND CAPITAL RESOURCES(continued)
 
 During
periods characterized by loan demand outpacing local deposit growth, the Company
may use sources of funds in addition to retail deposits which include national
market CDs and FHLB advances.  If additional liquidity is needed in
the future, there are several available sources, including purchasing Federal
funds, obtaining additional FHLB advances, acquiring additional national market
CDs, CDARS one-way buys or brokered deposits, and selling loans.  The
Company also can borrow under various lines of credit.  At September
30, 2009, these credit facilities aggregated approximately $19.7 million for
general liquidity purposes and $2.0 million for providing additional capital to
the Bank.
 
 As
discussed previously, total shareholders’ equity increased $4,791,000, to
$19,502,000 at September 30, 2009 from $14,711,000 at December 31,
2008.  The increase was primarily a result of the
following:
 
 Net
      proceeds for preferred stock issued to the U.S. Treasury
                      
                      $
                      4,662,000Increase
      in unrealized gains on available-for-sale securities, net of
      tax
                      
                      
                      149,000Net
      income
                      
                      
                      57,000Issuance
      of 1,127 shares of common stock under the Employee Stock Purchase
      Plan
                      
                      
                      18,000Stock
      based compensation for  stock options recognized over their
      vesting period
                      
                      
                      1,000Dividends
      on preferred stock
                      
                      
                      (96,000
                      )$
                      4,791,000
 
 At
September 30, 2009 and December 31, 2008, 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 capitalSeptember 30,
                      2009
                    
                    
                    December 31,
                      2008
                    
                    
                    well-
                      capitalized
                    
                    
                    Adequacy
                      purposesTier
      1 “core” capital to risk-weighted assets
                    
                    
                    9.0
                    %
                    
                    
                    9.9
                    %
                    
                    
                    6.0
                    %
                    
                    
                    4.0
                    %Total
      capital to risk-weighted assets
                    
                    
                    11.4
                    %
                    
                    
                    11.0
                    %
                    
                    
                    10.0
                    %
                    
                    
                    8.0
                    %Tier
      1 leverage ratio
                    
                    
                    7.8
                    %
                    
                    
                    8.5
                    %
                    
                    
                    5.0
                    %
                    
                    
                    4.0
                    %
 
 The
Company has $2.2 million in cash available to be downstreamed to the Bank as
paid in capital to continue to exceed the well-capitalized
benchmark.
  31
  WESTERN
RESERVE BANCORP, INC.
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND
RESULTS OF OPERATIONS
 September
30, 2009
 
 LIQUIDITY AND CAPITAL RESOURCES(continued)
 
 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, trust preferred securities,
or other capital instruments, but the market for these remains diminished in the
current economy.
 
 The
Company has a $2.0 million line of credit for capital purposes through TCF
National Bank NA, 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 balance outstanding on this line of credit at September 30, 2009
and $500,000 was outstanding at December 31, 2008.
 
 In 2003,
the Board of Directors approved The Western Reserve Bancorp, Inc. Employee Stock
Purchase Plan.  A Form S-8 Registration Statement was filed with the
SEC on April 1, 2004, and the Plan became effective on that
date.  Under this Plan, each employee is eligible to purchase, through
payroll deduction or direct payment to the Company, up to $3,000 worth of common
stock per year at market prices and without brokerage
commissions.  There are 6,250 shares of authorized but unissued shares
of stock allocated to the Plan.  Because the Plan has been registered
with the SEC, there are no restrictions on the resale of the stock, other than
those applicable to “affiliates” as defined in Rule 144 of the Securities and
Exchange Commission.  As of September 30, 2009, a total of 4,788
shares of common stock are held by 28 participants through the
Plan.
 
 In
October 2008, the United States Treasury (U.S. Treasury) introduced the Capital
Purchase Program (CPP), which involves the U.S. Treasury providing capital to
financial institutions by purchasing senior preferred stock in qualifying
institutions of up to 3% of risk-weighted assets or $25 billion, whichever is
lower.  The purpose of the program is to provide capital to help
financial institutions fund loan growth and stimulate the
economy.  The CPP is available to well-capitalized financial
institutions with the approval of their primary regulator and the U.S.
Treasury.  To realize the Company’s growth expectations and to take
advantage of the opportunities in the lending market, the Company issued 4,700
shares of Senior Preferred Securities to the U.S. Treasury on May 15, 2009 under
the CPP with net proceeds of $4,662,000.
 
 The
American Recovery and Reinvestment Act of 2009 (ARRA) was passed by United
States Congress and signed by the President on February 17, 2009.  The
ARRA includes a wide array of programs intended to stimulate the economy and
provides for extensive infrastructure, energy, health and education
needs.  The ARRA imposes certain new executive compensation and
corporate expenditure limits on all recipients of funds under the CPP, including
the Company.  The Company is permitted to repay any assistance
previously provided under TARP, including the CPP, at any time provided the
appropriate federal banking agency approves the repayment.
  32
  WESTERN
RESERVE BANCORP, INC.
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND
RESULTS OF OPERATIONS
 September
30, 2009
 
 LIQUIDITY AND CAPITAL RESOURCES(continued)
 
 As part
of its participation in the CPP, the Company agreed to various requirements and
restrictions imposed on all participants in the CPP.  Among the terms
of participation was a provision that the U.S. Treasury could change the terms
of participation at any time.
 
 As a
recipient of government funding under the CPP, the Company must comply with the
executive compensation and corporate governance standards imposed by the ARRA
for so long as the U.S. Treasury holds the Series A and Series B Preferred
Shares.  The standards imposed by the ARRA include the
following:
 
 ·
              incentive
      compensation for Senior Executive Officers must not encourage unnecessary
      and excessive risks that threaten the value of the financial
      institution;
 ·
              any
      bonus, retention award or incentive compensation paid (or under a legally
      binding obligation to be paid) to the Company’s
      Senior  Executive Officers and certain other employees based on
      statements of earnings, revenues, gains, or other criteria that are later
      proven to be materially inaccurate must be subject to recovery or
      “clawback” by the Company;
 ·
              the
      Company is prohibited from paying or accruing any bonus, retention award
      or incentive compensation with respect to its most highly-compensated
      employee except for grants of restricted stock that do not fully vest
      during the covered period and do not have a value which exceeds one-third
      of an employee’s total annual
compensation;
 ·
              severance
      payments to the Company’s Senior  Executive Officers and the
      five next most highly compensated employees, generally referred to as
      “golden parachute” payments, are prohibited, except for payments for
      services performed or benefits
accrued;
 ·
              compensation
      plans that encourage manipulation of reported earnings are
      prohibited;
 ·
              the
      U.S. Treasury may retroactively review bonuses, retention awards and other
      compensation previously paid to Senior Executive Officers that the U.S.
      Treasury finds to be inconsistent with the purposes of TARP or otherwise
      contrary to the public interest;
 ·
              the
      Company’s Board of Directors must establish a company-wide policy
      regarding excessive or luxury
expenditures;
 ·
              the
      Company’s proxy statements for annual shareholder meetings must permit a
      nonbinding “say on pay” shareholder vote on the compensation of
      executives;
 ·
              compensation
      in excess of $500,000 for each Senior  Executive Officer must
      not be deducted for federal income tax purposes;
  and
 ·
              compliance
      with the executive compensation reporting and recordkeeping requirements
      established by the U.S.
Treasury.
  33
  WESTERN
RESERVE BANCORP, INC.
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND
RESULTS OF OPERATIONS
 September
30, 2009
 
 INTEREST
RATE RISK
 
 Strategies
to manage interest rate risk are utilized to mitigate the possible adverse
impact to the Company’s results arising from changes in interest
rates.
 
 Management
believes that market interest rates are currently at or very near their low and
has initiated action to return to a more neutral position, rather than the
current liability sensitive position by offering longer term deposits and
increasing the emphasis on variable rate loans.  The Company expects
to benefit from a lower cost of funds by extending the life its deposits during
the current low point in the interest rate cycle as evidenced by the decrease in
the average balance of immediate-term repricing Market Rate Savings Accounts to
$68.7 million in the first nine months of 2009 from $78.3 million in the first
nine months of 2008 and the corresponding increase in the average balance of
fixed rate term CDs to $70.1 million in the first nine months of 2009 from $39.7
million in the like period in 2008.
 
 At both
September 30, 2009 and December 31, 2008, the Federal Reserve target rate was
defined as a range between zero and 0.25%.  The Company had
$104,052,000 of assets and $125,740,000 of liabilities maturing or repricing
within one year at September 30, 2009, representing a negative interest rate gap
of $21,688,000 (repricing interest earning assets were 82.8% of repricing
interest bearing liabilities).  Although the Company maintains a
liability-sensitive position, interest-earning assets have repriced downward
faster than interest-bearing liabilities during the first nine months of 2009
because many loans reprice based on changes in the prime rate at the time that
rate changes while deposit rates have been slower to adjust downward due to the
competitive environment for deposits.
 
 A
significant portion of the Company’s liabilities are Market Rate Savings
accounts which are generally priced in relation to a national money market
index.  This index moves in relation to the Federal funds target rate;
however, the interest rates offered by the Bank were higher than the rates
calculated using the index primarily due to excessive rates offered by local
competitors that were struggling to meet their liquidity
requirements.
  34
  WESTERN
RESERVE BANCORP, INC.
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND
RESULTS OF OPERATIONS
 September
30, 2009
 
 CRITICAL
ACCOUNTING POLICIES
 
 The
allowance for loan losses is a valuation allowance for probable incurred credit
losses, increased by the provision for loan losses and recoveries and decreased
by charge-offs.  Management estimates the allowance balance by
considering its historical loss experience, the nature and volume of the
portfolio, information about specific borrower situations and estimated
collateral values, economic conditions and other factors.  Allocations
of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management’s judgment, should be
charged-off.  Loan losses are charged against the allowance when
management believes the loan balance cannot be collected.  Management
considers various factors, including portfolio risk, economic environment and
loan delinquencies, when determining the level of the provision for loan
losses.  Loan quality is monitored on a monthly basis by management
and 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.
  35
  WESTERN
RESERVE BANCORP, INC.
 CONTROLS
AND PROCEDURES
 September
30, 2009
 
 The
Company carried out an evaluation, under the supervision and with the
participation of the Company’s management, including its Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company’s disclosure controls and procedures as of September 30, 2009,
pursuant to Exchange Act Rule 13a-15.  Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were, to the best of their knowledge,
effective as of September 30, 2009, 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 September 30, 2009, that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
  36
  WESTERN
RESERVE BANCORP, INC.
 FORM
10-Q
 September
30, 2009
 
 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.
                  Submission
      of Matters to a Vote of Security Holders
                  NoneItem
      5.
                  Other
      Information
                  None
 
  37
  Item 6 –
Exhibits
 
 WESTERN
RESERVE BANCORP, INC.
 FORM
10-Q
 September
30, 2009
 
 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 and Form 8-K filed
      with the Commission on May 21, 2009)
                        *3.2
                        
                        Code
      of Regulations of Western Reserve Bancorp, Inc. (incorporated by reference
      to the Company’s Report on Form SB-2 filed with the Commission on December
      29, 1997)
                        *4
                        
                        Legend
      Placed on Certificates Representing Shares Issued pursuant to an exemption
      from registration under Section 3(a)(11) of the Securities Act and Rule
      147 thereunder (incorporated by reference to the Company’s Report on Form
      10-KSB filed with the Commission on September 28, 2008)
                        *10.1
                        
                        Employment
      Agreement of Edward J. McKeon Dated December 15, 2005. (incorporated by
      reference to the Company’s Report on Form 8-K filed with the Commission on
      December 19, 2005)
                        *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 September 30,
      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
      September 18, 2001, as amended February 20, 2002 (incorporated by
      reference to the Company’s Report on Form 10-KSB filed with the Commission
      on September 28, 2003)
                        *10.5
                        
                        Agreement
      by and between Western Reserve Bancorp, Inc. and Cynthia A. Mahl, dated
      September 18, 2001, as amended February 20, 2002 (incorporated by
      reference to the Company’s Report on Form 10-KSB filed with the Commission
      on September 28, 2003)
                        *10.6
                        
                        Loan
      Agreement between Western Reserve Bancorp, Inc. and TCF National Bank,
      dated May 5, 2003 (incorporated by reference to the Company’s Report on
      Form 10-QSB filed with the Commission on August 14, 2003)
                        *10.7
                        
                        Western
      Reserve Bank Supplemental Executive Retirement Plan, dated May 15, 2003
      (incorporated by reference to the Company’s Report on Form 10-QSB filed
      with the Commission on August 14, 2003)
                        *10.8
                        
                        Western
      Reserve Bancorp, Inc. Employee Stock Purchase Plan (incorporated by
      reference to the Company’s Report on Form 10-QSB filed with the Commission
      on November 14, 2003)
                        *
 
 *   Previously
filed and incorporated herein by reference.
  38
 
 WESTERN
RESERVE BANCORP, INC.
 FORM
10-Q
 September
30, 2009
  Exhibit
                              No.
                            
                            Description of Exhibits10.9
                            
                            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 September 30, 2005)
                            *10.10
                            
                            First
      amendment to the Loan Agreement by and between Western Reserve Bancorp,
      Inc. and TCF National Bank, dated September 30, 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 September 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 September 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 2,
      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 Note 1
      of this Form 10-Q)
                            *
 
 *   Previously
filed and incorporated herein by reference.
  39
 
 WESTERN
RESERVE BANCORP, INC.
 FORM
10-Q
 September
30, 2009
 
 Exhibit
                          No.
                        
                        Description of Exhibits14
                        
                        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 September 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 Officer32.1
                        
                        Certification
      under Section 906 of the Sarbanes-Oxley Act by Edward J. McKeon, President
      and Chief Executive Officer32.2
                        
                        Certification
      under Section 906 of the Sarbanes-Oxley Act by Cynthia A. Mahl, Executive
      Vice President and Chief Financial Officer
  *   Previously
filed and incorporated herein by reference.
  40
  WESTERN
RESERVE BANCORP, INC.
 FORM
10-Q
 Quarter
ended September 30, 2009
 
 SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
 
 Western
      Reserve Bancorp, Inc.Date:
      November 16, 2009
                          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)
  41