WESTERN
RESERVE BANCORP, INC.


Medina,
Ohio





ANNUAL
REPORT


December
31, 2009








CONTENTS





LETTER
      TO SHAREHOLDERS
                          
                          1MANAGEMENT’S
      REPORT ON INTERNAL CONTROLOVER
      FINANCIAL REPORTING
                          
                          3REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                          
                          4CONSOLIDATED
      FINANCIAL STATEMENTSCONSOLIDATED
      BALANCE SHEETS
                          
                          5CONSOLIDATED
      STATEMENTS OF INCOME
                          
                          6CONSOLIDATED
      STATEMENTS OF CHANGES INSHAREHOLDERS’
      EQUITY
                          
                          7CONSOLIDATED
      STATEMENTS OF CASH FLOWS
                          
                          8NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                          
                          9COMPARATIVE
      SUMMARY OF SELECTED FINANCIAL DATA
                          
                          31MANAGEMENT’S
      DISCUSSION AND ANALYSIS
                          
                          32COMPANY
      INFORMATION
                          
                          43







Dear
Fellow Shareholder:
 
 “MAY
YOU LIVE IN INTERESTING TIMES.”
 
 Some
people consider this a Chinese proverb, while others call it a
curse.
 
 Well, we
are living through those interesting times.  Another way of describing
this is a recent quote by a banking regulator: “Ohio community bankers are
managing through this mess.”
 
 Your
management team and Board are as busy as a boat crew navigating through a
tsunami.  We may be getting wet, but we’re cutting through the
waves.  Let me discuss our major areas of concern:
 
 Profitability – Our
2009 profitability was disappointing.  The primary factors involved
were compressed margins due to the historically low rate environment, the
increased cost of the provision for loan losses and the extra expense related to
the FDIC insurance special assessment.  Barring unforeseen
developments, we expect 2010 profitability to be a significant improvement over
2009.
 
 Stock Price –
Historically, our stock price approached $30, went down to $24 with our stock
split in September of 2006, and quickly bounced back to the low $30’s. And then
came the storm.  As the big financial entities involved in the
meltdown were battered severely and their stocks fell off a cliff, our stock,
like most community banks’ stocks, was dragged down slowly.  The fact
that our profits were down didn’t help matters.  However, the major
issue for us is our stock price being painted with the same brush as the big
guys.
 
 I assure
you that your frustration with our stock price does not exceed that of your
directors or management team.  In most big banks, the directors hold a
tiny ownership position.  Our directors and management control 18% of
Western Reserve Bancorp, so our stock price definitely has our
attention.
 
 Loan Status –
Although our loan losses in 2009 were well below our peer group and the entire
banking industry, our loan portfolio does encompass some borrowers encountering
financial stress.  We are working with our customers when they are
struggling, but that approach is not without its costs since we often must
increase our Allowance for Loan Losses as we anticipate the Bank’s loss exposure
if the borrower is ultimately unable to succeed.  I need to note that
the customers in our loan portfolio who are presently struggling have been with
us for years.  These customers have been hurt by the devastating
effects of this economy.  We did not participate in reckless lending.
  1.
  Data Processing
Systems – Our Bank’s systems are supported by an operations center (core
processor) that also supports over 70 other community banks.  In turn,
they acquire the computer software that drives most of our products from another
firm.  Those two entities became enmeshed in a massive dispute which
required legal resolution.  The end result of that mess was that every
client bank involved was forced to choose one of these two combatants or go
completely outside to another entity which would provide software and
operational support.  This is a critical issue for us as well as every
other bank involved.  We offer dozens of products, many of which are
very sophisticated and complex.  In addition, these products must
comply with a myriad of regulations.  This project has entailed the
involvement of 13 WRB staff members, but has heavily required the focus of 5
officers of the Bank who spent over 12 days in presentations and meetings
dedicated to selecting the right solution.  This effort began in
August of 2009 and will in all likelihood take the entire year of 2010 to
complete.  The major phase of our conversion will take place in
mid-August but will entail enormous hours by our entire team before and after
the conversion date to ensure success.  Although this change was not
something we expected to have to make, we are excited about the improvements
that this change will bring to our Bank and enhancements we will be able to
provide our customers.
 
 Compensation/Staffing
– Management and the Board are of the opinion that if our profits are down and
our stock price is down, it is hard to justify a “business as
usual”
approach with regard to compensation.  Apparently that is only
possible on Wall Street.
 
 Therefore,
compensation for all employees has been frozen for the time
being.  The Bank’s profitability will be evaluated at mid-year and if
there is a strong profit picture developing compensation may be
adjusted.  I believe that after direct meetings with all of our team
members, it is apparent that they understand the Bank’s situation and why this
action was taken.  I find their attitude very
encouraging.
 
 Also,
three employees, two part-time and one full-time, have left the
Bank.  We have not replaced them.  This is a further
reflection of our desire to tighten our belt until we are certain that our
Bank’s profitability has turned around.
 
 Capital – In 2009 we
sought and received $4.7 million in Capital Purchase Program (CPP) funds from U.
S. Treasury. During this time of economic stress, regulators, accountants,
boards and management teams are focusing on the capital position of all
financial institutions.  All of the above-mentioned players must
concern themselves with their institution’s ability to withstand a worst case
loan loss scenario.  That is where the strength of the capital
position becomes paramount.  Our strength has been bolstered by the
significant presence of the CPP funds, and our capital ratios remain
strong.
 
 I’m not
going to kid you, this economic storm is of concern to us.  However,
we feel that we have an experienced, responsible management team and Board to
guide us through.
 
 Sincerely,
 
 Ed
McKeon
 President
& CEO
 
  2.
  MANAGEMENT’S
REPORT ON INTERNAL CONTROL
 OVER
FINANCIAL REPORTING
 
 The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company.  With the
participation of the President and Chief Executive Officer and the Chief
Financial Officer, management conducted an evaluation of the effectiveness of
internal control over financial reporting based on the framework and the
criteria established in Internal Control—Integrated
Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) as well as COSO’s Guidance for Smaller Public
Companies.  Based on this evaluation, management has concluded
that internal control over financial reporting was effective as of December 31,
2009.
 
 This
annual report does not include an attestation report of the Company’s registered
public accounting firm, Crowe Horwath LLP, regarding internal control over
financial reporting.  Management’s report was not subject to
attestation by the Company’s registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Company to provide only management’s report in this annual report.
 
 Edward
      J. McKeon
              Cynthia
      A. MahlPresident
      and
              Executive
      Vice President andChief
      Executive Officer
              Chief
      Financial Officer
 
 March 22,
2010
 
  3.
 
 REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Board of
Directors and Shareholders
 Western
Reserve Bancorp, Inc.
 Medina,
Ohio
 
 We have
audited the accompanying consolidated balance sheets of Western Reserve Bancorp,
Inc. as of December 31, 2009 and 2008, and the related consolidated statements
of income, changes in shareholders' equity, and cash flows for the years then
ended.  These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting.  Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting.  Accordingly, we express no such
opinion.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Western Reserve Bancorp,
Inc. as of December 31, 2009 and 2008, and the results of its operations and its
cash flows for the years then ended in conformity with U.S. generally accepted
accounting principles.
 
 Crowe
      Horwath LLP
 
 Cleveland,
Ohio
 March 22,
2010
  
  4.
  WESTERN
RESERVE BANCORP, INC.
 CONSOLIDATED
BALANCE SHEETS
 December
31, 2009 and 2008
  
 December 31,2009
                            
                            
                            2008ASSETSCash
      and due from financial institutions
                            
                            $
                            2,657,830
                            
                            
                            $
                            2,302,786Interest-bearing
      deposits in other financial institutions
                            
                            
                            15,005,771
                            
                            
                            
                            18,908,677Federal
      funds sold
                            
                            
                            515,000
                            
                            
                            
                            91,000Cash
      and cash equivalents
                            
                            
                            18,178,601
                            
                            
                            
                            21,302,463Securities
      available for sale
                            
                            
                            10,019,225
                            
                            
                            
                            10,214,322Loans
      held for sale
                            
                            
                            690,000
                            
                            
                            
                            -Loans,
      net of allowance of $2,316,715 and $1,743,470
                            
                            
                            164,860,130
                            
                            
                            
                            141,881,961Restricted
      stock
                            
                            
                            826,900
                            
                            
                            
                            728,400Other
      real estate owned
                            
                            
                            1,067,814
                            
                            
                            
                            290,000Premises
      and equipment, net
                            
                            
                            950,848
                            
                            
                            
                            1,006,081Bank
      owned life insurance
                            
                            
                            2,334,187
                            
                            
                            
                            2,231,665Prepaid
      Federal Deposit Insurance Corporation premiums
                            
                            
                            971,938
                            
                            
                            
                            -Accrued
      interest receivable and other assets
                            
                            
                            2,033,310
                            
                            
                            
                            1,457,347$
                            201,932,953
                            
                            
                            $
                            179,112,239LIABILITIES
      AND SHAREHOLDERS' EQUITYDepositsNoninterest-bearing
                            
                            $
                            22,789,030
                            
                            
                            $
                            16,942,194Interest-bearing
                            
                            
                            155,453,259
                            
                            
                            
                            139,775,662Total
      deposits
                            
                            
                            178,242,289
                            
                            
                            
                            156,717,856Other
      borrowings
                            
                            
                            -
                            
                            
                            
                            500,000Federal
      Home Loan Bank advances
                            
                            
                            3,400,000
                            
                            
                            
                            6,500,000Accrued
      interest payable and other liabilities
                            
                            
                            807,324
                            
                            
                            
                            683,663Total
      Liabilities
                            
                            
                            182,449,613
                            
                            
                            
                            164,401,519Shareholders'
      EquityCumulative
      preferred stock, no par value, $1,000 liquidation value:Series
      A, fixed rate, 4,700 and 0 shares authorized andissued
      at December 31, 2009 and 2008
                            
                            
                            4,700,000
                            
                            
                            
                            -Discount
      on Series A preferred stock
                            
                            
                            (264,939
                            )
                            
                            
                            -Series
      B, fixed rate, 235 and 0 shares authorized andissued
      at December 31, 2009 and 2008
                            
                            
                            235,000
                            
                            
                            
                            -Premium
      on Series B preferred stock
                            
                            
                            25,850
                            
                            
                            
                            -Common
      stock, no par value, $1 stated value, 1,500,000 sharesauthorized,
      584,727 and 583,330 shares issued andoutstanding
      as of December 31, 2009 and 2008
                            
                            
                            584,727
                            
                            
                            
                            583,330Additional
      paid-in capital
                            
                            
                            9,933,257
                            
                            
                            
                            9,912,293Retained
      earnings
                            
                            
                            4,036,186
                            
                            
                            
                            4,041,215Accumulated
      other comprehensive income
                            
                            
                            233,259
                            
                            
                            
                            173,882Total
      Shareholders' Equity
                            
                            
                            19,483,340
                            
                            
                            
                            14,710,720$
                            201,932,953
                            
                            
                            $
                            179,112,239
  
  5.
  WESTERN
RESERVE BANCORP, INC.
 CONSOLIDATED
STATEMENTS OF INCOME
 For the
years ended December 31, 2009 and 2008
 
  2009
                  
                  
                  2008Interest
      and dividend incomeLoans,
      including fees
                  
                  $
                  8,186,473
                  
                  
                  $
                  8,799,288Taxable
      securities
                  
                  
                  280,388
                  
                  
                  
                  329,558Tax
      exempt securities
                  
                  
                  171,968
                  
                  
                  
                  172,923Dividends
      on restricted stock
                  
                  
                  38,602
                  
                  
                  
                  34,299Federal
      funds sold and other short term funds
                  
                  
                  56,742
                  
                  
                  
                  273,6698,734,173
                  
                  
                  
                  9,609,737Interest
      expenseDeposits
                  
                  
                  2,628,106
                  
                  
                  
                  3,567,366Borrowings
                  
                  
                  152,699
                  
                  
                  
                  203,0892,780,805
                  
                  
                  
                  3,770,455Net
      interest income
                  
                  
                  5,953,368
                  
                  
                  
                  5,839,282Provision
      for loan losses
                  
                  
                  885,400
                  
                  
                  
                  529,174Net
      interest income after provision for loan losses
                  
                  
                  5,067,968
                  
                  
                  
                  5,310,108Noninterest
      incomeService
      charges on deposit accounts
                  
                  
                  205,117
                  
                  
                  
                  177,413Net
      gains on sales of loans
                  
                  
                  26,200
                  
                  
                  
                  1,446Other
                  
                  
                  263,020
                  
                  
                  
                  210,572494,337
                  
                  
                  
                  389,431Noninterest
      expenseSalaries
      and employee benefits
                  
                  
                  2,542,335
                  
                  
                  
                  2,456,586Occupancy
      and equipment
                  
                  
                  897,541
                  
                  
                  
                  928,604Federal
      deposit insurance
                  
                  
                  363,637
                  
                  
                  
                  109,051Data
      processing
                  
                  
                  373,828
                  
                  
                  
                  374,629Professional
      fees
                  
                  
                  216,883
                  
                  
                  
                  213,435Taxes
      other than income and payroll
                  
                  
                  188,676
                  
                  
                  
                  149,049Directors'
      fees
                  
                  
                  144,650
                  
                  
                  
                  144,000Collection
      and other real estate owned
                  
                  
                  182,987
                  
                  
                  
                  116,254Marketing
      and advertising
                  
                  
                  94,212
                  
                  
                  
                  103,833Community
      relations and contributions
                  
                  
                  68,204
                  
                  
                  
                  93,409Other
                  
                  
                  329,866
                  
                  
                  
                  437,5155,402,819
                  
                  
                  
                  5,126,365Income
      before income taxes
                  
                  
                  159,486
                  
                  
                  
                  573,174Income
      tax (benefit) expense
                  
                  
                  (29,734
                  )
                  
                  
                  119,866Net
      income
                  
                  $
                  189,220
                  
                  
                  $
                  453,308Preferred
      stock dividends and amortization, net
                  
                  
                  194,249
                  
                  
                  
                  -Net
      (loss) income available to common shareholders
                  
                  $
                  (5,029
                  )
                  
                  $
                  453,308Earnings
      (loss)  per common share:Basic
                  
                  $
                  (0.01
                  )
                  
                  $
                  0.78Diluted
                  
                  $
                  (0.01
                  )
                  
                  $
                  0.77
 
 6.
  WESTERN
RESERVE BANCORP, INC.
 CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
 For the
years ended December 31, 2009 and 2008
  
 AccumulatedAdditional
                    
                    
                    
                    
                    
                    Other
                    
                    
                    TotalPreferred
                    
                    
                    Common
                    
                    
                    Paid-In
                    
                    
                    Retained
                    
                    
                    Comprehensive
                    
                    
                    Shareholders'Stock, net
                    
                    
                    Stock
                    
                    
                    Capital
                    
                    
                    Earnings
                    
                    
                    Income
                    
                    
                    EquityBalance
      January 1, 2008
                    
                    $
                    -
                    
                    
                    $
                    579,059
                    
                    
                    $
                    9,702,632
                    
                    
                    $
                    3,587,907
                    
                    
                    $
                    59,375
                    
                    
                    $
                    13,928,973Comprehensive
      income:Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    453,308
                    
                    
                    
                    -
                    
                    
                    
                    453,308Change
      in unrealized gain on securities available for sale, net of
      tax
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    114,507
                    
                    
                    
                    114,507Total
      comprehensive income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    567,815Stock
      based compensation expense:Stock
      options recognized over the vesting period
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,025
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,025Modification
      of stock options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    131,851
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    131,851Exercise
      of stock options (3,125 shares)
                    
                    
                    -
                    
                    
                    
                    3,125
                    
                    
                    
                    51,675
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    54,800Tax
      benefit related to exercise of stock options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,618
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,618Common
      stock issued (1,146 shares) under Employee Stock Purchase Plan
      (ESPP)
                    
                    
                    -
                    
                    
                    
                    1,146
                    
                    
                    
                    20,492
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    21,638Balance,
      December 31, 2008
                    
                    
                    -
                    
                    
                    
                    583,330
                    
                    
                    
                    9,912,293
                    
                    
                    
                    4,041,215
                    
                    
                    
                    173,882
                    
                    
                    
                    14,710,720Comprehensive
      income:Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    189,220
                    
                    
                    
                    -
                    
                    
                    
                    189,220Change
      in unrealized gain on securities available for sale, net of
      tax
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    59,377
                    
                    
                    
                    59,377Total
      comprehensive income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    248,597Stock
      based compensation expense:Stock
      options recognized over the vesting period
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,085
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,085Common
      stock issued (1,397 shares) under Employee Stock Purchase Plan
      (ESPP)
                    
                    
                    -
                    
                    
                    
                    1,397
                    
                    
                    
                    18,879
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    20,276Senior
      preferred stock issued (4,700 shares Series A), net of offering
      costs
                    
                    
                    4,397,213
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,397,213Accretion
      of discount on Series A preferred stock
                    
                    
                    37,848
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (37,848
                    )
                    
                    
                    -
                    
                    
                    
                    -Preferred
      stock issued (235 shares Series B)
                    
                    
                    264,543
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    264,543Amortization
      of discount on Series B preferred stock
                    
                    
                    (3,693
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,693
                    
                    
                    
                    -
                    
                    
                    
                    -Dividends
      on preferred stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (160,094
                    )
                    
                    
                    -
                    
                    
                    
                    (160,094
                    )Balance,
      December 31, 2009
                    
                    $
                    4,695,911
                    
                    
                    $
                    584,727
                    
                    
                    $
                    9,933,257
                    
                    
                    $
                    4,036,186
                    
                    
                    $
                    233,259
                    
                    
                    $
                    19,483,340
 
 7.
 
 WESTERN
RESERVE BANCORP, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 For the
years ended December 31, 2009 and 2008
 
 2009
                    
                    
                    2008Cash
      flows from operating activitiesNet
      income
                    
                    $
                    189,220
                    
                    
                    $
                    453,308Adjustments
      to reconcile net income to net cashfrom
      operating activities:Provision
      for loan losses
                    
                    
                    885,400
                    
                    
                    
                    529,174Depreciation
                    
                    
                    180,575
                    
                    
                    
                    187,944Net
      (accretion) of securities
                    
                    
                    (11,541
                    )
                    
                    
                    (12,722
                    )Stock-based
      compensation
                    
                    
                    2,085
                    
                    
                    
                    134,876Loans
      originated for sale
                    
                    
                    (2,217,100
                    )
                    
                    
                    (97,500
                    )Proceeds
      from sales of loan originations
                    
                    
                    1,553,300
                    
                    
                    
                    98,946Gains
      on sales of loans
                    
                    
                    (26,200
                    )
                    
                    
                    (1,446
                    )Loss
      on disposal of fixed assets
                    
                    
                    -
                    
                    
                    
                    59,295Loss
      on sale of other real estate owned
                    
                    
                    -
                    
                    
                    
                    4,381Federal
      Home Loan Bank stock dividends
                    
                    
                    -
                    
                    
                    
                    (14,500
                    )Increase
      in cash surrender value of bank owned life insurance
                    
                    
                    (102,522
                    )
                    
                    
                    (89,085
                    )Net
      change in other assets and other liabilities
                    
                    
                    (1,486,846
                    )
                    
                    
                    (92,497
                    )Net
      cash from operating activities
                    
                    
                    (1,033,629
                    )
                    
                    
                    1,160,174Cash
      flows from investing activitiesAvailable
      for sale securities:Purchases
                    
                    
                    (1,540,746
                    )
                    
                    
                    (2,020,806
                    )Maturities,
      repayments and calls
                    
                    
                    1,837,348
                    
                    
                    
                    2,975,666Purchase
      of restricted stock
                    
                    
                    (98,500
                    )
                    
                    
                    (120,500
                    )Net
      (increase) in loans
                    
                    
                    (25,037,052
                    )
                    
                    
                    (17,695,214
                    )Purchases
      of auto loan portfolio
                    
                    
                    -
                    
                    
                    
                    (4,693,630
                    )Purchases
      of premises and equipment
                    
                    
                    (125,342
                    )
                    
                    
                    (66,018
                    )Purchase
      of bank owned life insurance
                    
                    
                    -
                    
                    
                    
                    (1,000,000
                    )Proceeds
      from sale of other real estate owned
                    
                    
                    395,669
                    
                    
                    
                    76,619Net
      cash from investing activities
                    
                    
                    (24,568,623
                    )
                    
                    
                    (22,543,883
                    )Cash
      flows from financing activitiesNet
      increase in deposits
                    
                    
                    21,524,433
                    
                    
                    
                    15,288,588Net
      (repayment) proceeds on line of credit
                    
                    
                    (500,000
                    )
                    
                    
                    500,000Net
      (repayment) proceeds from FHLB advances
                    
                    
                    (3,100,000
                    )
                    
                    
                    3,000,000Net
      proceeds from issuance of preferred stock
                    
                    
                    4,661,756
                    
                    
                    
                    -Dividends
      on preferred stock
                    
                    
                    (128,075
                    )
                    
                    
                    -Proceeds
      from issuance of common stock under ESPP
                    
                    
                    20,276
                    
                    
                    
                    21,638Proceeds
      and income tax benefit from exercise of stock options
                    
                    
                    -
                    
                    
                    
                    57,418Net
      cash from financing activities
                    
                    
                    22,478,390
                    
                    
                    
                    18,867,644Change
      in cash and cash equivalents
                    
                    
                    (3,123,862
                    )
                    
                    
                    (2,516,065
                    )Cash
      and cash equivalents at beginning of period
                    
                    
                    21,302,463
                    
                    
                    
                    23,818,528Cash
      and cash equivalents at end of period
                    
                    $
                    18,178,601
                    
                    
                    $
                    21,302,463Supplemental
      cash flow information:Interest
      paid
                    
                    $
                    2,821,415
                    
                    
                    $
                    3,728,984Income
      taxes paid
                    
                    
                    165,000
                    
                    
                    
                    275,000Supplemental
      disclosure of noncash investing activities:Transfer
      from loans to other real estate owned
                    
                    $
                    1,173,483
                    
                    
                    $
                    -
 
  8.
 
 WESTERN
RESERVE BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 
 NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Principles of
Consolidation: The consolidated financial statements include Western
Reserve Bancorp, Inc. and its wholly-owned subsidiary, Western Reserve Bank
(“the Bank”), together referred to as “the Company.”  Significant
intercompany transactions and balances are eliminated in
consolidation.
 
 Nature of Operations:
Western Reserve Bancorp, Inc. is a one-bank holding company.  Its
subsidiary, Western Reserve Bank, is a state-chartered commercial bank with
full-service locations in Medina and Brecksville, Ohio, a lending office in
Wooster, Ohio and two satellite offices in retirement communities in Medina,
engaged in the single business of commercial banking.  It offers a
full range of traditional banking services to consumers and businesses located
primarily in Medina, Cuyahoga and surrounding
counties.   Services offered include commercial and industrial,
real estate, home equity and consumer loans, as well as deposit products such as
checking accounts, savings and money market accounts, certificates of deposit,
individual retirement arrangements and electronic banking.  Commercial
loans are expected to be repaid from the cash flow from operations of
businesses. As of December 31, 2009, commercial loans to entities classified as
real estate holding companies comprise approximately $54,581,000, or 32.6% of
the total loan portfolio.  However, this category includes a
significant proportion of loans for buildings that are owner-occupied, and that
are classified as real estate holding companies solely because the owner of the
operating company has formed a real estate holding company for the single
purpose of owning the building that they then lease to their operating
company.  Customers’ ability to repay their loans is dependent on the
real estate and general economic conditions in the area.
 
 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 actual
results could differ.  The allowance for loan losses, deferred tax
assets, benefit plan accruals and the fair value of financial instruments are
particularly subject to change.
 
 Cash Flows: Cash and
cash equivalents include cash, deposits with other financial institutions with
maturities fewer than 90 days, and federal funds sold.  Net cash flows
are reported for customer loan and deposit transactions, interest bearing
deposits in other financial institutions, other assets and other liabilities and
short term borrowings.
 
 Interest-bearing Deposits in
Other Financial Institutions:  Interest bearing deposits in
other financial institutions mature within one year and are carried at
cost.
 
 Securities: Debt
securities are classified as held to maturity and carried at amortized cost when
management has the positive intent and ability to hold them to
maturity.  Debt securities are classified as available for sale when
they might be sold before maturity and are carried at fair value with unrealized
holding gains and losses reported separately in other comprehensive income, net
of tax.  All of the Company’s debt securities are classified as
available for sale.
 
 Interest
income includes amortization of purchase premium or discount using the level
yield method without anticipating prepayments, except for mortgage-backed
securities where prepayments are anticipated.  Gains and losses on
sales are recorded on the trade date and determined using the specific
identification method.
 
 
  9.
 
 WESTERN
RESERVE BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 
 NOTE 1 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES(continued)
 
 Management
evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis, and more frequently when economic or market conditions warrant
such an evaluation.
 
 Loans Held for Sale:
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value, on an aggregate basis, as
determined by commitments from investors.  Mortgage loans are
generally sold with servicing rights released.  Net unrealized losses,
if any, are recorded as a valuation allowance and charged to
earnings.
 
 Loans: Loans that
management has the intent and ability to hold for the foreseeable future or
until maturity or payoff are reported at the principal balance outstanding, net
of deferred loan fees and costs, purchased premiums, and an allowance for loan
losses.
 
 Interest
income is accrued on the unpaid principal balance.  Loan origination
fees, net of certain direct origination costs, are deferred and recognized in
interest income using the level-yield method without anticipating
prepayments.  Purchase premiums or discounts are amortized into income
using the level yield method.  Past due status is based on the
contractual terms of the loan.  In the event management deems the full
repayment of a loan to be in doubt, typically if payments are past due over 90
days, interest income is not recorded, and any interest accrued but uncollected
is reversed.  Payments received on such loans are reported as
principal reductions.  Loans are returned to accrual status when all
the principal and interest amounts contractually due are brought current and
future payments are reasonably assured.
 
 Concentrations of Credit
Risk:  Most of the Company’s business activity is with
customers located within Medina, Cuyahoga and the contiguous
counties.  Therefore, the Company’s exposure to credit risk is
significantly affected by changes in the economy in Medina, Cuyahoga and
the contiguous counties.
 
 Substantially
all loans are secured by specific items of collateral including business assets,
consumer assets, and commercial and residential real estate.  Other
financial instruments which potentially represent concentrations of credit risk
include deposit accounts in other financial institutions and federal funds
sold.
 
 Allowance for Loan
Losses: The allowance for loan losses is a valuation allowance for
probable incurred credit losses.  Loan losses are charged against the
allowance when management believes the inability to collect a loan’s balance is
confirmed.  Subsequent recoveries, if any, are credited to the
allowance. Management estimates the allowance balance required using past loan
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.
 
 The
allowance consists of specific and general components.  The specific
component relates to loans that are individually classified as
impaired.  The general component covers loans not individually
identified as impaired and is based on historical loss experience adjusted for
current factors.
 
 A loan is
impaired when, based on current information and events, it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement.  Loans,for which the
terms have been modified, and for which the borrower is experiencing financial
difficulties, are considered troubled debt restructurings and classified as
impaired.
 
 
  10.
 
 WESTERN
RESERVE BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 
 NOTE 1 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES(continued)
 
 Commercial
and commercial real estate loans are individually evaluated for
impairment.  If a loan is impaired, a portion of the allowance is
allocated so that the loan is reported, net, at the present value of estimated
future cash flows using the loan’s existing rate or at the fair value of
collateral if repayment is expected solely from the collateral.  Large
groups of smaller balance homogeneous loans, such as consumer and residential
real estate loans, are collectively evaluated for impairment, and accordingly,
they are not separately identified for impairment
disclosures.  Troubled debt restructurings are measured at the present
value of estimated future cash flows using the loan’s effective rate at
inception.
 
 Transfers of Financial
Assets: Transfers of financial assets are accounted for as sales when
control over the assets has been relinquished.  Control over
transferred assets is deemed to be surrendered when the assets have been
isolated from the Company, the transferee obtains the right (free of conditions
that constrain it from taking advantage of that right) to pledge or exchange the
transferred assets, and the Company does not maintain effective control over the
transferred assets through an agreement to repurchase them before their
maturity.
 
 Other Real Estate
Owned: Assets acquired through or instead of loan foreclosure are
initially recorded at fair value less estimated costs to sell when acquired,
establishing a new cost basis.  If fair value declines subsequent to
foreclosure, a valuation allowance is recorded through expense.  Costs
after acquisition are expensed.
 
 Premises and
Equipment: Premises and equipment are reported at cost less accumulated
depreciation.  Depreciation is computed using the straight-line method
over the shorter of the estimated useful lives of the assets, which range from
five to twenty years, or the term of the lease.  The Company will
amortize leasehold improvements over a longer period if a renewal of the lease
is considered probable.  Maintenance and repairs are charged to
expense as incurred.
 
 Restricted Stock: The
Bank is a member of the Federal Home Loan Bank (“FHLB”)
system.  Members are required to own a certain amount of stock based
on the level of borrowings and other factors, and may invest in additional
amounts.  The Bank is also a member of and owns stock in the Federal
Reserve Bank.  The Company also owns stock in Bankers Bancshares Inc.,
an institution that provides correspondent banking services to community
banks.  Stock in these institutions is classified as restricted stock,
carried at cost, and periodically evaluated for impairment based on ultimate
recovery of par value.  Both cash and stock dividends are reported as
income.
 
 Bank-Owned Life
Insurance: The Company has purchased life insurance policies on three key
executives.  Bank-owned life insurance is recorded at the amount that
can be realized under the insurance contract at the balance sheet date, which is
the cash surrender value adjusted for charges or other amounts due that are
probable at settlement.
 
 Stock-Based
Compensation:  Compensation cost is recognized for stock
options issued to employees, based on the fair value of these awards at the date
of grant. A Black-Scholes model is utilized to estimate the fair value of stock
options.  Compensation cost is recognized over the required service
period, generally defined as the vesting period.  Compensation cost is
recognized for modifications of share awards for the incremental fair value of
the award after the modification compared to the fair value of the award before
the modification.
 
 
  11.
 
 WESTERN
RESERVE BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 
 NOTE 1 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES(continued)
 
 Income Taxes: Income
tax expense is the total of the current year income tax due or refundable and
the change in deferred tax assets and liabilities.  Deferred tax
assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates.  A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
 
 The
Company adopted guidance issued by the FASB with respect to accounting for
uncertainty in income taxes as of January 1, 2007.  A tax position is
recognized as a benefit only if it is “more likely than not” that the tax
position would be sustained in a tax examination, with a tax examination being
presumed to occur.  The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on
examination.  For tax positions not meeting the “more likely than not”
test, no tax benefit is recorded.  Adopting this guidance had no
effect on the Company’s financial statements.
 
 The
Company and its subsidiaries are subject to U.S. federal income
tax.  The Company recognizes interest and/or penalties related to
income tax matters in income tax expense.
 
 Retirement Plans:
Employee 401(k) plan expense is the amount of the Company’s matching
contributions.Deferred
compensation and supplemental retirement plan expense allocates the benefits
over years of service.
 
 Earnings per Common
Share: Basic earnings (loss) per common share is 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.
 
 Comprehensive Income:
Comprehensive income consists of net income and other comprehensive
income.  Other comprehensive income includes unrealized gains and
losses on securities available for sale, which is also recognized as a separate
component of equity.
 
 Loss Contingencies:
Loss contingencies, including claims and legal actions arising in the ordinary
course of business, are recorded as liabilities when the likelihood of loss is
probable and an amount or range of loss can be reasonably
estimated.  Management does not believe there now are such matters
that will have a material effect on the financial statements.
 
 Restrictions on Cash:
Cash on hand or on deposit with the Federal Reserve Bank of $202,000 and
$317,000 was required to meet regulatory reserve and clearing requirements at
year-end 2009 and 2008, respectively.  These balances do not earn
interest.  Also included in cash and cash equivalents at year-end 2009
and 2008 was approximately $409,000 and $374,000, respectively, required to be
on deposit with Great Lakes Bankers Bank as a compensating balance for
correspondent banking services.
 
 Additionally,
the Company was required to maintain an interest-bearing deposit account at
another financial institution with a twelve-month average collected balance of
$750,000 as part of the conditions for renewal of a line of credit more fully
described in Note 8.
 
 
  12.
 
 WESTERN
RESERVE BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 
 NOTE 1 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES(continued)
 
 Dividend Restriction:
Banking regulations require maintaining certain capital levels and may limit the
dividends paid by the Bank to the Company or by the Company to
shareholders.  See Note 13 for more specific disclosures related to
the Bank.  Additionally, as part of the conditions for renewal of a
line of credit with another financial institution more fully described in Note
8, the Company may, over the life of the loan agreement, declare or pay
dividends to common shareholders, subject to an aggregate limit of
$100,000.  The Company participates in the United States Treasury’s
Troubled Asset Relief Program’s Capital Purchase Program which restricts the
Company’s ability to pay common dividends as more fully described in Note
17.
 
 Fair Values of Financial
Instruments: Fair values of financial instruments are estimated using
relevant market information and other assumptions, as more fully disclosed in
Note 5.  Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments and
other factors, particularly in the absence of broad markets for particular
items.  Changes in assumptions or in market conditions could
significantly affect the estimates.
 
 Operating Segments:
While the Company’s chief decision-makers monitor the revenue streams of the
Company’s various products and services, the identifiable segments are not
material and operations are managed and financial performance is evaluated on a
Company-wide basis.  Accordingly, all of the financial service
operations are considered by management to be aggregated in one reportable
operating segment.
 
 Reclassifications:  Some
items in the prior year financial statements were reclassified to conform to the
current presentation.
 
 Adoption of New Accounting
Standards:  In September 2006, the FASB issued guidance that
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements.  This guidance also
establishes a fair value hierarchy about the assumptions used to measure fair
value and clarifies assumptions about risk and the effect of a restriction on
the sale or use of an asset.  The guidance was effective for fiscal
years beginning after November 15, 2007.  In February 2008, the FASB
issued guidance that delayed the effective date of this fair value guidance for
all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years. The effect of adopting this new guidance was not
material.
 
 In
April 2009, the FASB amended existing guidance for determining whether
impairment is other-than-temporary for debt securities. The guidance requires an
entity to assess whether it intends to sell, or it is more likely than not that
it will be required to sell, a security that is in an unrealized loss position
before recovery of its amortized cost basis.  If either of these
criteria is met, the entire difference between amortized cost and fair value is
recognized as impairment through earnings.  For securities that do not
meet the aforementioned criteria, the amount of impairment is split into two
components as follows: 1) other-than-temporary impairment (OTTI) related to
other factors, which is recognized in other comprehensive income and 2) OTTI
related to credit loss, which must be recognized in the income
statement.  The credit loss is defined as the difference between the
present value of the cash flows expected to be collected and the amortized cost
basis.  This guidance was effective for interim and annual reporting
periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009.  The effect of adopting this
new guidance was not material.
 
 
  13.
 
 WESTERN
RESERVE BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 
 NOTE 1 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES(continued)
 
 In April
2009, the FASB issued guidance that emphasizes that the objective of a fair
value measurement does not change even when market activity for the asset or
liability has decreased significantly.  Fair value is the price that
would be received for an asset sold 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.  When observable transactions or quoted prices are not
considered orderly, then little, if any, weight should be assigned to the
indication of the asset or liability’s fair value.   Adjustments
to those transactions or prices should be applied to determine the appropriate
fair value.  The guidance, which was applied prospectively, was
effective for interim and annual reporting periods ending after June 15, 2009
with early adoption permitted for periods ending after March 15,
2009.   The effect of adopting this new guidance was not
material.
 
 Newly Issued Not Yet
Effective Standards:  In June 2009, the FASB amended
previous guidance relating to transfers of financial assets and eliminates the
concept of a qualifying special purpose entity.  This guidance must be
applied 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. This guidance must be applied to transfers occurring on or after the
effective date. Additionally, on and after the effective date, the concept of a
qualifying special-purpose entity is no longer relevant for accounting purposes.
Therefore, formerly qualifying special-purpose entities should be evaluated for
consolidation by reporting entities on and after the effective date in
accordance with the applicable consolidation guidance. The disclosure provisions
were also amended and apply to transfers that occurred both before and after the
effective date of this guidance.  The effect of adopting this new
guidance is not expected to be material.
 
 NOTE
2 - SECURITIES
 
 The
following table summarizes the amortized cost and fair value of available for
sale securities at December 31, 2009 and 2008 and the corresponding amounts of
gross unrealized gains and losses recognized in accumulated other comprehensive
income.
 Gross
                  
                  
                  GrossAmortized
                  
                  
                  Unrealized
                  
                  
                  UnrealizedCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  Fair Value2009Mortgage-backed
                  
                  $
                  5,048,768
                  
                  
                  $
                  215,372
                  
                  
                  $
                  -
                  
                  
                  $
                  5,264,140Municipal
                  
                  
                  4,617,035
                  
                  
                  
                  141,682
                  
                  
                  
                  (3,632
                  )
                  
                  
                  4,755,085$
                  9,665,803
                  
                  
                  $
                  357,054
                  
                  
                  $
                  (3,632
                  )
                  
                  $
                  10,019,2252008U.S.
      Government-sponsored enterprises
                  
                  $
                  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
 
 
  14.
 
 WESTERN
RESERVE BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 
 NOTE 2 – SECURITIES(continued)
  All
mortgage-backed securities are residential mortgage-backed securities issued by
U.S. government sponsored entities. The fair values of debt securities at
year-end 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.
 
 Amortized
                        Cost
                      
                      
                      Fair
                        ValueDue
      in one year or less
                      
                      $
                      —
                      
                      
                      $
                      —Due
      from one to five years
                      
                      
                      480,001
                      
                      
                      
                      507,633Due
      from five to ten years
                      
                      
                      3,475,481
                      
                      
                      
                      3,580,390Due
      from ten to fifteen years
                      
                      
                      661,553
                      
                      
                      
                      667,062Mortgage-backed
                      
                      
                      5,048,768
                      
                      
                      
                      5,264,140$
                      9,665,803
                      
                      
                      $
                      10,019,225
 
 No
securities were sold during 2009 or 2008.  At year-end 2009 and 2008,
securities with carrying values of $7,303,319 and $8,012,943, respectively, were
pledged to secure public deposits, borrowings and for other purposes as required
or permitted by law.
 
 Securities
with unrealized losses at year-end 2009 and 2008, aggregated by investment
category and length of time that individual securities have been in a continuous
unrealized loss position, are as follows:
 
 December 31, 2009:
                  
                  Less Than 12 Months
                  
                  
                  12 Months or More
                  
                  
                  TotalFair
                    Value
                  
                  
                  Unrealized
                    Loss
                  
                  
                  Fair
                    Value
                  
                  
                  Unrealized
                    Loss
                  
                  
                  Fair
                    Value
                  
                  
                  Unrealized
                    LossMunicipal
                  
                  $
                  220,527
                  
                  
                  $
                  (3,632
                  )
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  220,527
                  
                  
                  $
                  (3,632
                  )Total
                  
                  $
                  220,527
                  
                  
                  $
                  (3,632
                  )
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  220,527
                  
                  
                  $
                  (3,632
                  )
 
 December 31, 2008:
                    
                    Less Than 12 Months
                    
                    
                    12 Months or More
                    
                    
                    TotalFair
                      Value
                    
                    
                    Unrealized
                      Loss
                    
                    
                    Fair
                      Value
                    
                    
                    Unrealized
                      Loss
                    
                    
                    Fair
                      Value
                    
                    
                    Unrealized
                      LossMortgage-backed
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    96,270
                    
                    
                    $
                    (1,884
                    )
                    
                    $
                    96,270
                    
                    
                    $
                    (1,884
                    )Municipal
                    
                    
                    208,969
                    
                    
                    
                    (15,114
                    )
                    
                    
                    629,768
                    
                    
                    
                    (1,979
                    )
                    
                    
                    838,737
                    
                    
                    
                    (17,093
                    )Total
                    
                    $
                    208,969
                    
                    
                    $
                    (15,114
                    )
                    
                    $
                    726,038
                    
                    
                    $
                    (3,863
                    )
                    
                    $
                    935,007
                    
                    
                    $
                    (18,977
                    )
 
 At
year-end 2009 and 2008, there were no holdings of securities of any one issuer,
other than Fannie Mae and Freddie Mac, in an amount greater than 10% of
shareholders’ equity. The U.S. Government has affirmed their support for the
obligations of these entities.
 
 
  15.
 
 WESTERN
RESERVE BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 
 In
determining other-than temporary impairment for debt securities, management
considers many factors, including the length of time and the extent to which the
fair value has been less than cost, the financial condition and near-term
prospects of the issuer, whether the market decline was affected by
macroeconomic conditions and whether the Company has the intent to sell the debt
security or more likely than not will be required to sell the debt security
before its anticipated recovery.  The assessment of whether an
other-than-temporary decline exists involves a high degree of subjectivity and
judgment and is based on the information available to management at a point in
time.  At year-end 2009 and 2008 the Company had no debt securities
with other-than temporary impairment.
 
 NOTE
3 – LOANS
 
 Loans at
year-end were as follows:
 2009
                      
                      
                      2008Commercial
      business
                      
                      $
                      45,248,813
                      
                      
                      $
                      40,538,308Commercial
      real estate
                      
                      
                      97,754,556
                      
                      
                      
                      83,252,004Commercial
      construction
                      
                      
                      6,319,927
                      
                      
                      
                      3,917,279Home
      equity
                      
                      
                      10,211,566
                      
                      
                      
                      7,734,516Residential
      mortgage and construction
                      
                      
                      933,687
                      
                      
                      
                      1,277,501Consumer
      and other loans
                      
                      
                      4,096,687
                      
                      
                      
                      3,298,283Purchased
      auto loans
                      
                      
                      2,589,488
                      
                      
                      
                      3,577,953Other
                      
                      
                      22,121
                      
                      
                      
                      29,587167,176,845
                      
                      
                      
                      143,625,431Less
      allowance for loan losses
                      
                      
                      2,316,715
                      
                      
                      
                      1,743,470$
                      164,860,130
                      
                      
                      $
                      141,881,961
 
 Activity
in the allowance for loan losses was as follows:
 
 2009
                      
                      
                      2008Beginning
      balance
                      
                      $
                      1,743,470
                      
                      
                      $
                      1,605,766Provision
      for loan losses
                      
                      
                      885,400
                      
                      
                      
                      529,174Loans
      charged off
                      
                      
                      (335,137
                      )
                      
                      
                      (394,710
                      )Recoveries
                      
                      
                      22,982
                      
                      
                      
                      3,240Ending
      balance
                      
                      $
                      2,316,715
                      
                      
                      $
                      1,743,470
 
 Loans
individually considered impaired were as follows:
 
 2009
                              
                              
                              2008Year-end
      loans with no allocated allowancefor
      loan losses
                              
                              $
                              3,322,718
                              
                              
                              $
                              1,108,795Year-end
      loans with allocated allowancefor
      loan losses
                              
                              
                              2,103,343
                              
                              
                              
                              393,835$
                              5,426,061
                              
                              
                              $
                              1,502,630Amount
      of the allowance for loan losses allocated
                              
                              $
                              361,000
                              
                              
                              $
                              69,766Average
      of impaired loans during the year
                              
                              $
                              2,972,672
                              
                              
                              $
                              1,137,217
 
 At
December 31, 2009 and 2008, there were $3,698,621 and $1,657,328, respectively,
of loans in nonaccrual status.  There were no other loans more than 90
days past due.  At December 31, 2009, there were $1,834,245 in
restructured loans not included in nonaccrual loans, and $1,723,982 in
restructured loans included in nonaccrual loans, all of which are considered
impaired.  The restructured loans are performing in accordance with
their modified terms.  Interest income recognized on impaired loans
while considered impaired was immaterial for 2009 and 2008.
 
 
  16.
 
 WESTERN
RESERVE BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 
 NOTE 3 – LOANS(continued)
 
 Loans to
principal officers, directors, and their affiliates during 2009 were as
follows:
 
 Beginning
      balance
                      
                      $
                      2,977,293New
      loans and draws on lines of credit
                      
                      
                      542,668Effect
      of changes in the composition of related parties
                      
                      
                      (1,545,025
                      )Repayments
                      
                      
                      (79,328
                      )Ending
      balance
                      
                      $
                      1,895,608
 
 NOTE
4 – OTHER REAL ESTATE OWNED
 
 The
Company had other real estate owned of $1,067,814 at December 31, 2009,
consisting of two commercial properties, and $290,000 at December 31, 2008,
consisting of one commercial property.   Expenses related to
foreclosed assets, net of rental income, were $42,762 and $43,695 in 2009 and
2008, respectively. There were no gains or losses on the sale of real estate
owned in 2009.  In 2008, the Company recognized a loss of $4,381 on
the sale of real estate owned.
 
 NOTE
5- FAIR VALUE
 
 Fair
value is the exchange price that would be received for an asset or paid to
transfer a liability (exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants
on the measurement date. There are three levels of inputs that may be used to
measure fair values:
 
 Level 1:
Quoted prices (unadjusted) for identical assets or liabilities in active markets
that the entity has the ability to access as of the measurement
date.
 
 Level 2:
Significant other observable inputs other than Level 1 prices such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable
market data.
 
 Level 3:
Significant unobservable inputs that reflect a reporting entity’s own
assumptions about the assumptions that market participants would use in pricing
an asset or liability.
 
 The
Company used the following methods and significant assumptions to estimate the
fair value of each type of financial instrument:
 
 Investment
Securities:  The fair values for securities available for sale
are determined by quoted market prices, if available (Level 1).  For
securities where quoted market prices are not available, fair values are
calculated based on matrix pricing, which is a mathematical technique widely
used in the industry to value debt securities without relying exclusively on
quoted prices for the specific securities but rather by relying on the
securities’ relationship to other benchmark quoted securities (Level 2
inputs).
 
 
  17.
 
 WESTERN
RESERVE BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 
 NOTE 5- FAIR VALUE(continued)
 
 Impaired
Loans:  The fair value of impaired loans with specific
allocations of the allowance for loan losses is generally based on recent real
estate appraisals.  These appraisals may utilize a single valuation
approach or a combination of approaches including comparable sales and the
income approach.  Adjustments are routinely made in the appraisal
process by the appraisers to adjust for differences between the comparable sales
and income data available.  Such adjustments are usually significant
and typically result in Level 3 classification of the inputs for determining
fair value.
 
 Assets
and liabilities measured at fair value are summarized below:
 
 Fair Value Measurements UsingQuoted Prices in
                          
                          
                          SignificantActive Markets
                          
                          
                          Other
                          
                          
                          Significantfor Identical
                          
                          
                          Observable
                          
                          
                          UnobservableAssets
                          
                          
                          Inputs
                          
                          
                          Inputs(Level One)
                          
                          
                          (Level Two)
                          
                          
                          (Level Three)December 31, 2009Assets
      and liabilities measured at fair value on a recurring
    basis:Investment
      securities available for saleMortgage-backed
                          
                          $
                          -
                          
                          
                          $
                          5,264,140
                          
                          
                          $
                          -Municipal
                          
                          
                          -
                          
                          
                          
                          4,755,085
                          
                          
                          
                          -Assets
      and liabilities measured at fair value on a nonrecurring
      basis:Impaired
      loans
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,742,343December 31, 2008Assets
      and liabilities 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
      and liabilities 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 an unpaid principal balance of $2,103,343
with valuation allowances of $361,000 at December 31, 2009, resulting in an
additional provision for loan losses of approximately $291,000 for the year
ending December 31, 2009.  At December 31, 2008, impaired loans had a
principal balance of $393,835, with a valuation allowance of $69,766, resulting
in an additional provision for loan losses of $69,766 for the
period.
 
 
  18.
 
 WESTERN
RESERVE BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 
 NOTE 5- FAIR VALUE(continued)
 
 The
carrying amounts and estimated fair values of financial instruments, at December
31, 2009 and 2008 are as follows:
 
 2009
                  
                  
                  2008Carrying
                    Amount
                  
                  
                  Estimated
                    Fair Value
                  
                  
                  Carrying
                    Amount
                  
                  
                  Estimated
                    Fair ValueCash
      and cash equivalents
                  
                  $
                  18,178,601
                  
                  
                  $
                  18,179,000
                  
                  
                  $
                  21,302,463
                  
                  
                  $
                  21,302,000Securities
      available for sale
                  
                  
                  10,019,225
                  
                  
                  
                  10,019,000
                  
                  
                  
                  10,214,322
                  
                  
                  
                  10,214,000Loans,
      net of allowance
                  
                  
                  164,860,130
                  
                  
                  
                  164,395,000
                  
                  
                  
                  141,881,961
                  
                  
                  
                  141,702,000Loans
      held for sale
                  
                  
                  690,000
                  
                  
                  
                  697,000
                  
                  
                  
                  —
                  
                  
                  
                  —Accrued
      interest receivable
                  
                  
                  491,845
                  
                  
                  
                  492,000
                  
                  
                  
                  490,783
                  
                  
                  
                  491,000Demand
      and savings deposits
                  
                  
                  (98,800,893
                  )
                  
                  
                  (98,801,000
                  )
                  
                  
                  (90,783,194
                  )
                  
                  
                  (90,783,000
                  )Time
      deposits
                  
                  
                  (79,441,396
                  )
                  
                  
                  (79,453,000
                  )
                  
                  
                  (65,934,662
                  )
                  
                  
                  (66,530,000
                  )Federal
      Home Loan Bank advances
                  
                  
                  (3,400,000
                  )
                  
                  
                  (3,401,000
                  )
                  
                  
                  (6,500,000
                  )
                  
                  
                  (6,632,000
                  )Other
      borrowings
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (500,000
                  )
                  
                  
                  (500,000
                  )Accrued
      interest payable
                  
                  
                  (116,073
                  )
                  
                  
                  (116,000
                  )
                  
                  
                  (156,683
                  )
                  
                  
                  (157,000
                  )
 
 The
methods and assumptions, not previously presented, used to estimate fair value
are as follows:
 
 Carrying
amount is the estimated fair value for cash and cash equivalents, accrued
interest receivable and payable, demand deposits, short-term debt, and variable
rate loans and deposits that reprice frequently and fully.  For fixed
rate loans or deposits and for variable rate loans or deposits with infrequent
repricing or repricing limits, fair value is based on discounted cash flows
using current market rates applied to the estimated life and credit
risk.  Fair value of loans held for sale is valued as determined by
outstanding commitments from third party investors.  Fair value of
debt is based on current rates for similar financing.  Fair values of
unrecorded commitments were not material.  It is not practical to
estimate the fair value of restricted stock due to restrictions placed on its
transferability.  These securities have been omitted from this
disclosure.
 
 NOTE
6 – PREMISES AND EQUIPMENT, NET
 
 Year-end
premises and equipment were as follows:
 
 2009
                    
                    
                    2008Leasehold
      improvements
                    
                    $
                    1,181,594
                    
                    
                    $
                    1,181,817Furniture
      and equipment
                    
                    
                    878,229
                    
                    
                    
                    1,086,4222,059,823
                    
                    
                    
                    2,268,239Less
      accumulated depreciation
                    
                    
                    (1,108,975
                    )
                    
                    
                    (1,262,158
                    )$
                    950,848
                    
                    
                    $
                    1,006,081
 
 The
Company leases its facilities and certain equipment under operating
leases.  Rent expense, excluding assessments for common area
maintenance, was $418,378 and $418,210 in 2009 and 2008,
respectively.  Common area maintenance and utilities were $159,868 and
$181,287 in 2009 and 2008, respectively.
 
 
  19.
 
 WESTERN
RESERVE BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 
 NOTE 6 – PREMISES AND EQUIPMENT, NET(continued)
 
 At
December 31, 2009, the total contractual future minimum rental payments under
the facilities leases excluding renewal options that are present are as
follows:
 
 2011
                            
                            $
                            427,5862012
                            
                            
                            436,1372013
                            
                            
                            399,5972014
                            
                            
                            135,276$
                            1,398,596
 
 NOTE
7 – DEPOSITS
 
 At
year-end, total interest-bearing deposits were as follows:
 
 2009
                      
                      
                      2008Interest-bearing
      demand
                      
                      $
                      9,772,226
                      
                      
                      $
                      6,958,911Savings
                      
                      
                      37,132,223
                      
                      
                      
                      41,734,003Money
      market
                      
                      
                      29,107,414
                      
                      
                      
                      25,148,086Time
      under $100,000
                      
                      
                      34,499,050
                      
                      
                      
                      35,433,397Time
      $100,000 and over
                      
                      
                      44,942,346
                      
                      
                      
                      30,501,265$
                      155,453,259
                      
                      
                      $
                      139,775,662
 
 Scheduled
maturities of time deposits are as follows:
 
 2010
                      
                      $
                      53,997,1622011
                      
                      
                      15,611,7332012
                      
                      
                      4,368,1812013
                      
                      
                      4,638,9982014
                      
                      
                      714,896Thereafter
                      
                      
                      110,426$
                      79,441,396
 
 Deposits
of $100,000 or more were $101,495,258 and $78,212,349 at year-end 2009 and 2008,
respectively.
 
 At
year-end 2009 and 2008, there were $19,356,801 and $14,561,933, respectively, in
national market certificates of deposit, primarily in amounts below the FDIC
insurance thresholds.  In addition, at year-end 2009 and 2008, there
were $19,330,563 and $10,420,978, respectively, in Certificate of Deposit
Account Registry Service (“CDARS”) program reciprocal deposits.
 
 Deposits
from principal officers, directors and their affiliates at year-end 2009 and
2008 were $3,632,360 and $4,041,697, respectively.
 
 
  20.
 
 WESTERN
RESERVE BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 
 NOTE
8 – FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
 
 Advances
from the Federal Home Loan Bank at year-end were as follows:
 
 Rate or
                      
                      
                      AverageRange of Rates
                      
                      
                      Rate
                      
                      
                      2009
                      
                      
                      2008Fixed-rate
      advances:Maturing
      March 2009
                      
                      
                      2.39%-3.25
                      %
                      
                      
                      3.08
                      %
                      
                      $
                      -
                      
                      
                      $
                      3,100,000Maturing
      March 2010
                      
                      
                      2.70
                      %
                      
                      
                      2.70
                      %
                      
                      
                      500,000
                      
                      
                      
                      500,000Maturing
      April 2010
                      
                      
                      4.57
                      %
                      
                      
                      4.57
                      %
                      
                      
                      1,000,000
                      
                      
                      
                      1,000,000Maturing
      March 2011
                      
                      
                      3.06
                      %
                      
                      
                      3.06
                      %
                      
                      
                      400,000
                      
                      
                      
                      400,000Maturing
      June 2011
                      
                      
                      3.65
                      %
                      
                      
                      3.65
                      %
                      
                      
                      1,000,000
                      
                      
                      
                      1,000,000Maturing
      March 2012
                      
                      
                      3.50
                      %
                      
                      
                      3.50
                      %
                      
                      
                      300,000
                      
                      
                      
                      300,000Maturing
      March 2013
                      
                      
                      3.75
                      %
                      
                      
                      3.75
                      %
                      
                      
                      200,000
                      
                      
                      
                      200,000$
                      3,400,000
                      
                      
                      $
                      6,500,000
 
 There
were no variable-rate advances at December 31, 2009 or 2008.  Interest
is payable monthly, and the principal is due at maturity, with prepayment
penalties for early payment.  The advances are collateralized by
$53,441,000 of loans and $454,000 of FHLB stock under a blanket lien
agreement.  As of December 31, 2009, the Company’s available borrowing
capacity with the FHLB was $17,146,000 subject to the acquisition of additional
shares of FHLB stock.
 
 In 2003,
the Company entered into 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 December 31, 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.   The
Company borrowed $500,000 against this line for capital purposes at 4.20% on
December 29, 2008 and repaid it on May 15, 2009.  There was no balance
outstanding at December 31, 2009.  The Company borrowed $3,000,000
against this line of credit for liquidity purposes at prime less 1.10%, or 4.15%
on March 31, 2008 for seven days.  There were no other borrowings
against the line of credit during 2009 or 2008.
 
 There are
certain covenants on the line relating to the Company’s and the Bank’s operating
performance and capital status.  As of December 31, 2009, the Company
and the Bank were in compliance with all but one of these covenants. The Bank’s
ratio of nonperforming loans to total assets was 1.86% at December 31, 2009,
above the covenant of 1.50% or less.  The Company expects the covenant
to be waived. At December 31, 2008, the Company and the Bank were in compliance
with all covenants.
 
 The
Company also has the ability to borrow under various other credit facilities
that totaled $3,580,000 at December 31, 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
$2,580,000 is available from two correspondent banks secured by the Company’s
unpledged securities.
 
 
  21.
 
 WESTERN
RESERVE BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 
 NOTE
9 — EMPLOYEE BENEFITS
 
 The
Company has a 401(k) Retirement Plan that covers substantially all employees and
allows eligible employees to contribute up to 90% of their compensation subject
to maximum statutory limitations.  Under the Plan, the Company is
permitted to make discretionary profit sharing or matching contributions to the
Plan. During 2009 and 2008, the Company matched eligible contributions of each
participating employee’s compensation, resulting in expense of $43,974 and
$43,701, respectively.
 
 The
Company has a Supplemental Executive Retirement Plan for the Chief Executive
Officer, Chief Lending Officer and Chief Financial Officer.  Under the
terms of the Plan, these individuals will be paid an annual benefit of twenty
percent of their respective base salaries for a period of ten years following
retirement at or after age 65 or termination other than for
cause.  The plan includes a vesting feature of five percent per year
for twenty years for the Chief Lending Officer and Chief Financial Officer from
2006 through 2026.
 
 The
accrued liability for this plan at December 31, 2009 was $276,148 and the
related expense for 2009 was $54,471.  At December 31, 2008, the
accrued liability for this plan was $221,677 and the related expense was
$51,791.
 
 The
Company invested in single-premium cash-surrender value life insurance policies
(Bank-Owned Life Insurance) for the Chief Executive Officer, Chief Lending
Officer and Chief Financial Officer as the named insureds.  The
Company is the owner and sole beneficiary of these policies.  The
Company increased its investment in Bank Owned Life Insurance by $500,000 for
the Chief Lending Officer and by $500,000 for the Chief Financial Officer in
2008.  Bank-Owned Life Insurance policies are tax-advantaged
instruments in that the increases in cash surrender value and the eventual death
benefit under the policies are not taxable income to the Company.  The
income from these policies is intended to help offset the cost of providing a
supplemental retirement plan for each executive.
 
 The
Company recorded income of $102,522 and $89,085 for 2009 and 2008 from its life
insurance policies.  The cash surrender value of the insurance
policies was $2,334,187 and $2,231,665 at December 31, 2009 and 2008,
respectively.
 
 NOTE
10 – INCOME TAXES
 
 Income
tax expense (benefit) was as follows:
 2009
                      
                      
                      2008Current
                      
                      $
                      217,530
                      
                      
                      $
                      223,149Deferred
                      
                      
                      (247,264
                      )
                      
                      
                      (103,283
                      )Total
      income tax (benefit) expense
                      
                      $
                      (29,734
                      )
                      
                      $
                      119,866
 
 Total
income tax expense differed from the amounts computed by applying the federal
income tax rate of 34% in all periods presented to income before income taxes as
a result of the following for the periods ended December 31:
 
 
  22.
 
 WESTERN
RESERVE BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 
 NOTE 10 – INCOME TAXES(continued)
 
 2009
                      
                      
                      2008Income
      tax at statutory rate
                      
                      $
                      54,225
                      
                      
                      $
                      194,879Tax
      exempt income
                      
                      
                      (54,035
                      )
                      
                      
                      (51,876
                      )Income
      from life insurance contracts
                      
                      
                      (34,857
                      )
                      
                      
                      (30,289
                      )Other,
      net
                      
                      
                      4,933
                      
                      
                      
                      7,152$
                      (29,734
                      )
                      
                      $
                      119,866
 
 The
components of the net deferred tax asset (liability) as of December 31 are as
follows:
 
 2009
                      
                      
                      2008Deferred
      tax assets:Allowance
      for loan losses
                      
                      $
                      642,355
                      
                      
                      $
                      478,938Deferred
      compensation
                      
                      
                      93,890
                      
                      
                      
                      75,370Stock
      option expense
                      
                      
                      48,140
                      
                      
                      
                      47,431Nonaccrual
      loan interest income
                      
                      
                      28,961
                      
                      
                      
                      -Deferred
      loan fees and costs
                      
                      
                      22,858
                      
                      
                      
                      5,271Depreciation
                      
                      
                      2,591
                      
                      
                      
                      -Accrued
      expenses
                      
                      
                      340
                      
                      
                      
                      1,020Other
                      
                      
                      4,077
                      
                      
                      
                      -843,212
                      
                      
                      
                      608,030Deferred
      tax liabilities:Unrealized
      gain on securities available for sale
                      
                      
                      (120,164
                      )
                      
                      
                      (89,576
                      )Prepaid
      expenses
                      
                      
                      (37,740
                      )
                      
                      
                      (35,866
                      )FHLB
      stock dividends
                      
                      
                      (27,710
                      )
                      
                      
                      (27,710
                      )Depreciation
                      
                      
                      -
                      
                      
                      
                      (13,956
                      )(185,614
                      )
                      
                      
                      (167,108
                      )$
                      657,598
                      
                      
                      $
                      440,922
 
 At
December 31, 2009 and 2008, the Company had no ASC 740-70 unrecognized tax
benefits or accrued interest and penalties recorded.  The Company does
not expect the amount of unrecognized tax benefits to significantly increase
within the next twelve months.  The Company recognizes interest and
penalties as a component of income tax expense.
 
 The
Company and its subsidiary are subject to U.S. federal income tax as well as
income tax in the state of Ohio for Western Reserve Bancorp.  The Bank
is subject to tax in Ohio based upon its net worth.  The Company is no
longer subject to examination by taxing authorities for years prior to
2006.
 
 NOTE
11 – STOCK OPTIONS
 
 The
Western Reserve Bancorp, Inc. 1998 Stock Option Plan as amended (the “Plan”)
provided the Board with the authority to compensate directors, officers and
employees with stock option awards for their services to the Company for a
ten-year period that ended in 2008 and, accordingly, there were no options
available to be awarded under the plan in 2009.  Options granted under
the Plan are designated as Non-qualified stock options meaning that they will
not be designated as Incentive stock options meeting the requirements of Section
422 of the Internal Revenue Code of 1986, as amended.
 
 
  23.
 
 WESTERN
RESERVE BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 
 NOTE 11 – STOCK OPTIONS(continued)
 
 A summary
of the activity in the plan is as follows:
 
 Year Ended December 31, 2009Shares
                      
                      
                      Weighted Average
                        Exercise PriceOptions
      outstanding at beginning of year
                      
                      
                      106,136
                      
                      
                      $
                      18.70Granted
                      
                      
                      —
                      
                      
                      
                      —Exercised
                      
                      
                      —
                      
                      
                      
                      —Forfeited
                      
                      
                      (1,749
                      )
                      
                      
                      23.60Options
      outstanding at end of year
                      
                      
                      104,387
                      
                      
                      $
                      18.62Options
      exercisable at year-end
                      
                      
                      103,262
                      
                      
                      $
                      18.53
 
 Intrinsic
value is defined as the excess of the market price of the Company’s stock as of
December 31, 2009 over the exercise price of the option.  The
aggregate intrinsic value of all options outstanding and exercisable at December
31, 2009 was zero.
 
 The
maximum option term is ten years, and options granted after 2004 generally vest
100% after five years while options granted before 2005 vested over three
years.  The Company is recognizing compensation expense on a
straight-line basis over the vesting period for options awarded but not
vested.  Compensation expense for 2009 was $2,085 and for 2008 was
$3,025.  The related tax benefit was not material.  In 2008,
the Company recognized $131,851 in compensation expense related to a five-year
extension of the option terms for 55,012 options that would have expired in
2008.  The related income tax benefit was $44,829.
 
 Options
outstanding at year-end 2009 were as follows:
 Outstanding
                      
                      
                      ExercisableRange of Exercise Prices
                      
                      Number
                      
                      
                      Weighted Average Remaining
                        Contractual Life (years)
                      
                      
                      Number
                      
                      
                      Weighted Average
                        Exercise Price$16.00-$19.99
                      
                      
                      79,366
                      
                      
                      
                      2.2
                      
                      
                      
                      79,366
                      
                      
                      $
                      16.76$20.00-$23.99
                      
                      
                      11,875
                      
                      
                      
                      1.3
                      
                      
                      
                      11,875
                      
                      
                      
                      20.04$24.00-$31.99
                      
                      
                      9,139
                      
                      
                      
                      4.2
                      
                      
                      
                      8,014
                      
                      
                      
                      27.20$32.00
                      
                      
                      4,007
                      
                      
                      
                      3.8
                      
                      
                      
                      4,007
                      
                      
                      
                      32.00Outstanding
      at year-end
                      
                      
                      104,387
                      
                      
                      
                      2.4
                      
                      
                      
                      103,262
                      
                      
                      $
                      18.53
 
 The
weighted average remaining contractual life of exercisable options as of
December 31, 2009 was 2.3 years.  No options were granted during 2009
or 2008.
 
 No
options were exercised in 2009.  Proceeds, related tax benefits
realized from options exercised and intrinsic value of options exercised in 2008
are listed in the table below.  New shares were issued to satisfy
these exercises.
 
 2008Proceeds
      of options exercised
                    
                    $
                    54,800Related
      tax benefit recognized
                    
                    
                    2,618Intrinsic
      value of options exercised
                    
                    
                    7,700
 
 
  24.
 
 WESTERN
RESERVE BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008
 
 NOTE 11 – STOCK OPTIONS(continued)
 
 The
compensation cost yet to be recognized for stock options that have been awarded
but not vested is as follows at December 31, 2009:
 
 Compensation Costs2010
                    
                    $
                    1,4262011
                    
                    
                    7292012
                    
                    
                    709Total
                    
                    $
                    2,864
 
 All
outstanding options are expected to vest.
 
 NOTE
12 – LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
 
 Some
financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing
needs.  These are agreements to provide credit or to support the
credit of others, as long as conditions established in the contract are met, and
usually have expiration dates or other termination clauses and may require
payment of a fee.  Some commitments are expected to expire without
being used.  Total commitments do not necessarily represent future
cash requirements.  Off-balance-sheet risk to credit loss exists up to
the face amount of these instruments, although material losses are not
anticipated.  The same credit policies are used to make such
commitments as are used for loans, including obtaining collateral at exercise of
the commitment.
 
 The
contractual amounts of loan commitments were as follows at
year-end:
 
 2009
                    
                    
                    2008Fixed
                      Rate
                    
                    
                    Variable
                      Rate
                    
                    
                    Fixed
                      Rate
                    
                    
                    Variable
                      RateCommitments
      to extend credit (net of participations)
                    
                    $
                    5,224,000
                    
                    
                    $
                    9,413,000
                    
                    
                    $
                    4,253,000
                    
                    
                    $
                    8,084,000Unused
      home equity and overdraft lines of credit
                    
                    
                    —
                    
                    
                    
                    11,444,000
                    
                    
                    
                    —
                    
                    
                    
                    9,923,000Unused
      commercial lines of credit
                    
                    
                    92,000
                    
                    
                    
                    13,605,000
                    
                    
                    
                    812,000
                    
                    
                    
                    13,087,000
 
 The
Company had standby letters of credit totaling $1,236,000 and loans sold with
recourse of $111,000 at December 31, 2009.  There were standby letters
of credit totaling $59,000 outstanding at December 31, 2008.
 
 Commitments
to make loans are generally made for periods of one year or less.  At
December 31, 2009, the fixed rate loan commitments have interest rates ranging
from 6.50% to 7.50% and maturities ranging from approximately three years to
twenty-five years.
 
 The
Company participates in the Federal Home Loan Bank of Cincinnati’s Mortgage
Purchase Program which provides the Company the ability to sell conventional
mortgage loans in the secondary market.  The program utilizes a Lender
Risk Account (“LRA”) which is funded through the proceeds of individualmortgages
sold.  One LRA is established for each master commitment and the
amount deposited into the LRA is approximately thirty to fifty basis points of
each original loan balance.
  
  25.




WESTERN
RESERVE BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009 and 2008





NOTE 12 – LOAN COMMITMENTS AND OTHER
RELATED ACTIVITIES(continued)





If a loss
on an individual loan is in excess of homeowner equity and (if applicable)
primary mortgage insurance, funds are withdrawn from the related LRA to cover
the shortfall.  The Company is eligible to receive LRA funds, net of
any losses, beginning in the sixth year from the date a master commitment is
fulfilled and ending in the eleventh year or when all of the loans sold under a
master commitment have been paid in full.   The Company’s LRA
totaled $18,826 at December 31, 2009 and $11,191 at December 31,
2008.  For the year ended December 31, 2009, seven loans were sold as
part of the Mortgage Purchase Program totaling
$1,527,000.   During 2008, one loan was sold as part of the
Mortgage Purchase Program totaling $97,500.  There were two
residential mortgage loans totaling $690,000 held for sale at December 31, 2009,
and no such loans at December 31, 2008.





NOTE
13 – REGULATORY CAPITAL MATTERS





The
payment of dividends by the Bank to the Company is subject to restrictions by
its regulatory agencies.  These restrictions generally limit dividends
to the lesser of its undivided profits or the total of its net income for that
year, combined with its retained net income from the preceding two years, as
defined.  Accordingly, the Bank will have approximately $823,000, plus
its net income in 2010, available to be paid as dividends to the
Company.  As a practical matter, banks are discouraged from paying
dividends in excess of current year net income.  In addition,
dividends may not reduce capital levels below the minimum regulatory
requirements as described below.





The Bank
is subject to regulatory capital requirements administered by state and federal
banking agencies.  Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities and
certain off-balance-sheet items calculated under regulatory accounting
practices.  Capital amounts and classifications are also subject to
qualitative judgments by regulators.Failure to meet capital
requirements can initiate regulatory action.  Management believes as
of December 31, 2009, the Bank met all capital adequacy requirements to which it
is subject.





Prompt
corrective action regulations provide five classifications: well-capitalized,
adequately-capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized, although these terms are not used to represent
overall financial condition.  If less than well-capitalized,
regulatory approval is required to accept brokered deposits.  If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required.





The
Bank’s actual and required capital amounts and ratios at year-end are presented
in the following table.  At year-end 2009 and 2008, the most recent
regulatory notifications categorized the Bank as well-capitalized. Management is
not aware of any events since December 31, 2009 that would change the Bank’s
capital category.




(continued)


26.




WESTERN
RESERVE BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008




NOTE 13 – REGULATORY CAPITAL MATTERS(continued)





($ in thousands)
                            
                            Western Reserve
                              Bank
                            
                            
                            Minimum Required
                              For Capital
                              Adequacy Purposes
                            
                            
                            Minimum To Be
                              Well-Capitalized
                              Under Prompt
                              Corrective Action
                              ProvisionsAmount
                            
                            
                            Ratio
                            
                            
                            Amount
                            
                            
                            Ratio
                            
                            
                            Amount
                            
                            
                            Ratio2009Total
      Capital to risk-weighted assets
                            
                            $
                            21,270
                            
                            
                            
                            12.3
                            %
                            
                            $
                            13,835
                            
                            
                            
                            8.0
                            %
                            
                            $
                            17,294
                            
                            
                            
                            10.0
                            %Tier
      1 (Core) Capital to risk-weighted assets
                            
                            
                            15,106
                            
                            
                            
                            8.7
                            %
                            
                            
                            6,918
                            
                            
                            
                            4.0
                            %
                            
                            
                            10,376
                            
                            
                            
                            6.0
                            %Tier
      1 (Core) Capital to average assets
                            
                            
                            15,106
                            
                            
                            
                            7.7
                            %
                            
                            
                            7,824
                            
                            
                            
                            4.0
                            %
                            
                            
                            9,780
                            
                            
                            
                            5.0
                            %2008Total
      Capital to risk-weighted assets
                            
                            $
                            16,617
                            
                            
                            
                            11.0
                            %
                            
                            $
                            12,067
                            
                            
                            
                            8.0
                            %
                            
                            $
                            15,084
                            
                            
                            
                            10.0
                            %Tier
      1 (Core) Capital to risk-weighted assets
                            
                            
                            14,874
                            
                            
                            
                            9.9
                            %
                            
                            
                            6,034
                            
                            
                            
                            4.0
                            %
                            
                            
                            9,050
                            
                            
                            
                            6.0
                            %Tier
      1 (Core) Capital to average assets
                            
                            
                            14,874
                            
                            
                            
                            8.5
                            %
                            
                            
                            7,023
                            
                            
                            
                            4.0
                            %
                            
                            
                            8,779
                            
                            
                            
                            5.0
                            %





NOTE
14 – PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS





Condensed
financial information of Western Reserve Bancorp, Inc. follows:





CONDENSED
BALANCE SHEETS


December
31, 2009 and 2008





2009
                          
                          
                          2008ASSETSCash
      and cash equivalents
                          
                          $
                          78,831
                          
                          
                          $
                          97,729Investment
      in bank subsidiary
                          
                          
                          15,338,873
                          
                          
                          
                          15,047,947Restricted
      stock
                          
                          
                          70,000
                          
                          
                          
                          25,000Subordinated
      debt due from bank subsidiary
                          
                          
                          4,000,000
                          
                          
                          
                          -Other
      assets
                          
                          
                          64,751
                          
                          
                          
                          53,660Total
      assets
                          
                          $
                          19,552,455
                          
                          
                          $
                          15,224,336LIABILITIES
      AND SHAREHOLDERS' EQUITYNote
      payable
                          
                          $
                          -
                          
                          
                          $
                          500,000Other
      liabilities
                          
                          
                          69,115
                          
                          
                          
                          13,616Shareholders'
      equity
                          
                          
                          19,483,340
                          
                          
                          
                          14,710,720$
                          19,552,455
                          
                          
                          $
                          15,224,336




(continued)


27.


WESTERN
RESERVE BANCORP, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008


NOTE 14 – PARENT COMPANY ONLY
CONDENSED FINANCIAL STATEMENTS(continued)





CONDENSED
STATEMENTS OF INCOME


December
31, 2009 and 2008





2009
                  
                  
                  2008Interest
      and dividend income
                  
                  $
                  33,522
                  
                  
                  $
                  20,037Operating
      expenses
                  
                  
                  97,657
                  
                  
                  
                  228,127Income
      (loss) before income tax and undistributed income of bank
      subsidiary
                  
                  
                  (64,135
                  )
                  
                  
                  (208,090
                  )Income
      tax benefit
                  
                  
                  21,806
                  
                  
                  
                  70,044Equity
      in undistributed income of bank subsidiary
                  
                  
                  231,549
                  
                  
                  
                  591,354Net
      income
                  
                  $
                  189,220
                  
                  
                  $
                  453,308Preferred
      stock dividends and amortization, net
                  
                  
                  194,249
                  
                  
                  
                  -Net
      income (loss) available to common shareholders
                  
                  $
                  (5,029
                  )
                  
                  $
                  453,308





CONDENSED
STATEMENTS OF CASH FLOWS


December
31, 2009 and 2008





2009
                            
                            
                            2008Cash
      flow from operating activitiesNet
      income
                            
                            $
                            189,220
                            
                            
                            $
                            453,308Stock
      based compensation
                            
                            
                            2,085
                            
                            
                            
                            134,876Equity
      in undistributed income of bank subsidiary
                            
                            
                            (231,549
                            )
                            
                            
                            (591,354
                            )Change
      in other assets and liabilities
                            
                            
                            12,389
                            
                            
                            
                            (22,210
                            )Net
      cash flows from operating activities
                            
                            
                            (27,855
                            )
                            
                            
                            (25,380
                            )Cash
      flows from investing activitiesNet
      (increase) decrease in loans to subsidiary
                            
                            
                            (4,000,000
                            )
                            
                            
                            1,500,000Purchase
      of restricted stock
                            
                            
                            (45,000
                            )
                            
                            
                            -Investment
      in bank subsidiary
                            
                            
                            -
                            
                            
                            
                            (2,500,000
                            )Net
      cash flows from investing activities
                            
                            
                            (4,045,000
                            )
                            
                            
                            (1,000,000
                            )Cash
      flow from financing activitiesNet
      (decrease) increase in borrowings
                            
                            
                            (500,000
                            )
                            
                            
                            500,000Proceeds
      and income tax benefit fromexercise
      of stock options
                            
                            
                            -
                            
                            
                            
                            57,418Net
      proceeds from issuance of preferred stock
                            
                            
                            4,661,756
                            
                            
                            
                            -Dividends
      on preferred stock
                            
                            
                            (128,075
                            )
                            
                            
                            -Proceeds
      from issuance of common stockunder
      Employee Stock Purchase Plan
                            
                            
                            20,276
                            
                            
                            
                            21,638Net
      cash flows from financing activities
                            
                            
                            4,053,957
                            
                            
                            
                            579,056Change
      in cash and cash equivalents
                            
                            
                            (18,898
                            )
                            
                            
                            (446,324
                            )Cash
      and cash equivalents at beginning of year
                            
                            
                            97,729
                            
                            
                            
                            544,053Cash
      and cash equivalents at end of year
                            
                            $
                            78,831
                            
                            
                            $
                            97,729








(continued)




28.




WESTERN
RESERVE BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008


NOTE
15 – OTHER COMPREHENSIVE INCOME





Other
comprehensive income components and the related tax effects were as
follows:





2009
                          
                          
                          2008Unrealized
      holding gains on availablefor sale securities arising during the
      period
                          
                          $
                          89,964
                          
                          
                          $
                          173,496Tax
      effect
                          
                          
                          (30,587
                          )
                          
                          
                          (58,989
                          )Net-of-tax amount
                          
                          $
                          59,377
                          
                          
                          $
                          114,507





NOTE
16 –EARNINGS PER SHARE





Basic
earnings per share is computed by dividing net income (loss) available to common
shareholders by the weighted average number of shares outstanding during the
period.  Diluted earnings per share are computed using the weighted
average number of shares determined for the basic computation plus the dilutive
effect of potential common shares issuable under stock options.  In
computing earnings per common and common equivalent share, the Company has
utilized the treasury stock method.





The
factors used in the earnings per share computation follow.





Year
      ended December 31,2009
                              
                              
                              2008Numerator:Net
      income
                              
                              $
                              189,220
                              
                              
                              $
                              453,308Preferred
      stock dividends and amortization, net
                              
                              
                              (194,249
                              )
                              
                              
                              -Net
      income (loss) available to common shareholders
                              
                              
                              (5,029
                              )
                              
                              
                              453,308Denominator:Denominator
      for basic earnings per share availableto
      common shareholders-weighted average shares
                              
                              
                              584,017
                              
                              
                              
                              582,230Effect
      of dilutive shares:Nonqualified
      stock options
                              
                              
                              -
                              
                              
                              
                              9,951Denominator
      for diluted earnings per share available
                              
                              
                              584,017
                              
                              
                              
                              592,181to
      common shareholdersBasic
      earnings (loss) per common share
                              
                              $
                              (0.01
                              )
                              
                              $
                              0.78Diluted
      earnings (loss) per common share
                              
                              $
                              (0.01
                              )
                              
                              $
                              0.77Stock
      options not considered in computingdiluted
      earnings per common share becausethey
      were antidilutive
                              
                              
                              104,387
                              
                              
                              
                              15,208





NOTE
17 - PREFERRED STOCK





On May
15, 2009, as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase
Program, the Company entered into a Letter Agreement and Securities Purchase
Agreement (collectively, the “Purchase Agreement”) with the United States
Department of the Treasury (“U.S. Treasury”), pursuant to which the Company sold
4,700 shares of newly authorized Fixed Rate Cumulative Perpetual Preferred
Stock, Series A, par value $0.00 per share and liquidation value $1,000 per
share (the “Series A Preferred Stock”) and also issued warrants (the “Warrants”)
to the U.S. Treasury to acquire an additional $235,000




(continued)


29.




WESTERN
RESERVE BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2009 and 2008


NOTE 17 - PREFERRED STOCK
(Continued)




The
Series A Preferred Stock will pay cumulative dividends at a rate of 5.00% per
annum for the first five years, and 9.00% per annum thereafter.  The
Series B Preferred Stock will pay cumulative dividends at a rate of 9.00% per
annum. The Company may redeem the Series A or Series B Preferred Stock at any
time subject to the approval of its primary regulator.  Neither the
Series A nor the Series B Preferred Stock is subject to any contractual
restrictions on transfer, except that the U.S. Treasury or any its transferees
may not effect any transfer that, as a result of such transfer, would require
the Company to become subject to the periodic reporting requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934.





Pursuant
to the terms of the Purchase Agreement, the ability of the Company to declare or
pay dividends or distributions on, or purchase, redeem or otherwise acquire for
consideration, shares of its Common Stock will be subject to restrictions,
effectively eliminating the Company’s ability to declare dividends to common
shareholders during the time the preferred stock is
outstanding.  These restrictions will terminate on the earlier of (a)
the third anniversary of the date of issuance of the Preferred Stock and (b) the
date on which the Preferred Stock has been redeemed in whole or the U.S.
Treasury has transferred all of the Preferred Stock to third parties, except
that, after the third anniversary of the date of issuance of the Preferred
Stock, if the Preferred Stock remains outstanding at such time, the Company may
not increase its common dividends per share without obtaining consent of the
U.S. Treasury.





The
Purchase Agreement also subjects the Company to certain of the executive
compensation limitations included in the Emergency Economic Stabilization Act of
2008 (the “EESA”). In this connection, as a condition to the closing of the
transaction, the Company’s Senior Executive Officers (as defined in the Purchase
Agreement) (the “Senior Executive Officers”), (i) voluntarily waived any claim
against the U.S. Treasury or the Company for any changes to such officer’s
compensation or benefits that are required to comply with the regulation issued
by the U.S. Treasury under the TARP Capital Purchase Program and acknowledged
that the regulation may require modification of the compensation, bonus,
incentive and other benefit plans, arrangements and policies and agreements as
they relate to the period the U.S. Treasury owns the Preferred Stock of the
Company; and (ii) entered into a letter with the Company amending the Benefit
Plans with respect to such Senior Executive Officers as may be necessary, during
the period that the Treasury owns the Preferred Stock of the Company, as
necessary to comply with Section 111(b) of the EESA.





30.




WESTERN
RESERVE BANCORP, INC.
 COMPARATIVE
SUMMARY OF SELECTED FINANCIAL DATA
 As of
December 31, 2009 and 2008, and for the Years then Ended


($000’s
      except per share data)
                    
                    2009
                    
                    
                    2008Balance
      Sheet Data:Total
      assets
                    
                    $
                    201,933
                    
                    
                    $
                    179,112Securities
      available for sale
                    
                    
                    10,019
                    
                    
                    
                    10,214Total
      loans
                    
                    
                    167,177
                    
                    
                    
                    143,625Allowance
      for loan losses
                    
                    
                    2,317
                    
                    
                    
                    1,743Total
      deposits
                    
                    
                    178,242
                    
                    
                    
                    156,718Shareholders’
      equity
                    
                    
                    19,483
                    
                    
                    
                    14,711Income
      Statement Data:Total
      interest income
                    
                    $
                    8,734
                    
                    
                    $
                    9,610Total
      interest expense
                    
                    
                    2,781
                    
                    
                    
                    3,771Net
      interest income
                    
                    
                    5,953
                    
                    
                    
                    5,839Provision
      for loan losses
                    
                    
                    885
                    
                    
                    
                    529Net
      interest income after provision for loan losses
                    
                    
                    5,068
                    
                    
                    
                    5,310Noninterest
      income
                    
                    
                    494
                    
                    
                    
                    389Noninterest
      expense
                    
                    
                    5,403
                    
                    
                    
                    5,126Income
      before income tax
                    
                    
                    159
                    
                    
                    
                    573Income
      tax (benefit) expense
                    
                    
                    (30
                    )
                    
                    
                    120Net
      income
                    
                    $
                    189
                    
                    
                    $
                    453Preferred
      stock dividends and amortization, net
                    
                    
                    194
                    
                    
                    
                    —Net
      income (loss) available to common shareholders
                    
                    $
                    (5
                    )
                    
                    $
                    453Per
      Share Data:Basic
      income per common share
                    
                    $
                    (0.01
                    )
                    
                    $
                    0.78Diluted
      income per common share
                    
                    
                    (0.01
                    )
                    
                    
                    0.77Tangible
      common equity per common share at year-end (a)
                    
                    
                    25.29
                    
                    
                    
                    25.22Cash
      dividends per common share
                    
                    
                    n/a
                    
                    
                    
                    n/aAverage
      shares used in basic income per share calculations
                    
                    
                    584,017
                    
                    
                    
                    582,230Average
      shares used in diluted income per share calculations
                    
                    
                    584,017
                    
                    
                    
                    592,181Operating
      Ratios:Total
      loans to total deposits
                    
                    
                    93.79
                    %
                    
                    
                    91.65
                    %Total
      shareholders’ equity to total assets
                    
                    
                    9.65
                    %
                    
                    
                    8.21
                    %Average
      shareholders’ equity to average assets
                    
                    
                    9.46
                    %
                    
                    
                    8.65
                    %Return
      on average equity
                    
                    
                    1.06
                    %
                    
                    
                    3.17
                    %Return
      on average assets
                    
                    
                    0.10
                    %
                    
                    
                    0.27
                    %Dividend
      payout ratio
                    
                    
                    n/a
                    
                    
                    
                    n/aAllowance
      for loan losses to total loans
                    
                    
                    1.39
                    %
                    
                    
                    1.21
                    %Average assets
                    
                    $
                    189,388
                    
                    
                    $
                    165,171Average
      shareholders’ equity
                    
                    
                    17,922
                    
                    
                    
                    14,294





(a)
Shareholders’ equity less preferred stock divided by the number of common shares
outstanding at year-end.





31.





WESTERN
RESERVE BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS





OVERVIEW





In the
following section, management presents an analysis of Western Reserve Bancorp,
Inc.’s (“Company”) financial condition and results of operations as of and for
the years ended December 31, 2009 and 2008.  This discussion is
intended to provide a more comprehensive review of the operating results and
financial condition than could be obtained from an examination of the financial
statements alone.  This analysis should be read in conjunction with
the consolidated financial statements and related footnotes and the selected
financial data elsewhere in this report.





Net
income for 2009 was $189,220, a decrease of $264,088, or 58.3%, from 2008 net
income of $453,308.  The decrease in 2009 was primarily related to
increases in the provision for loan losses and in Federal Deposit Insurance
Corporation (“FDIC”) assessments in 2009.  Net income (loss) available
to common shareholders is net income reduced by preferred stock dividends and
amortization, net and was ($5,029) in 2009 and $453,308 in 2008.





Deposits
increased $21,524,433, or 13.7%, to $178,242,289 at December 31,
2009.  Growth in Certificates of Deposit (CDs) of $13.5 million,
checking accounts of $8.6 million and money market accounts of $4.0 million was
partially offset by decreases in savings accounts of $4.6 million.  To
the extent these increased deposits were not deployed in loans, they were placed
in short-term interest-earning deposits.  The Company anticipates that
excess funds and deposit growth will be used to make high-quality loans as
economic conditions return to pre-recession levels.





Management
believes that there are significant opportunities for commercial lending in
Wayne County and southern Medina County.  The Company opened a lending
office in Wooster, Ohio in December 2008 to position itself for future growth
opportunities.





The
Brecksville office, which opened in October 2004, continues to meet management’s
expectations for both loan and deposit growth.  At year-end 2009,
Brecksville’s total loans were $26.9 million and total deposits were $41.0
million.  Approximately 56.3% of Brecksville’s deposits were in Market
Rate Savings Accounts which tend to have lower interest rates than
CDs.  Over the past two years the Company has added two seasoned
lending officers to the Brecksville office.





The
Company’s liquidity position decreased somewhat in 2009, primarily due to a
decrease in Federal Home Loan Bank (“FHLB”) advances as loan growth and deposit
growth were in line with each other during the year.  As of year-end
2009, cash and cash equivalents had decreased $3.1 million, or 14.7% to $18.2
million from year-end 2008.  Management believes the Company is
well-positioned to take advantage of prudent lending and other opportunities
during 2010.





FINANCIAL
CONDITION





Total
assets at December 31, 2009, were $201,932,953, an increase of $22,820,714 or
12.7% over 2008 year-end assets of $179,112,239.  The primary reason
for the increase in total assets was an increase in loans which was primarily
funded by an increase in deposits.  The Company’s issuance of
preferred stock under the U.S. Treasury’s Capital Purchase Program (“CPP”) also
provided funds that increased total assets.  These increases were
partially offset by a decrease in cash and cash equivalents in
2009.









32.





SECURITIES





The
Company invests in securities of U. S. government-sponsored enterprises,
mortgage-backed securities and municipal securities, all of which are classified
as available-for-sale at December 31, 2009.  At year-end 2009, the
portfolio totaled $10,019,225, and was comprised of 53% mortgage-backed
securities and 47% municipal securities.  During 2009, one $500,000
U.S. government agency security was called and payments of $1,337,348 on
mortgage-backed securities were received.  In addition, during 2009,
the Company purchased $1.2 million in mortgage-backed securities and $351,000 of
municipal securities.  The securities portfolio provides liquidity at
a higher yield than the rate earned on overnight Federal funds sold or other
short-term instruments.  Securities in the portfolio may also be used
as collateral for public funds deposits and, at year-end 2009, $7,303,319 of
securities were pledged to secure public deposits.





LOANS





Total
loans increased $23,551,414, or 16.4%, in 2009 to $167,176,845 at
year-end.  The Company achieved this level of growth in a period
characterized by financial institutions turning away business
customers.  The Company managed its growth by using prudent
underwriting standards to make loans to well-qualified customers.  The
Company’s primary lending focus is commercial loans to small businesses in its
primary market area which includes Medina, Cuyahoga, Wayne and contiguous
counties.  Commercial loans, which include commercial business,
commercial real estate and commercial construction loans, increased $21.6
million and were responsible for much of the growth in the loan portfolio during
2009.  The growth in commercial loans was primarily in commercial real
estate loans and commercial business loans which increased $14.5 million and
$4.7 million, respectively.





Of the
total loans at December 31, 2009, approximately $122.5 million or 73.3% are at a
variable rate of interest, and $44.7 million or 26.7% are fixed
rate.  Of the total loans, $97.0 million, or 57.6% mature or are able
to be repriced within twelve months.  Only $2.0 million or 1.2% of
total loans mature or reprice in more than five years.





The
Company’s loan-to-deposit ratio was 93.8% at December 31, 2009, compared to
91.6% at December 31, 2008.  The Company’s loan-to-assets ratio
increased to 81.6% at December 31, 2009 compared to 79.2% at December 31,
2008.  Management anticipates that the loan-to-deposit ratio for 2010
will remain in the range of 90% to 95% and the loan-to-assets ratio will remain
in the range of 79% to 85%.





The
Company participates in the Federal Home Loan Bank of Cincinnati’s Mortgage
Purchase Program which provides the Company the ability to sell conventional
mortgage loans in the secondary market with the option to retain the servicing
or sell the servicing rights to a third party servicer.  Generally,
the Company sells the servicing rights of loans sold through the
program.  The program is structured whereby the Company enters into an
arrangement to deliver up to $2.0 million under a master commitment within a
nine-month timeframe.  The program also utilizes a Lender Risk Account
(LRA) which is funded from the proceeds of individual mortgages
sold.  Refer to Note 12 of the consolidated financial statements for
more information regarding the Federal Home Loan Bank of Cincinnati’s Mortgage
Purchase Program.





DEPOSITS
AND OTHER FUNDING SOURCES





Total
deposits increased by $21,524,433, or 13.7% to $178,242,289 at December 31,
2009, compared to $156,717,856 at December 31, 2008.







33.


Percent
      ofAmount
                        
                        
                        PortfolioTotal
      Deposits at December 31, 2009:Noninterest
      bearing demand deposits
                        
                        $
                        22,789,030
                        
                        
                        
                        12.8
                        %Interest-bearing
      NOW accounts
                        
                        
                        9,772,226
                        
                        
                        
                        5.5
                        %Savings
      accounts and money market accounts
                        
                        
                        66,239,637
                        
                        
                        
                        37.2
                        %Certificates
      of deposit (CDs)
                        
                        
                        70,804,584
                        
                        
                        
                        39.7
                        %Individual
      Retirement Arrangements (IRAs)
                        
                        
                        8,636,812
                        
                        
                        
                        4.8
                        %Total
                        
                        $
                        178,242,289
                        
                        
                        
                        100.00
                        %





As of
December 31, 2009, the Company had $19,356,801 of national market CDs, primarily
from other banks and credit unions, generally in amounts below the FDIC
insurance threshold, with terms ranging from one year to five years, and rates
ranging from 0.65% to 5.00%.  As of year-end 2009, the weighted
average rate of these CDs was 2.26%, and the weighted average remaining maturity
was 15.3 months.  At December 31, 2008, there was $14,561,933 in
national market CDs.  Although management believes these CDs were
obtained at market rates at the time they were originated, they may be more
vulnerable to price sensitivity than local deposits.  As these CDs
mature management may replace them at lower rates for longer terms.





Deposits
of $100,000 or more totaled $101,495,258, or 56.9% of total deposits as of
December 31, 2009 compared to $78,212,349 or 49.9% of total deposits at December
31, 2008.  The Company participates in the Certificate of Deposit
Account Registry Service (“CDARS”) program which allows depositors to maintain a
deposit relationship with the Bank but place funds in amounts less than the FDIC
insurance limit at various banks to maintain deposit insurance.  In
return, the Bank can receive reciprocal deposits from other institutions
participating in the CDARS program.  The Bank had $19.3 million and
$10.4 million placed with the CDARS program at December 31, 2009 and 2008,
respectively.





Local CDs
included $4,816,871 in public funds at December 31, 2009, of these $3.6 million
at 0.08% mature in 2010 and $1.2 million at 0.51% mature in 2011.  In
addition, CDARS has placed $4,054,728 in public funds with the
Company.





The
Company obtains additional funding through the Federal Home Loan Bank of
Cincinnati. As of December 31, 2009 and 2008, the Company had FHLB advances of
$3,400,000 and $6,500,000, respectively.





RESULTS
OF OPERATIONS





Consolidated
net income was $189,220 in 2009, compared to $453,308 in 2008, a decrease of
58.3%.  Income before income taxes was $156,486 in 2009, compared to
$573,174 in the prior year.  Net income (loss) available to common
shareholders was ($5,029) and $453,308 in 2009 and 2008,
respectively.  Basic and diluted earnings per common share were both
$(0.01) for the year ended December 31, 2009.  Basic and diluted
earnings per common share were $0.78 and $0.77, respectively, in
2008.





The
primary reasons for the decrease in net income were increases in the provision
for loan losses and in FDIC assessments partially offset by an increase in net
interest income.  For 2009, the provision for loan losses reflected
the impact of net charge-offs of $312,155, increases in impaired and nonaccrual
loans, and overall growth in the loan portfolio.







34.




The
Company paid or accrued $160,094 in dividends on preferred stock in
2009.  No dividends were paid on common stock in 2009 or 2008, and the
Company does not expect to pay cash dividends in the foreseeable future, due to
restrictions on dividend payments resulting from the issuance of preferred stock
to the U.S. Treasury under the Troubled Asset Relief Program (“TARP”) Capital
Purchase Program (“CPP”) and because the capital is needed to support the
Company’s continued growth.





NET
INTEREST INCOME





Net
interest income for 2009 was $5,953,368, an increase of $114,086, or 2.0%
compared with $5,839,282 in 2008.  The increase in net interest income
was attributable to decreases in interest rates on deposits and increases in
loan volume; these were partially offset by increases in deposit volume and
decreases in interest rates on loans.




Following
is a table showing the average balances, interest and rates on a fully
taxable-equivalent basis of the Company’s interest-earning assets and
interest-bearing liabilities as of December 31, 2009 and 2008.




Year ended
                  
                  
                  Year endedDecember 31, 2009
                  
                  
                  December 31, 2008Average
                  
                  
                  
                  
                  
                  Average
                  
                  
                  Average
                  
                  
                  
                  
                  
                  AverageBalance
                  
                  
                  Interest
                  
                  
                  Rate
                  
                  
                  Balance
                  
                  
                  Interest
                  
                  
                  Rate($ in thousands)Interest-earning
      assets:Federal
      funds sold and other short term funds
                  
                  $
                  16,799
                  
                  
                  $
                  57
                  
                  
                  
                  0.34
                  %
                  
                  $
                  11,962
                  
                  
                  $
                  274
                  
                  
                  
                  2.29
                  %Securities
      — taxable
                  
                  
                  5,735
                  
                  
                  
                  280
                  
                  
                  
                  4.92
                  %
                  
                  
                  6,524
                  
                  
                  
                  330
                  
                  
                  
                  5.09
                  %Securities
      — tax exempt
                  
                  
                  4,590
                  
                  
                  
                  247
                  
                  
                  
                  5.57
                  %
                  
                  
                  4,499
                  
                  
                  
                  241
                  
                  
                  
                  5.39
                  %Restricted
      stock
                  
                  
                  777
                  
                  
                  
                  39
                  
                  
                  
                  4.97
                  %
                  
                  
                  648
                  
                  
                  
                  34
                  
                  
                  
                  5.29
                  %Loans
                  
                  
                  155,568
                  
                  
                  
                  8,186
                  
                  
                  
                  5.26
                  %
                  
                  
                  135,848
                  
                  
                  
                  8,799
                  
                  
                  
                  6.48
                  %Total
      interest-earning assets
                  
                  
                  183,469
                  
                  
                  
                  8,809
                  
                  
                  
                  4.81
                  %
                  
                  
                  159,481
                  
                  
                  
                  9,678
                  
                  
                  
                  6.07
                  %Noninterest
      earning assets
                  
                  
                  5,919
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  5,690Total
      assets
                  
                  $
                  189,388
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  165,171Interest-bearing
      liabilities:Transaction
      accounts (NOW)
                  
                  $
                  8,344
                  
                  
                  
                  48
                  
                  
                  
                  0.57
                  %
                  
                  $
                  7,010
                  
                  
                  
                  69
                  
                  
                  
                  0.99
                  %Market
      rate savings accounts
                  
                  
                  67,941
                  
                  
                  
                  609
                  
                  
                  
                  0.90
                  %
                  
                  
                  76,520
                  
                  
                  
                  1,892
                  
                  
                  
                  2.47
                  %Time
      deposits
                  
                  
                  71,293
                  
                  
                  
                  1,971
                  
                  
                  
                  2.77
                  %
                  
                  
                  43,999
                  
                  
                  
                  1,606
                  
                  
                  
                  3.65
                  %Federal
      Home Loan Bank advances and other borrowings
                  
                  
                  4,196
                  
                  
                  
                  153
                  
                  
                  
                  3.64
                  %
                  
                  
                  6,006
                  
                  
                  
                  203
                  
                  
                  
                  3.38
                  %Total
      interest-bearing liabilities
                  
                  
                  151,774
                  
                  
                  
                  2,781
                  
                  
                  
                  1.83
                  %
                  
                  
                  133,535
                  
                  
                  
                  3,770
                  
                  
                  
                  2.82
                  %Noninterest-bearing
      liabilities
                  
                  
                  19,692
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  17,342Shareholders'
      equity
                  
                  
                  17,922
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  14,294Total
      liabilities and shareholders' equity
                  
                  $
                  189,388
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  165,171Net
      interest income
                  
                  
                  
                  
                  
                  
                  6,028
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  5,908Tax
      equivalent adjustment
                  
                  
                  
                  
                  
                  
                  (75
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (69
                  )Net
      interest income per financial statements
                  
                  
                  
                  
                  
                  $
                  5,953
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  5,839Net
      interest margin(Net
      yield on average earning assets)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.29
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.71
                  %





The
average balance of loans includes nonaccrual loans.







35.




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 - change in volume multiplied by the previous year's
      rate.


Rate
      Variance - change in rate multiplied by the previous year's
      volume.


Rate/Volume
      Variance - change in volume multiplied by the change in
      rate.  This variance was allocated to volume variance and rate
      variance in proportion to the relationship of the absolute dollar amount
      of the change in each.





Summary of Changes in Net Interest Income2009 vs. 2008
                      
                      
                      2008 vs. 2007Increase (Decrease) due to
                      
                      
                      Increase (Decrease) due toVolume
                      
                      
                      Rate
                      
                      
                      Net
                      
                      
                      Volume
                      
                      
                      Rate
                      
                      
                      Net($ in thousands)Interest
      income:Federal
      funds sold and other short term funds
                      
                      $
                      48
                      
                      
                      $
                      (265
                      )
                      
                      $
                      (217
                      )
                      
                      $
                      (329
                      )
                      
                      $
                      (447
                      )
                      
                      $
                      (776
                      )Securities
      — taxable
                      
                      
                      (39
                      )
                      
                      
                      (11
                      )
                      
                      
                      (50
                      )
                      
                      
                      23
                      
                      
                      
                      (5
                      )
                      
                      
                      18Securities
      — tax exempt
                      
                      
                      (2
                      )
                      
                      
                      8
                      
                      
                      
                      6
                      
                      
                      
                      1
                      
                      
                      
                      11
                      
                      
                      
                      12Restricted
      stock
                      
                      
                      7
                      
                      
                      
                      (2
                      )
                      
                      
                      5
                      
                      
                      
                      4
                      
                      
                      
                      (6
                      )
                      
                      
                      (2
                      )Loans
                      
                      
                      1,181
                      
                      
                      
                      (1,794
                      )
                      
                      
                      (613
                      )
                      
                      
                      1,287
                      
                      
                      
                      (1,782
                      )
                      
                      
                      (495
                      )Total
      interest-earning assets
                      
                      
                      1,195
                      
                      
                      
                      (2,064
                      )
                      
                      
                      (869
                      )
                      
                      
                      986
                      
                      
                      
                      (2,229
                      )
                      
                      
                      (1,243
                      )Interest
      expense:Transaction
      accounts (NOW)
                      
                      
                      (12
                      )
                      
                      
                      33
                      
                      
                      
                      21
                      
                      
                      
                      (6
                      )
                      
                      
                      1
                      
                      
                      
                      (5
                      )Market
      rate savings accounts
                      
                      
                      192
                      
                      
                      
                      1,091
                      
                      
                      
                      1,283
                      
                      
                      
                      (151
                      )
                      
                      
                      1,645
                      
                      
                      
                      1,494Time
      deposits
                      
                      
                      (816
                      )
                      
                      
                      451
                      
                      
                      
                      (365
                      )
                      
                      
                      (129
                      )
                      
                      
                      354
                      
                      
                      
                      225Federal
      Home Loan Bank advances and other borrowings
                      
                      
                      64
                      
                      
                      
                      (14
                      )
                      
                      
                      50
                      
                      
                      
                      (85
                      )
                      
                      
                      9
                      
                      
                      
                      (76
                      )Total
      interest-bearing liabilities
                      
                      
                      (572
                      )
                      
                      
                      1,561
                      
                      
                      
                      989
                      
                      
                      
                      (371
                      )
                      
                      
                      2,009
                      
                      
                      
                      1,638Change
      in net interest income
                      
                      $
                      623
                      
                      
                      $
                      (503
                      )
                      
                      $
                      120
                      
                      
                      $
                      615
                      
                      
                      $
                      (220
                      )
                      
                      $
                      395





The
average net interest margin for 2009 was 3.29%, a decrease of 42 basis points
(“bp”) from 3.71% in 2008.  Net interest margin decreased in 2009 as
historically low market interest rates resulted in interest rates earned on
assets decreasing faster than interest rates paid on deposits.





The
average yield on interest earning assets in 2009 was 4.81%, compared to 6.07% in
2008.  During 2009, the average yield on loans decreased to 5.26% from
6.48% for 2008.  This includes loan fees, net of loan costs, of
$53,834 in 2009 and $48,007 in 2008, which contributed 0.03% to the net interest
margin in both years.  During 2009 net interest margin improved from
3.09% in the first quarter to 3.52% in the fourth quarter because the interest
rates on loans adjusted rapidly when market interest rates were reduced in late
2008 while interest rates on deposits decreased more slowly during
2009.





The
target for short-term interest rates decreased to a historical low range of
0.00% to 0.25% in December 2008.  The Company decreased its prime rate
accordingly and, at December 31, 2009 and 2008, the Bank’s prime rate was
3.25%.  With market rates near zero, management expects that rates are
likely to rise as the economy strengthens although the timing remains
uncertain.







36.




The cost
of interest-bearing funds decreased during 2009, to 1.83% on
average.  This was down from 2.82% during 2008.  A
significant portion of the Company’s liabilities are Market Rate Savings
accounts which are priced according to a national money market index; however,
the Bank did not decrease rates on these accounts as significantly as the index
would have indicated due to competitive reasons.





NONINTEREST
INCOME





Total
noninterest income increased $104,906 to $494,337 in 2009, from $389,431 in
2008.  The increase in 2009 was primarily due to increases in rental
income of $30,000, service charges on deposit accounts of $28,000, gains on
sales of mortgage loans of $25,000, and earnings from Bank Owned Life Insurance
of $13,000.  The Bank entered into a lease arrangement for one other
real estate owned (“OREO”) property in 2009 resulting in rental income of
$30,000.  The lessee has the right to purchase the property during the
three-year lease term.





The
Company participates in the FHLB’s Mortgage Purchase Program which provides the
Company with the ability to profitably sell conventional residential mortgages
in the secondary market.  The Bank sold seven loans totaling
$1,527,100 with gains of $26,200 in 2009 and one loan totaling $97,500 with a
gain of $1,446 in 2008.  The Company does not retain the servicing for
loans sold to the FHLB under the Mortgage Purchase Program.





Service
charges on deposits totaled $205,117 in 2009 and $177,413 in
2008.  Service charges on deposit accounts increased primarily due to
a reduction in the earnings credit on commercial accounts in 2009, commensurate
with overall decreases in short-term interest rates.





The
largest components of “other” noninterest income, aside from the increase in
earnings from Bank Owned Life Insurance and rental income, were fee income from
ATM programs, the rental of safe deposit boxes, CDARS fees and wire transfer
fees.  Management expects that noninterest income will increase as the
Company increases in size and continues to increase the number of customers
served.





NONINTEREST
EXPENSE





Total
noninterest expense in 2009 was $5,402,819, an increase of $276,454 or 5.4% over
the $5,126,365 in 2008.  Increases in FDIC premiums of $255,000
comprise most of the increase in 2009 over 2008.  Other, less
significant increases included salaries and benefits ($86,000), collection and
OREO ($67,000) and Ohio state franchise tax ($40,000) that were partially offset
by decreases in occupancy and equipment ($31,000) community relations ($25,000)
and other noninterest expense ($108,000).





Other
expense amounts were as follows for the years ended December 31:





2009
                
                
                2008Reversal
      of prior year interest income on non-accrual loans
                
                $
                —
                
                
                $
                77,950Loss
      on disposal of fixed assets
                
                
                —
                
                
                
                59,295Loan
      expense
                
                
                54,347
                
                
                
                49,636Travel
      and entertainment
                
                
                38,360
                
                
                
                47,199Insurance
                
                
                36,992
                
                
                
                37,026CDARS
      fees
                
                
                27,448
                
                
                
                14,959Telephone
                
                
                23,682
                
                
                
                25,480Supplies,
      postage and printing
                
                
                83,055
                
                
                
                74,751Other
                
                
                65,982
                
                
                
                51,219Total
                
                $
                329,866
                
                
                $
                437,515







37.




Non-interest
expense as a percentage of average assets improved to 2.85% in 2009, compared to
3.10% in 2008, and overhead compared to net interest income increased to 90.8%
in 2009, up from 87.8% in 2008.    The Company’s efficiency
ratio increased to 83.79% in 2009 from 82.30% in 2008.  These ratios
indicate that the Company has become less efficient in 2009; however, this was
primarily due to the effect of the special FDIC assessment of $89,000 in 2009
which increased the efficiency ratio by 1.38% in 2009.  Total assets
per full-time equivalent employee increased to approximately $5,458,000 at
December 31, 2009 from $4,841,000 at December 31, 2008 as a result of the
Company’s growth.





PROVISION
AND THE ALLOWANCE 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 creditworthiness of
the Company’s borrowers and other related factors.  The Company
revised its methodology for determining the provision for loan losses in 2009 to
provide larger allowances for loans with risk grades indicating increased risk
characteristics.  The provision for loan losses was $885,400 in 2009
and $529,174 in 2008, representing an increase of $356,226.




Allowance
for Loan Losses and Related Information for the year ended December 31,
2009
 
 Commercial
                    Real Estate
                  
                  
                  Commercial &
                    Industrial
                  
                  
                  Residential
                  
                  
                  Consumer
                  
                  
                  TotalBeginning
      Balance
                  
                  $
                  1,180,643
                  
                  
                  $
                  416,121
                  
                  
                  $
                  101,730
                  
                  
                  $
                  44,976
                  
                  
                  $
                  1,743,470Charge-offs
                  
                  
                  (133,095
                  )
                  
                  
                  (74,891
                  )
                  
                  
                  (87,766
                  )
                  
                  
                  (39,385
                  )
                  
                  
                  (335,137
                  )Recoveries
                  
                  
                  6,333
                  
                  
                  
                  1,647
                  
                  
                  
                  12,796
                  
                  
                  
                  2,206
                  
                  
                  
                  22,982Provisions
                  
                  
                  618,194
                  
                  
                  
                  187,346
                  
                  
                  
                  26,901
                  
                  
                  
                  52,959
                  
                  
                  
                  885,400Ending
      Balance
                  
                  $
                  1,672,075
                  
                  
                  $
                  530,223
                  
                  
                  $
                  53,661
                  
                  
                  $
                  60,756
                  
                  
                  $
                  2,316,715Loans
      evaluated for impairment at year-end:Individually
                  
                  $
                  4,791,192
                  
                  
                  $
                  634,869
                  
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  $
                  5,426,061Collectively
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  66,067
                  
                  
                  
                  40,738
                  
                  
                  
                  106,805




In 2009,
loans totaling $335,137 were charged off and $22,982 was recovered on loans
previously charged off.  In 2008, loans totaling $394,710 were charged
off and $3,240 was recovered on loans previously charged off. At December 31,
2009, the allowance for loan losses was 1.38% of total loans, compared to 1.21%
at year-end 2008.  At December 31, 2009, $361,000 or 15.58% of the
allowance for loan losses was allocated to impaired loan balances
individually.  At December 31, 2008, $69,766, or 4.00% of the
allowance for loan losses was allocated to impaired loan balances
individually.  At December 31, 2009, twenty-six loans totaling
$3,698,621 were in nonaccrual status, compared to ten loans totaling $1,657,328
at year-end 2008.  At December 31, 2009, there were eight loans to two
borrowers totaling $1.8 million classified as troubled debt restructurings
(“TDR) because a concession had been granted based on the borrowers’ financial
difficulty.  The TDR loans were performing in accordance with their
modified terms.  Management believes the allowance for loan losses at
December 31, 2009, is adequate to absorb probable incurred losses in the loan
portfolio.







38.




Information
related to the Company’s credit risk profile by internally assigned grade at
December 31, 2009, is included in the following table.





Commercial
                    Real Estate
                  
                  
                  Commercial &
                    Industrial
                  
                  
                  Residential
                  
                  
                  Consumer
                  
                  
                  TotalGrade:Pass
                  
                  $
                  93,277,462
                  
                  
                  $
                  32,952,310
                  
                  
                  $
                  11,079,186
                  
                  
                  $
                  6,667,558
                  
                  
                  $
                  143,976,516Watch
                  
                  
                  5,663,583
                  
                  
                  
                  1,175,681
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  6,839,264Special
      mention
                  
                  
                  3,671,595
                  
                  
                  
                  1,309,728
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,981,323Substandard
                  
                  
                  4,839,386
                  
                  
                  
                  1,007,490
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  5,846,876Nonaccruing
      and troubled debt restructurings
                  
                  
                  4,791,192
                  
                  
                  
                  634,869
                  
                  
                  
                  66,067
                  
                  
                  
                  40,738
                  
                  
                  
                  5,532,866Total
                  
                  $
                  112,243,218
                  
                  
                  $
                  37,080,078
                  
                  
                  $
                  11,145,253
                  
                  
                  $
                  6,708,296
                  
                  
                  $
                  167,176,845





Loans
graded other than “Pass” are typically in industries displaying distress in the
current economy.  As the grades become more adverse, the related
industry is likely displaying greater sensitivity to the current economic
conditions and the borrower’s financial strength may have
deteriorated.  Industries such as commercial real estate management
and real estate development are particularly affected by current economic
conditions.





The
Company’s past due loans are very low, with only $26,000 in delinquent loans
(excluding loans on nonaccrual status).  Delinquent loans by type and
number of days delinquent at December are included in the table
below.





Commercial
                      Real Estate
                    
                    
                    Commercial &
                      Industrial
                    
                    
                    Residential
                    
                    
                    Consumer
                    
                    
                    TotalNumber
      of days past due:31
      to 60
                    
                    $
                    25,492
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    155
                    
                    
                    $
                    25,64761
      to 90
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Over
      90 and accruing
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -





LIQUIDITY





Liquidity
refers to the ability to fund loan demand, meet deposit customers’ withdrawal
needs and provide for operating expenses.  As summarized in the
Statement of Cash Flows, the main sources of cash flow are receiving deposits
from customers and, to a lesser extent, proceeds from FHLB advances, borrowings,
and repayment of principal and interest on loans and investments.  The
primary uses of cash are lending to borrowers and, secondarily, investing in
securities and short-term interest-earning assets.  Assets available
to satisfy those needs include cash and due from banks, Federal funds sold,
interest-bearing deposits in other banks, loans held for sale and
available-for-sale securities.  These assets are commonly referred to
as liquid assets.  Liquid assets were $28,887,826 at December 31,
2009, compared to $31,516,785 at the same date in 2008.





If
additional liquidity is needed, the Company has several possible sources which
include obtaining additional Federal Home Loan Bank advances, purchasing federal
funds, selling loans, and acquiring one-way buy CDARS, additional national
market CDs or brokered deposits.  The Company also can borrow under
various lines of credit.  For additional information refer to Note 8
of the consolidated financial statements.









39.




INTEREST
RATE SENSITIVITY/GAP





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





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





The
primary source of interest rate risk in the Company’s balance sheet is repricing
risk, which results from differences in the timing and velocity with which
interest rates earned on assets or paid on liabilities can change in relation to
market interest rates.





The
Company’s balance sheet “gap” divides interest-bearing assets and liabilities
into maturity and repricing categories, and measures the “gap” in each
category.  From this perspective, the Company was in a liability
sensitive position in the one-year category, with $115.2 million in assets and
$131.3 million in liabilities subject to repricing during the next
year.  However, most of the assets reprice more rapidly than the
liabilities (due to their respective contractual
provisions).  Management has the ability to control the repricing on
non-maturity deposits, such as checking and savings accounts.  A
significant portion of the Company’s liabilities are Market Rate Savings
accounts on which the Company generally sets the interest rate based on a
national money market index.  However, management did not reduce the
interest rates paid on Market Rate Savings accounts to the extent indicated by
the index because the competitive banking environment in our market area would
not have supported such low interest rates.





From an
income statement perspective, based on the model utilized by the Company to
analyze its interest rate sensitivity, the Company’s net interest income will
benefit from an increase in interest rates, since interest income will increase
more rapidly than interest expense.   The model indicates that if
market interest rates were to experience an immediate increase of 100 bp, the
company’s net interest income would increase by approximately
5.8%.  Modeling for a 100 bp decrease in interest rates is not
meaningful, due to the current rate environment.   Modeling
interest rate sensitivity is highly dependent on numerous assumptions used in
the modeling process, and actual changes in interest income and expense may be
different than projected.





CAPITAL
RESOURCES





Total
shareholders’ equity at December 31, 2009 was $19,483,340, compared to
$14,710,720 at December 31, 2008.  The increase of $4,773,000 was
primarily due to net proceeds of $4,662,000 from the issuance of preferred stock
under the U.S. Treasury’s CPP, net income of $189,000 for 2009, proceeds of
$20,000 from the Employee Stock Purchase Plan (resulting in 1,397 shares
issued), and an increase of $59,000 in the net unrealized gains on available for
sale securities partially offset by dividends and amortization, net on preferred
stock of $194,000.





Banking
regulators have established minimum capital ratios for banks and bank holding
companies.  Total risk-based capital is made up of Tier 1 Capital and
Tier 2 Capital.  Tier 1 Capital is total shareholders’ equity less any
intangible assets.  Tier 2 Capital is the allowance for loan losses
(includible up to a maximum of 1.25% of risk-weighted assets), plus the
qualifying portion of subordinated debt.  Refer to Note 13 in the
Company’s consolidated financial statements for a more complete discussion of
risk-based capital.  The Bank exceeded the applicable minimum
regulatory capital requirements at December 31, 2009 and 2008, and was
considered to be well-capitalized under the regulatory
guidelines.  Management intends to maintain the Bank’s
well-capitalized status.







40.




The
Company has grown rapidly in its eleven-year history, and continues to consider
capital strategies to support its growth and operations. In 2009 the Company
participated in the U.S. Treasury’s Capital Purchase Program and received $4.7
million in exchange for issuing preferred stock. For information related to the
U.S. Treasury’s Capital Purchase Program see Note 17 to the consolidated
financial statements.  Additionally, the Company has a $5,000,000 line
of credit through an unaffiliated financial institution with up to $2,000,000
for the purpose of providing additional capital to the Bank as
needed.  By borrowing against the line of credit and then investing
the funds into the Bank as capital, the Company is able to manage the Bank’s
capital ratios.  Traditional capital sources include issuing common or
preferred stock or other capital instruments, but the market for these has
diminished in the current economy.





Restrictions
exist regarding the ability of the Bank to transfer funds to the Company in the
form of cash dividends, loans or advances, as discussed in Note 13 to the
consolidated financial statements.  No cash dividends were declared or
paid on common stock during the years ended December 31, 2009 and
2008.  Management and the Board do not expect the Company to pay cash
dividends on common stock in the foreseeable future and believe that the capital
that would be used to pay dividends is more effectively invested in the
continuing growth and operations of the Company.




As of
December 31, 2009, management is not aware of any current recommendations by the
banking regulatory authorities which, if they were to be implemented, would
have, or are reasonably likely to have, a material adverse effect on the
Company’s liquidity, capital resources or operations.





CRITICAL
ACCOUNTING POLICIES





The
allowance for loan losses is a valuation allowance for probable incurred credit
losses, increased by the provision for loan losses and recoveries and decreased
by charge-offs.  Management estimates the level of the provision for
loan losses and the allowance balance by considering its historical loss
experience, the nature, volume and risk characteristics in the loan portfolio,
information about specific borrower circumstances and estimated collateral
values, economic conditions and other factors.  Allocations of the
allowance may be made for specific loans, but the entire allowance is available
for any loan that, in management’s judgment, should be
charged-off.  Loan losses are charged against the allowance when
management believes the loan balance cannot be collected.  Loan
quality is monitored on a monthly basis by management and at least twice
annually by an independent third party.  The Company’s Loan Review
Committee, which is comprised of three independent members of the Company’s
Board of Directors, is responsible for reviewing the results of this independent
third party assessment and monitoring the credit quality of the loan
portfolio.





CONTRACTUAL
OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET
ARRANGEMENTS





The
following table presents, as of December 31, 2009, significant fixed and
determinable contractual obligations by payment date.  The payment
amounts represent those amounts contractually due to the recipient and do not
include any unamortized premiums or discounts, hedge basis adjustments, or other
similar adjustments.









41.




Further
discussion of the nature of each obligation is included in the referenced note
to the consolidated financial statements.





($ in thousands)
                  
                  Note
                    Reference
                  
                  
                  2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  2013
                  
                  
                  2014
                  
                  
                  ThereafterDeposits
      without maturity
                  
                  
                  7
                  
                  
                  $
                  98,801Time
      deposits
                  
                  
                  7
                  
                  
                  
                  53,997
                  
                  
                  $
                  15,612
                  
                  
                  $
                  4,368
                  
                  
                  $
                  4,639
                  
                  
                  $
                  715
                  
                  
                  $
                  110FHLB
      advances and other borrowings
                  
                  
                  8
                  
                  
                  
                  1,500
                  
                  
                  
                  1,400
                  
                  
                  
                  300
                  
                  
                  
                  200
                  
                  
                  
                  —
                  
                  
                  
                  —Operating
      leases
                  
                  
                  6
                  
                  
                  
                  428
                  
                  
                  
                  436
                  
                  
                  
                  400
                  
                  
                  
                  135
                  
                  
                  
                  —
                  
                  
                  
                  —





Note 12
to the consolidated financial statements discusses in greater detail other
commitments and contingencies and the various obligations that exist under those
agreements.  Examples of these commitments and contingencies include
commitments to extend credit to borrowers under lines of credit and employment
agreements between the Company and certain of its executive
officers.





At
December 31, 2009, the Company had no unconsolidated, related special purpose
entities, nor did it engage in derivatives and hedging contracts, such as
interest rate swaps, that may expose it to liabilities greater than the amounts
recorded on the consolidated balance sheet.  The Company’s investment
policy prohibits engaging in derivatives contracts for speculative trading
purposes; however, in the future, management may pursue certain contracts, such
as interest rate swaps, in the effort to execute a sound and defensive interest
rate risk management policy.





IMPACT
OF INFLATION AND CHANGING PRICES





The
majority of assets and liabilities of the Company are monetary in nature and
therefore the Company differs greatly from most commercial and industrial
companies that have significant investments in fixed assets or
inventories.  However, inflation does have an important impact on the
growth of total assets in the banking industry and the resulting need to
increase equity capital in order to maintain an appropriate equity to assets
ratio.  Inflation significantly affects noninterest expense, which
tends to rise during periods of general inflation.  Management
believes the most significant impact on financial results is the Company’s
ability to react to changes in interest rates.  Management seeks to
maintain a fairly balanced position between interest rate sensitive assets and
liabilities and to actively manage the balance sheet in order to protect against
the effects of wide interest rate fluctuations on net income and shareholders’
equity.





FORWARD
LOOKING STATEMENTS





Certain
statements contained in this report that are not historical facts are forward
looking statements that are 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.







42.




EXECUTIVE
OFFICERS—WESTERN RESERVE BANCORP, INC.





Edward J.
McKeon, President and Chief Executive Officer


Brian K.
Harr, Executive Vice President


Cynthia
A. Mahl, Executive Vice President, Corporate Secretary and
Treasurer




EXECUTIVE
OFFICERS—WESTERN RESERVE BANK





Edward J.
McKeon, President and Chief Executive Officer


Brian K.
Harr, Executive Vice President and Chief Lending Officer


Cynthia
A. Mahl, Executive Vice President, Chief Financial Officer and Senior Operations
Officer





TRANSFER
AGENT, REGISTRAR & DIVIDEND AGENT





Western
Reserve Bank


4015
Medina Road, Suite 100


P.O. Box
585


Medina,
Ohio 44258-0585


(330)
764-3131 or (866) 633-4622





STOCK
INFORMATION





The
Company’s common stock was held by approximately 495 holders of record as of
December 31, 2009.  Howe Barnes Hoefer & Arnett, Inc (Howe Barnes)
makes a market in the Company’s shares of stock.  Howe Barnes is a
Chicago based investment firm that specializes in the research and trading of
small and medium sized community bank stocks.  The Company’s shares
are quoted on the OTC “Pink Sheets” under the symbol WRBO.  The quoted
price of the Company’s stock is expected to change over time, dependent
primarily upon the supply and demand for the shares.  Shareholders and
other interested parties may contact Lou Coines at Howe Barnes at 1-800-800-4693
or their broker with any inquiries regarding buying or selling shares of Western
Reserve Bancorp, Inc.





ANNUAL
REPORT ON FORM 10-K





A copy of
the Company’s 2009 Annual Report on Form 10-K filed with the Securities and
Exchange Commission is available to shareholders without charge.  To
obtain a copy, direct your request to Cynthia A. Mahl, Executive Vice President
and CFO, Western Reserve Bancorp, Inc.  P.O. Box 585, Medina,
OH  44258-0585.  You may also access the report at www.sec.gov or
through Western Reserve Bank’s web site at www.westernreservebank.com.





ANNUAL
MEETING





The
Annual Shareholders’ Meeting will be held Wednesday, April 28, 2010, at 9:00
a.m. at The Blue Heron Banquet and Conference Center, 3227 Blue Heron Trace,
Medina, Ohio 44256.  All shareholders are encouraged to
attend.







43.




BOARD
OF DIRECTORS (1)





P.M.
      Jones
            
            Edward
      J. McKeonChairman
            
            President
      and Chief Executive OfficerWestern
      Reserve Bancorp, Inc. and
            
            Western
      Reserve Bancorp, Inc. andWestern
      Reserve Bank
            
            Western
      Reserve BankMedina,
      Ohio
            
            Medina,
      OhioRoland
      H. Bauer
            
            R.
      Hal NicholsPresident
      and Chief Executive Officer
            
            Chairman
      and ManagerThe
      Cypress Companies
            
            Austin
      Associates, LLCAkron,
      Ohio
            
            Toledo,
      OhioBijay
      K. Jayaswal, M.D.
            
            Rory
      H. O’NeilPhysician,
      Cardiology
            
            PresidentMedina,
      Ohio
            
            Quetzal
      Corp.Westfield
      Center, OhioRay
      E. Laribee
            
            Glenn
      M. SmithAttorney
            
            Retired
      PresidentLaribee
      & Hertrick
            
            Smith
      Bros., Inc.Medina,
      Ohio
            
            Medina,
      OhioC.
      Richard Lynham
            
            Thomas
      A. TubbsChairman
      of the Board and Owner
            
            Bank
      Executive Benefits ConsultantHarbor
      Castings, Inc.
            
            Homerville,
      OhioNorth
      Canton, Ohio





(1)All
are Directors of Western Reserve Bancorp, Inc. and Western Reserve
Bank





BRECKSVILLE
ADVISORY BOARD





Victoria
      J. Burns
            
            Brendan
      RosePresident,
      Burns Realty Group
            
            C.F.O.,
      Industrial First Inc.Joe
      Carollo
            
            Greg
      SkaljacPresident,
      Jani-King of Cleveland
            
            Vice
      President, Luce, Smith & Scott Inc.Member,
      Brecksville City CouncilLouis
      N. Carouse, Jr.
            
            Michael
      R. TorchiaMember,
      Brecksville City Council
            
            President
      & Owner, The Realty Store, LLCSteve
      Karas, Retired Executive