UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.  20549





FORM 10-K





x
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


For the fiscal year ended December 31, 2010


or


 ̈
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934





Commission file number 000-51264





Western Reserve Bancorp, Inc.


(Exact name of registrant as specified in its charter)





Ohio

31-1566623(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)4015 Medina Road, Suite 100, Medina, Ohio

44256(Address of principal executive offices)

(Zip Code)





Registrant’s telephone number, including area code (330) 764-3131





Securities registered under Section 12(b) of the Exchange Act:  None





Securities registered pursuant to Section 12(g) of the Exchange Act:  Common stock, no par value, $1.00 stated value


(Title of class)





Indicate by check mark if the registrant is a well-known seasoned issuer, as identified in Rule 405 of the Securities Act.


 ̈Yes   xNo





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.


 ̈Yes   xNo





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the Issuer was required to file such reports), and (2) has been subject to such filing requirements for past 90 days.


xYes    ̈No





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.


x





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





Large accelerated filer   ̈
Accelerated filer   ̈Non-accelerated filer     ̈ (do not check if a smaller reporting company)
Smaller reporting company x





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


 ̈Yes    xNo





As of June 30, 2010, the aggregate market value of the common stock held by non-affiliates of the Bancorp was $4,843,172 (which excludes 105,897 shares held by directors and executive officers).  As of that date, there were 585,419 shares of common stock issued and outstanding.





As of March 25, 2011, there were 586,084 shares of the Company’s common stock, without par value, issued and outstanding.









DOCUMENTS INCORPORATED BY REFERENCE





Parts I and II:
Portions of Registrant’s 2010 Annual Report to Shareholders and Portions of Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held May 19, 2011


Part III:
Portions of Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held May 19, 2011




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PART I





Item 1.  Description of Business





General





Western Reserve Bancorp, Inc. (“the Company”), an Ohio corporation incorporated on February 25, 1997, is a bank holding company that owns all of the capital stock of the Western Reserve Bank, an Ohio state-chartered bank headquartered in Medina, Ohio (the "Bank").  From the date of the Company’s inception through October 1998, the Company and the Bank conducted no business other than matters incidental to their organization and opening for business.  On February 24, 1998, the Company commenced an initial public offering (the “Offering”) of up to 625,000 shares of its Common Stock pursuant to a Registration Statement on Form SB-2 filed with the Securities and Exchange Commission ("SEC") on February 12, 1998, as amended. The Offering was concluded on July 1, 1998.  A total of 400,334 shares of the Company’s common stock were sold, with proceeds, net of offering costs, of $6,368,499.  Approximately $5,800,000 of the proceeds was used to provide initial capitalization for the Bank.  The Bank commenced business on November 6, 1998.





During 2000, the Company sold an additional 84,731 shares of common stock in an intra-state offering exempt from the Securities Act of 1933 pursuant to Section 3(a)(11) and Rule 147 promulgated thereunder.  A registration statement was filed with the Ohio Division of Securities on Form 6(A)(1) on September 11, 2000.  The Offering resulted in proceeds, net of offering costs, of approximately $1,577,000.





During 2004, the Company sold an additional 83,277 shares of common stock in an intra-state offering exempt from the Securities Act of 1933 pursuant to Section 3(a)(11) and Rule 147 promulgated thereunder.  A registration statement was filed with the Ohio Division of Securities on Form 6(A)(1) on May 3, 2004.  The Offering resulted in proceeds, net of offering costs, of approximately $1,968,000.





The Company filed a Registration Statement on Form 8-A with the SEC on April 28, 2005 to register its common shares under Section 12(g) of the 1934 Act.





The Company declared a five-for-four stock split as of September 22, 2006 for shareholders of record as of September 5, 2006.  A total of 114,270 new shares were issued and cash of $4,803 was paid for 141 fractional shares.  All share and per share amounts have been adjusted to reflect the stock split.





On May 15, 2009 the Company became a participant in the U.S. Treasury’s Troubled Asset Relief Program Capital Purchase Program (the “CPP”) and issued $4,700,000 in preferred stock to the U.S. Treasury.   Refer to the Company’s 2010 Annual Report to Shareholders Note 17 (which is incorporated herein by reference) for additional discussion about the CPP.





The Company and the Bank currently maintain their offices at 4015 Medina Road, Suite 100, Medina, Ohio 44256.  The Bank opened a second full-service office in October 2004 located at 8751 Brecksville Road, Brecksville, Ohio 44141.




The Company’s telephone number is (330) 764-3131, and its web site is www.westernreservebank.com.





Business Strategy





In the mid- to late-1990s, many of the financial institutions in the Medina County market area had been acquired by large regional organizations headquartered outside of the area.  As a result, the organizers believed that the competitive and economic environment was right for a new, independent, locally owned and managed bank to serve the financial needs of the residents and businesses in the Medina area.  The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended.  Currently, the only business the Company is engaged in is the ownership of its wholly owned bank subsidiary, Western Reserve Bank.  However, in the future, the holding company structure could provide flexibility for the expansion of the Company’s business through additional banking-related services which commercial banks are currently unable to provide under present law.





The Bank offers a broad range of deposit services for consumers and businesses, including noninterest-bearing and interest-bearing checking accounts, savings and money market accounts, time certificates of deposit and individual retirement accounts.   The Bank engages in a full line of lending activities, including all types of commercial loans to businesses, consumer loans to individuals for household, family and other personal expenditures, and real estate loans including first mortgage loans, home equity loans and construction loans.  The Bank offers both fixed rate and variable rate residential mortgage loans.  Generally, the Bank does not keep longer-term fixed rate mortgages in its portfolio, but participates in a Mortgage Purchase Program with the Federal Home Loan Bank of Cincinnati to assist the Bank’s customers in obtaining fixed rate mortgage loans.  The Bank also offers other services, including debit and ATM cards with access to regional and national automated teller networks, a courier service for business deposits, remote deposit capture, cash management services, internet banking for both businesses and consumers, safe deposit boxes, cashiers checks, traveler’s checks and two ATMs.




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Under applicable law, the Bank is permitted to make loans to individual borrowers in aggregate amounts of up to 15 percent of the sum of the Bank’s total capital and allowance for loan losses.  At December 31, 2010, the Bank’s legal lending limit was approximately $3,189,000.  The Board of Directors has established an "in-house” lending limit of $2,000,000 although, under certain circumstances, the Board Loan Committee can authorize, on a case-by-case basis, lending relationships in excess of this “in-house” limit.  The Board may from time to time raise or lower the “in-house” limit as it deems appropriate to comply with safe and sound banking practices and respond to overall economic conditions.    The Company believes that the Bank’s legal lending limit is adequate to satisfy the credit needs of most of its clients.  For credit needs that exceed the Bank’s legal lending limit, the Bank has the ability to participate with other banks to meet the credit need.  In such instances, the Bank intends to be the lead bank in the loan arrangement.





The Bank’s market area is competitive.  There are at least thirteen commercial banks and savings institutions with nearly twenty-seven offices in the Bank’s primary service areas of Medina and Brecksville.  The rapid growth of the Bank in the twelve years since it opened has confirmed the founding shareholders’ belief that a local community bank that offered excellent customer service would be well-received in the Bank’s primary market areas.  The Bank’s competition, in addition to large regional banks, includes credit unions, finance companies, insurance companies, mortgage companies, securities brokerage firms, money market funds, loan production offices and other providers of financial services.





Employees





At December 31, 2010, the Bank has 34 full-time-equivalent employees (30 full-time and 8 part-time).  None of its employees is covered by a collective bargaining agreement.  The Company considers its employee relations to be excellent.





Reports to Security Holders





The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy solicitation materials, as applicable, under Commission Regulation 14A.  The public may read and copy any materials the Company files with the Commission at the SEC’s Public Reference Room at 100 F. Street, NE, Washington, DC 20549, on official business days during the hours of 10:00 am to 3:00 pm.  The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330.  The Commission maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission at http://www.sec.gov.  The reports are also accessible through the Company’s web site at http://www.westernreservebank.com/a_sec.htm.





SUPERVISION AND REGULATION





General





Financial institutions and their holding companies are extensively regulated under federal and state law.  As a result, the growth and earnings performance of the Company can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes and regulations and the policies of various governmental regulatory authorities including, but not limited to, the Board of Governors of the Federal Reserve System (the "FRB"), the Federal Deposit Insurance Corporation (the "FDIC"), the Ohio Division of Financial Institutions (the “Division”), the Internal Revenue Service (the “IRS”), the state taxing authorities and the Securities and Exchange Commission (the "SEC"). The effect of such statutes, regulations and policies can be significant, and cannot be predicted with a high degree of certainty.





Federal and state laws and regulations generally applicable to financial institutions such as the Company and the Bank regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends.  The system of supervision and regulation applicable to the Company and the Bank establishes a comprehensive framework for their respective operations and isintended primarily for the protection of the FDIC's deposit insurance funds and the depositors, rather than the shareholders, of financial institutions.




4




The following references to material statutes and regulations affecting the Company and the Bank are brief summaries thereof and do not purport to be complete.  As such, they are qualified in their entirety by reference to such statutes and regulations.  Any change in applicable law or regulations may have a material effect on the business of the Company and the Bank.





The Company





General.  The Company, as the sole stockholder of the Bank, is a bank holding company.  As a bank holding company, the Company is registered with, and is subject to regulation by, the FRB under the Bank Holding Company Act of 1956 (the “BHCA”) as amended.  In accordance with FRB policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank.  Under the BHCA, the Company is subject to periodic examination by the FRB and is required to file with the FRB periodic reports of its operations and such additional information as the FRB may require. The Company is also subject to regulation by the Division under Ohio law.





Investments and Activities.Under the BHCA, a bank holding company must obtain FRB approval before acquiring substantially all the assets of any bank or bank holding company or ownership or control of any voting shares of any bank or bank holding company if, after such acquisition, it would own or control, directly or indirectly, more than five percent (5%) of the voting shares of such bank or bank holding company.  The BHCA also prohibits the Company, with certain limited exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries.  The principal exception to this prohibition allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the FRB to be so closely related to banking as to be a proper incident thereto.





Affiliate Transactions.  Various governmental requirements, including Sections 23A and 23B of the Federal Reserve Act, limit borrowings by holding companies and other non-bank subsidiaries from affiliated insured depository institutions, and also limit other transactions between holding companies and their non-bank subsidiaries and their affiliated insured depository institutions.  Section 23A of the Federal Reserve Act generally requires that an insured depository institution's loan to its non-bank affiliates be secured, and Section 23B of the Federal Reserve Act generally requires that an insured depository institution's transactions with its non-bank affiliates be on arms-length terms.





Control Acquisitions.  The Change in Bank Control Act prohibits a person or group of persons from acquiring "control" of a bank holding company unless the FRB has been notified and has not objected to the transaction.  Under the rebuttable presumption established by the FRB, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act, such as the Company, would, under the circumstances set forth in the presumption, constitute acquisition of control of the bank holding company.





Gramm-Leach-Bliley Act.  The Financial Services Modernization Act of 1999, better known as the Gramm-Leach-Bliley Act (the “GLBA”), permits bank holding companies to become “financial holding companies” and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature.  A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized, well managed and has at least a satisfactory rating under the Community Reinvestment Act.  No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the FRB.  The GLBA defines “financial in nature” to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the FRB has determined to be closely related to banking.  The Company has not elected to become a financial holding company under this regulatory framework.





The Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 contains important requirements for public companies in the area of financial disclosure and corporate governance. In accordance with section 302(a) of the Sarbanes-Oxley Act, written certifications by the Company’s Chief Executive Officer and Chief Financial Officer are required which attest that the Company’s quarterly and annual reports filed with the SEC do not contain any untrue statement of a material fact. Additionally, the Chief Executive Officer and Chief Financial Officer are required to certify that the Company has effective disclosure controls and procedures.  In accordance with Section 404 of the Sarbanes-Oxley Act, the Company implemented a program to monitor the Company’s internal control over financial reporting.  This includes the identification of significant processes and accounts, documentation of the design of control effectiveness over process and entity level controls and testing of the operating effectiveness of key controls over financial reporting.  See Item 9A of the Company’s annual report on Form 10-K for more information regarding management’s evaluation of the Company’s disclosure controls and procedures, and the Company’s internal control over financial reporting.




5




Also in response to the Sarbanes-Oxley Act, the Company adopted a series of policies and procedures to improve itscorporate governance practices, including the adoption of charters for the Audit Committee, the Compensation Committee and the Nominating and Governance Committee.  The charters for these three committees are designed to help the committees function more efficiently and with greater independence from the Board of Directors, which was one of the primary goals in the adoption of Sarbanes-Oxley.  The members of each of these three committees are currently and, under the terms of the respective charters, will continue to be "independent" pursuant to standards adopted by NASDAQ.  Further, the Board of Directors has determined that under the NASDAQ "independence" standards, a majority of the members of the Board of Directors is currently independent.  The Board of Directors also has adopted a Code of Business Conduct and Ethics (the "Code") which applies to all officers, directors and employees of the Company and the Bank.  The Code addresses topics such as compliance with laws and regulations, honest and ethical conduct, conflicts of interest, confidentiality and protection of Company assets, fair dealing and accurate and timely periodic reports, and also provides for enforcement mechanisms.  The administration of the Code has been delegated to the Nominating and Governance Committee of the Board of Directors.  Copies of the Company’s Audit Committee Charter, Compensation Committee Charter, Nominating and Corporate Governance Committee Charter and Code of Business Conduct and Ethics are available on the Company’s website at www.westernreservebank.com.





Troubled Asset Relief Program Capital Purchase Program (the “CPP”).  As a participant in the U.S. Treasury’s CPP, the Bank is subject to dividend and other provisions imposed by the Emergency Economic Stabilization Act of 2008 (the “EESA”) as amended by The American Recovery and Reinvestment Act of 2009 (the “ARRA”).  These restrictions include limitations on dividends to common shareholders, effectively eliminating the Company’s ability to declare such dividends during the time the Company is a participant in the CPP.  In addition, certain forms of compensation for executive officers, generally including the chief executive officer, chief financial officer and the next three highest compensated executive officers are limited or prohibited.  Refer to the Company’s 2010 Annual Report to Shareholders Note 17 and to the Company’s Proxy Statement under the caption “Recent Amendments to Compensation Plans and Arrangements Necessary to Comply with EESA” (both of which are incorporated herein by reference) for additional discussion about the CPP.





The Bank





General.  The Bank is an Ohio-chartered bank and member of the Federal Reserve System.  The Bank is therefore regulated by the Division as well as the FRB.  The regulatory agencies have the authority to regularly examine the Bank, which is subject to all applicable rules and regulations promulgated by its supervisory agencies.  In addition, the deposits of the Bank are insured by the Federal Deposit Insurance Corporation up to applicable limits through the Deposit Insurance Fund (DIF) and, therefore, the Bank is subject to FDIC regulations.





Deposit Insurance.The deposits of the Bank are insured up to regulatory limits set by the FDIC. The FDIC maintains the Deposit Insurance Fund (“DIF”) by assessing depository institutions an insurance premium (assessment). The amount assessed to each institution is based on statutory factors that include the balance of insured deposits as well as the degree of risk the institution poses to the DIF. The FDIC assesses higher rates to those institutions that pose greater risks to the insurance fund.   The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) revised the statutory authorities governing the FDIC’s management of the DIF. Key requirements from the Dodd-Frank Act have resulted in the FDIC’s adoption of the following proposed amendments: (1) redefined the assessment base used to calculate deposit insurance assessments to “average consolidated total assets minus average  tangible equity”; (2) raised the DIF’s minimum reserve ratio to 1.35 percent and removed the upper limit on the reserve ratio; (3) revised adjustments to the assessment rates by eliminating one adjustment and adding another; and (4) revised the deposit insurance assessment rate schedules due to changes to the assessment base. Revised rate schedules and other revisions to the deposit insurance assessment rules would become effective April 1, 2011 and would be used to calculate the June 30, 2011 assessments which are due September 30, 2011.





The Emergency Economic Stabilization Act of 2008 provided a temporary increase in deposit insurance coverage from $100,000 to $250,000 per depositor.  The increased deposit insurance limit was originally set to expire on January 1, 2010 and then subsequently extended to run through December 31, 2013.  However, effective July 21, 2010, the Dodd-Frank Act permanently raised the standard maximum deposit insurance coverage amount to $250,000. The FDIC deposit insurance coverage limit applies per depositor, per insurance depository institution for each account ownership category.




6




On November 9, 2010, the FDIC issued a final rule implementing a provision of the Dodd-Frank Act which temporarily provided for separate deposit insurance coverage for noninterest-bearing transaction accounts. Funds held in noninterest-bearing transaction accounts (such as checking accounts) are fully insured, without limit, and the temporary unlimited coverage is separate from and in addition to, the deposit insurance coverage provided to depositors with respect to other accounts held at an insured depository institution. This temporary deposit insurance coverage for transaction accounts will terminate on December 31, 2012.  As of January 1, 2013, noninterest-bearing transaction accounts will then be insured under the FDIC’s general deposit insurance coverage rules.





The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order, or any condition imposed in writing by, or written agreement with, the FDIC.  The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital.  Management of the Company is not aware of any activity or condition that could result in termination of the deposit insurance of the Bank.





Capital Requirements. The FRB, Division and FDIC require banks and holding companies to maintain minimum capital ratios.  The “risk-adjusted” capital guidelines for the Bank involve a mathematical process of assigning various risk weights to different classes of assets, then evaluating the sum of the risk-weighted balance sheet structure against the Bank’s capital base.  The rules set the minimum guidelines for the ratio of capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) at 8%. Tier 1 Capital is comprised of common equity, retained earnings, and a limited amount of perpetual preferred stock less certain intangible items. At least half of the total capital is to be Tier 1 Capital.  The remainder may consist of a limited amount of subordinated debt, other preferred stock, and a portion of the loan loss reserves (not to exceed 1.25% of risk-weighted assets).  The Bank anticipates maintaining capital at a level sufficient to be classified as “well capitalized” pursuant to the Federal Reserve guidelines.





In addition, the federal banking regulatory agencies have adopted leverage capital guidelines for banks and bank holding companies.  Under these guidelines, banks and bank holding companies must maintain a minimum ratio of three percent (3%) Tier 1 Capital to total assets.  However, most banking organizations are expected to maintain capital ratios well in excess of the minimum level and generally must keep their Tier 1 ratio at or above 5%.  The Bank intends to maintain capital well above the regulatory minimum.





The capital requirements described above are minimum requirements.  Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions.  For example, the regulations provide that additional capital may be required to take adequate account of, among other things, interest rate risk or the risks posed by concentrations of credit, nontraditional activities or securities trading activities.





In addition to the minimum regulatory capital requirements discussed above, provisions contained in the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) expressly provide for certain supervisory actions which are directly keyed to the capital levels of an insured depository institution.  These “prompt corrective action” provisions impose progressively more restrictive constraints on operations, management and capital distributions of a particular institution as its regulatory capital decreases.  Using Tier 1 risk-based, total risk-based, and Tier 1 leverage capital ratios as the relevant measures, FDIC insured depository institutions are grouped into one of the following five prompt corrective action capital categories: well capitalized, adequately capitalized; undercapitalized; significantly undercapitalized; and critically undercapitalized.  An institution may be considered well capitalized if it has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6% and a Tier 1 leverage capital ratio of at least 5%, provided, however, such institution is not subject to a written advisement, order or capital directive to meet and maintain a specific capital level for any particular capital measure.  An adequately capitalized institution must have a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4% and a Tier 1 leverage capital ratio of at least 4% (3% if the institution has achieved the highest composite rating in its most recent examination).





As of December 31, 2010, the Bank’s capital ratios exceeded the thresholds necessary for being considered “well-capitalized” and exceeded its minimum regulatory capital requirements with a total risk-based capital ratio of 11.3%, a Tier 1 risk-based capital ratio of 10.0% and a leverage ratio of 8.0%.   The Bank issued $4,000,000 in subordinated debt to the holding company in 2009 that qualified as Tier 2 capital.  In the first quarter of 2010, the Bank repaid that debt and the holding company concurrently invested $3,500,000 in the Bank, which qualified as Tier 1 Capital.




7




The Bank has grown rapidly in its twelve year history, and continued rapid growth will require it to consider capital strategies to support that growth.  The Company has a $3,000,000 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, and up to $1,000,000 for liquidity purposes.  At December 31, 2010, there were no borrowings on the line of credit.  The Company is able to borrow against the line of credit and then invest the funds in the Bank as paid-in capital, thus enabling the Bank to manage its capital ratios.  The interest rate on the line is variable, at 0.50% above the prime rate or LIBOR plus 3.00%, which is at the Company’s option at the time the line is drawn.  The line is secured by 100% of the stock of the Bank.  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, 2010 the Bank and the Company were not in compliance with certain of the covenants.  The Bank’s ratio of nonperforming loans to total assets was 3.94% at December 31, 2010, above the covenant of 2.00% or less.  Additionally, the Bank was required to have annual net income of at least $200,000, which was not met due to the significant provision for loan losses in 2010.  Finally, the Company was required to have total capital of at least $18.5 million, and the Company’s total capital was $17.3 million. The covenants have been waived for December 31, 2010. At December 31, 2009, the Company and the Bank were in compliance with all but one of the covenants.  The Bank’s ratio of nonperforming loans to total assets was 1.86%, compared to the then-current requirement of 1.50%.  That covenant was waived.  At year-end 2008, the Company borrowed $500,000 on the capital line of credit, which was repaid in May 2009.  Other capital-raising strategies that the Company could consider in the future include issuing preferred or common stock, or issuing subordinated debt at the Bank level.  However, there is currently very little market for these instruments.





Dividends.  As indicated above, as a participant in the CPP, the Company and the Bank are subject to certain dividend restrictions effectively eliminating their ability to declare and pay dividends during the period that the Company remains a participant in the CPP.  In addition, Ohio law and FRB provisions prohibit the Bank, without the prior approval of both the Division and the FRB, from paying dividends in an amount greater than 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 a practical matter, banks are discouraged from paying dividends in excess of current year net income.  Due to the current operating losses, the Bank would currently be prohibited from paying any dividends to the Company without prior regulatory approval.  The payment of dividends by any financial institution or its holding company is also affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be under-capitalized.  In addition, any dividend paid by the Bank or the Company must be consistent with the Board of Governor’s Policy Statement on the Payment of Cash Dividends by State Member Banks and Bank Holding Companies.





Branching Authority. Ohio chartered banks have the authority under Ohio law to establish branches anywhere in the State of Ohio, subject to receipt of all required regulatory approvals.  Additionally, in May 1997 Ohio adopted legislation “opting in” to the provisions of Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") which allows banks to establish interstate branch networks through acquisitions of other banks, subject to certain conditions, including certain limitations on the aggregate amount of deposits that may be held by the surviving bank and all of its insured depository institution affiliates.  The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is also allowed by the Riegle-Neal Act and authorized by Ohio law.





Management and the Board, on an ongoing basis, evaluate selected growth opportunities, including branching.  Several criteria are considered to be essential for an expansion, including:  the area must have a large deposit base, the community must have a strong community identity; there should not be another community bank located in the same area; and there must be significant opportunities for profit.





Depositor Preference.  The Federal Deposit Insurance Act provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non deposit creditors and shareholders of the institution.





Privacy Provisions of Gramm-Leach-Bliley Act.  Under GLBA, federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties.  These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to non-affiliated third parties.  The privacy provisions of GLBA affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.




8




Federal Home Loan Bank.  The Federal Home Loan Banks (“FHLBs”) provide credit to their members in the form of advances.  As a member of the FHLB of Cincinnati, the Bank must maintain an investment in the capital stock of the FHLB of Cincinnati.




Upon the origination or renewal of a loan or advance, each FHLB is required by law to obtain and maintain a security interest in collateral in one or more of the following categories: fully-disbursed, whole first mortgage loans on improved residential property not more than 90 days delinquent or securities representing a whole interest in such loans; securities issued, insured or guaranteed by the United States Government or an agency thereof; deposits in any FHLB; or other real estate-related collateral acceptable to the applicable FHLB, if such collateral has a readily ascertainable value and the FHLB can perfect its security interest in the collateral.





Anti-Money Laundering Provisions of the USA Patriot Act of 2001.  On October 26, 2001, the USA Patriot Act of 2001 (the “Patriot Act”) was signed into law. The Patriot Act is intended to strengthen U.S. law enforcement's and the intelligence community's ability to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide-ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including: (a) due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons; (b) standards for verifying customer identification at account opening; and (c) rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.





Fiscal and Monetary Policies.  The Bank’s business and earnings are affected significantly by the fiscal and monetary policies of the federal government and its agencies. The Bank is particularly affected by the policies of the FRB, which regulates the supply of money and credit in the United States. Among the instruments of monetary policy available to the Federal Reserve are (a) conducting open market operations in United States government securities, (b) changing the discount rates of borrowings of depository institutions, (c) imposing or changing reserve requirements against depository institutions’ deposits, and (d) imposing or changing reserve requirements against certain borrowing by banks and their affiliates. These methods are used in varying degrees and combinations to affect directly the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. For that reason alone, the policies of the FRB can have a material effect on the earnings of the Bank.





In addition to programs discussed elsewhere herein, there have been numerous other actions recently undertaken by the Federal Reserve Board, the U.S. Department of the Treasury, the FDIC and others in efforts to address the current liquidity and credit crisis in the financial industry. These measures, many of which were taken in connection with or pursuant to recent stimulus measures enacted by Congress, include proposed acquisitions of troubled bank assets; homeowner relief that encourages loan restructuring and modification; the establishment of significant liquidity and credit facilities for financial institutions and investment banks; the lowering of the federal funds rate; a temporary guaranty program for money market funds; and other coordinated efforts to address illiquidity and other weaknesses in the banking sector.  The Company cannot predict the impact that these measures may have on the financial condition or results of operations of the Company or the Bank.  Nor can the Company predict what other legislation or regulations might be adopted going forward or the impact that such future measures may have on the Company or the Bank





Recent and Pending Regulatory Changes.  The Dodd-Frank Act, signed by the President on July 21, 2010 posed a significant impact on financial regulations. Certain provisions such as the permanent increase in deposit insurance coverage had an immediate effective date. Provisions regarding rules for interchanges fees on electronic debit transactions must be effective by July 21, 2011. Other provisions which, though intended to provide regulatory relief to community banks, may require time and further analysis to evaluate the actual consequences. Implementation of the Dodd-Frank Act provisions, which are conservatively estimated at more than 5,000 pages of new or expanded regulations for banks, will result in new rulemaking by the federal regulatory agencies over the next several years. Fully implementing the new and expanded regulation will involve ensuring compliance with extensive new disclosure and reporting requirements. The Dodd-Frank Act created an independent regulatory body, the Bureau of Consumer Financial Protection (“Bureau”), with authority and responsibility to set rules and regulations for most consumer protection laws applicable to all banks — large and small — adds another regulator to scrutinize and police financial activities. Transfer to the Bureau of all consumer financial protection functions for designated laws by the other federal agencies must be completed no later than July 21, 2011. The Bureau has responsibility for mortgage reform and enforcement, as well as broad new powers over consumer financial activities which could impact what consumer financial services would be available and how they are provided. The following consumer protection laws are the designated laws that will fall under the Bureau’s rulemaking authority: the Alternative Mortgage Transactions Parity Act of 1928, the Consumer Leasing Act of 1976, the Electronic Fund Transfer Act, the Equal Credit Opportunity Act, the Fair Credit Billing Act, the Fair Credit Reporting Act subject to certain exclusions, the Fair Debt Collection Practices Act, the Home Owners Protection Act, certain privacy provisions of the Gramm-Leach-Bliley Act, the Home Mortgage Disclosure Act (HMDA), the Home Ownership and Equity Protection Act of 1994, the Real Estate Settlement Procedures Act (RESPA), the S.A.F.E. Mortgage Licensing Act of 2008 (SAFE Act), and the Truth in Lending Act. Review and revision of current financial regulations in conjunction with added new financial service regulations will heighten the regulatory compliance burden and increase litigation risk for the banking industry.




9




In addition to the Dodd-Frank Act, there is significant potential for new federal regulations relating to lending, funding practices, and liquidity and capital standards, and the bank regulatory agencies are expected to be very aggressive in responding to concerns and trends identified in examinations. These increased governmental actions may increase our costs and limit our ability to pursue certain business opportunities.





Additional Regulation. The Bank is also subject to federal regulation as to such matters as the maintenance of required reserves against deposits, limitations in connection with affiliate transactions, limitations as to the nature and amount of its loans and investments, regulatory approval of any merger or consolidation, issuance or retirement by the Bank of its own securities and other aspects of banking operations.  In addition, the activities and operations of the Bank are subject to a number of additional detailed, complex and sometimes overlapping laws and regulations.  These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-in-Lending Act (Regulation Z), the Federal Equal Credit Opportunity Act (Regulation B), the Fair Credit Reporting Act (Regulation V), the Truth in Savings Act (Regulation DD), the Community Reinvestment Act (Regulation BB), anti-redlining legislation and antitrust laws.




10




BUSINESS-STATISTICAL DISCLOSURE





I.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL





The information contained in the Company’s 2010 Annual Report to Shareholders under the caption “Net Interest Income” of “Management’s Discussion and Analysis” is incorporated by reference.





II.
INVESTMENT PORTFOLIO





The estimated fair values of securities available for sale at December 31, 2010 and 2009 are as follows:





Amortized

Cost


Gross

Unrealized

Gains


Gross

Unrealized

Losses


Weighted

Average

Yield2010Mortgage-backed residential

$
7,532,920


$
214,887


$
(45,758
)


3.83
%Tax-free municipal


4,890,165



158,571



(3,258
)


4.02
%(1)Taxable municipal


253,625



—



(7,955
)


5.40
%$
12,676,710


$
373,458


$
(56,971
)


4.44
%2009Mortgage-backed residential

$
5,264,140


$
215,372


$
—



4.83
%Tax-free municipal


4,755,085



141,682



(3,632
)


5.52
%(1)$
10,019,225


$
357,054


$
(3,362
)


5.16
%





Maturities of Investment SecuritiesDue in one

to five years


Due in five

to ten years


Greater

than ten yearsAmortized

Cost


Weighted

Average

Yields


Amortized

Cost


Weighted

Average

Yields


Amortized

Cost


Weighted

Average

YieldsMortgage-backed residential

$
61,919



5.24
%

$
1,433,231



4.45
%

$
6,206,899



3.68
%Tax-free municipal


839,771



5.34
%(1)


3,542,737



5.35
%(1)


662,970



5.69
%(1)Taxable municipal


—



—



245,670



4.02
%


—



—$
901,690



5.33
%

$
5,221,638



5.04
%

$
6,869,869



3.88
%





(1)
Fully tax-equivalent based on federal income tax structure applicable at December 31, 2010 and 2009.





There is one municipal security with a fair value of $242,386, maturing in less than one year.  Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.




11




III.
LOAN PORTFOLIO





A.
Types of Loans - Total loans on the balance sheet are comprised of the following classifications at December 31, 2010 and 2009.





2010


2009Commercial

$
140,592,699


$
149,323,296Home equity lines of credit


11,620,756



10,211,566Residential mortgage


806,411



933,687Consumer installment


4,926,165



4,118,808Purchased auto loans


1,558,763



2,589,488159,504,794



167,176,845Less allowance for loan losses


4,544,316



2,316,715$
154,960,478


$
164,860,130





Concentrations of Credit Risk:  Western Reserve Bank grants commercial, residential real estate mortgage and installment loans to businesses and individuals mainly in Medina, Cuyahoga, Wayne and contiguous counties in Ohio.  Commercial loans include loans collateralized by business assets.  At December 31, 2010, commercial loans secured by real estate make up approximately 71.1% of the loan portfolio.  Other commercial loans to businesses comprise 17.0% of total loans, and are expected to be repaid from cash flows from operations of the businesses.





Variable rate home equity lines of credit make up approximately 7.3% of the loan portfolio and are collateralized by residential real estate.  Residential mortgage and construction loans are 0.5% of the loan portfolio and are secured primarily by first mortgages on residential property.  Installment loans to individuals and other loans make up approximately 3.1% of the loan portfolio and are primarily collateralized by consumer assets or are unsecured.  Purchased auto loans make up approximately 1.0% of the loan portfolio and are collateralized by automobiles and serviced by another financial institution.  At December 31, 2010, approximately 1.4% of the Bank’s total loan portfolio was unsecured.





B.
Maturities and Sensitivities of Loans to Changes in Interest Rates - The following table shows the maturity distribution and sensitivity to changes in interest rates of loans outstanding as of December 31, 2010.  Fixed rate loans are presented based on their maturity date, and variable rate loans with floating or adjustable interest rates are included based on their earliest repricing opportunity.





Within


One to


Afterone year


five years


five years


TotalCommercial

$
68,812,946


$
64,475,721


$
7,304,032


$
140,592,699Home equity lines of credit


11,620,756



—



—



11,620,756Residentialmortgage


380,794



214,119



211,498



806,411Consumer installment


4,434,129



436,813



55,223



4,926,165Purchased auto loans


9,220



1,549,543



—



1,558,763$
85,257,845


$
66,676,196


$
7,570,753


$
159,504,794





Of the loans maturing or repricing after one year, approximately $39,727,000 have variable interest rates, and $34,520,000 have fixed interest rates.




12




III.
LOAN PORTFOLIO(Continued)





C.
Risk Elements





1.
Nonaccrual, Past Due, Restructured and Impaired Loans - The following schedule summarizes nonaccrual, past due, restructured and impaired loans at December 31.





2010


2009(a)
Nonhomogeneous loans accounted for on a nonaccrual basis

$
7,546,298


$
3,591,816(b)
Accruing loans which are contractually past due 90 days or more as to interest or principal payments


8,131



—(c)
Loans not included in (a) or (b) which are "Troubled Debt Restructurings" as defined in The FASB’s Accounting Standards Codification(ASC) Topic 310, subtopic 40, sections 15, 30 and 50


1,612,433



1,834,245(d)
Other loans defined as “impaired”


—



—$
9,166,862


$
5,426,061Percentage of allowance to non-performing loans


60.2
%


64.5
%





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





Pass


Special

Mention


Substandard


Doubtful


Not Rated


TotalCommercial real estate

$
85,034,950


$
10,717,741


$
17,698,468


$
-


$
-


$
113,451,159Commercial business


24,023,215



1,229,339



1,888,986



-



-



27,141,540Residential mortgage:Home equity line of credit



73,250



709,912



-



10,837,594



11,620,7561-4 family residential










51,725







754,686



806,411Consumer:Installment


















4,926,165



4,926,165Purchased auto loans


















1,558,763



1,558,763Total

$
109,058,165


$
12,020,330


$
20,349,091


$
-


$
18,077,208


$
159,504,794





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.





Management believes the allowance for loan losses at December 31, 2010 is adequate to absorb probable losses on nonperforming loans, as the allowance balance is maintained by management at a level considered adequate to cover losses that are currently anticipated based on the Company’s loss experience, the loss experience of comparable companies, general economic conditions, information about specific borrower situations including their financial position and collateral values, and other factors and estimates which are subject to change over time.




13




III.
LOAN PORTFOLIO(Continued)





2010Gross interest income that would have been recorded in 2010 on nonaccrual loans outstanding at December 31, 2010 if the loans had been current, in accordance with their original terms and had been outstanding throughout the period or since origination if held for part of the period

$
401,981Interest income actually recorded on nonaccrual loans and included in net income for the period


199,186Interest income not recognized during the period

$
202,795





Discussion of the Nonaccrual Policy





The accrual of interest income is discontinued when the collection of a loan’s principal or interest, in whole or in part, is doubtful.  When interest accruals are discontinued, interest income accrued but not yet paid is reversed.  In general, while loans which are past due 90 days or more as to interest or principal payments are considered for nonaccrual status, management may elect to continue the accrual of interest when the estimated net realizable value of collateral, in management’s judgment, is sufficient to cover the principal balance and accrued interest and the loan is in process of collection.  Management may also elect to place loans that are less than 90 days past due on nonaccrual status when circumstances warrant.  These circumstances may include deteriorating financial condition of the borrower, project or industry, bankruptcy and any other issue that management determines is likely to result in the borrower’s inability to repay the loan.





2.
Potential Problem Loans





As of December 31, 2010, in addition to the $9,166,862 of loans reported under Item III, C.1., there are no other outstanding loans where known information about possible credit problems of the borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans pursuant to Item III. C.1 at some future date.  There were no loans classified for regulatory purposes as loss, doubtful or substandard that have not been disclosed in Section 1 above.





3.
Foreign Loans Outstanding





None





4.
Loan Concentrations





As of December 31, 2010, commercial loans to entities classified as “lessors of nonresidential buildings” comprise approximately $54,129,000, or 33.9% 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.





D.
Other Interest-Bearing Assets





There are no other interest-bearing assets as of December 31, 2010 that would be required to be disclosed under Item III. C.1 or 2 if such assets were loans.




14





IV.
SUMMARY OF LOAN LOSS EXPERIENCE





A.
The following schedule presents an analysis of the allowance for loan losses, average loan data and related ratios for the years ended December 31:





2010


2009LoansLoans outstanding at end of period

$
159,504,794


$
167,176,845Average loans outstanding during period

$
168,798,326


$
155,567,937Allowance for loan lossesBalance at beginning of period

$
2,316,715


$
1,743,470Loans charged-offCommercial


2,670,486



207,986Home equity lines of credit


—



39,766Residential mortgage


6,785



48,000Consumer installment


10,000



10,018Purchased auto loans


36,868



29,3672,724,139



335,137Recoveries of loans previously charged-offCommercial


15,669



7,980Home equity lines of credit


16,763



12,796Residential mortgage


712



—Consumer installment


4,887



579Purchased auto loans


1,100



1,62739,131



22,982Net loans charged-off


2,685,008



312,155Provision for loan losses


4,912,609



885,400Balance at end of period

$
4,544,316


$
2,316,715Ratio of net charge-offs during the period to average loans outstanding during the period


1.59
%


0.20
%





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.





B.
The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and related ratios.





Percentage of Loans inEach Category toAllowance Amount


Total Loans2010


2009


2010


2009Commercial

$
4,132,942


$
2,043,657



88.1
%


89.3
%Home equity lines of credit


152,561



51,058



7.3



6.1Residential mortgage


9,811



2,603



0.5



0.6Consumer installment


19,640



31,850



3.1



2.5Purchased auto loans


15,136



28,905



1.0



1.5Unallocated


214,226



158,642Total

$
4,544,316


$
2,316,715



100.0
%


100.0
%




15




IV.
SUMMARY OF LOAN LOSS EXPERIENCE (Continued)





While management's periodic analysis of the adequacy of the allowance for loan losses may allocate portions of the allowance for specific problem loan situations, the entire allowance is available for any loan charge-offs that occur.





V.
DEPOSITS




The average amount of deposits and average rates paid are summarized as follows for the year ended December 31:





2010


2009Average


Average


Average


AverageAmount


Rate


Amount


RateNoninterest bearing demand deposits

$
21,235,573



0.00
%

$
19,046,406



0.00
%Interest bearing demand deposits


10,312,548



0.44



8,344,012



0.57Savings and money market accounts


74,480,377



0.66



67,941,295



0.90Certificates of deposit and IRAs


80,366,652



1.97



71,292,805



2.77$
186,395,150



1.14


$
166,624,518



1.58





At December 31, 2010, the Bank had $39,530,981 of time certificates of deposit of $100,000 or more outstanding.  Remaining maturities of these time deposits are as follows:





Three months or less

$
7,038,218Over three through six months


5,224,361Over six through twelve months


10,227,213Over twelve months


17,041,189$
39,530,981




VI.
RETURN ON EQUITY AND ASSETS




The ratio of net income to average shareholders' equity and average total assets and certain other ratios are as follows:





2010


2009Average total assets

$
208,103,000


$
189,388,000Average shareholders’ equity

$
18,967,000


$
17,922,000Net income (loss)

$
(1,915,769
)

$
189,220Net income (loss) available to common shareholders

$
(2,226,568
)

$
(5,029
)Return on average total assets


(0.92
)%


0.10
%Return on average shareholders' equity


(10.10
)%


1.06
%Cash dividends declared on common stock

$
0.00


$
0.00Dividend payout percentage


n/a



n/aAverage shareholders’ equity to average total assets


9.11
%


9.46
%





VII.
SHORT-TERM BORROWINGS





The Company did not have any reportable categories of short-term borrowings during or at the end of the reported periods.




16




Item 1A.  Risk Factors





This item is not applicable to smaller reporting companies.





Item 1B.  Unresolved Staff Comments





This item is not applicable to smaller reporting companies.





Item 2.  Description of Property





The Company leases premises for the Bank's main office at 4015 Medina Road, Suite 100, Medina, Ohio, from a person who was a related party until December 17, 2009.  The facility serves as the Company’s corporate headquarters.  The leased premises consist of approximately 11,784 square feet of a three-story multi-tenant brick building constructed in 1998 with ample parking.  The building is located on State Route 18, a major thoroughfare in Medina, approximately 1.5 miles west of Interstate 71 and 1 mile east of downtown Medina.  The Bank has five interior teller stations (two of which are sit-down teller desks and three of which are traditional stand-up teller counters), a two-lane drive-through, a drive-up ATM, a night depository facility, and lending, accounting and operations offices.





The facility is leased under an operating lease with a primary term of ten years which expired in October 2008 and options for two five-year extensions.  The Company exercised the first option for a five-year extension expiring in October 2013.  The annual lease payment was $251,737 for 2010 and $246,302, and is subject to annual increases.  Refer to Note 6 in the Company’s 2010 Annual Report to Shareholders (incorporated herein by reference) for additional discussion about the lease.





On October 4, 2004, the Company opened a second full-service facility located at 8751 Brecksville Road, Brecksville, Ohio.  The Bank entered into an operating lease agreement for approximately 5,600 square feet of space for this location from an unrelated party.  The lease is for a term of ten years beginning October 1, 2004, with two five-year renewal options.  The annual lease payment was $167,465 for 2010 and $163,909 for 2009, and is subject to annual increases.





The Bank occupies a small, full-service, limited-hours office inside Western Reserve Masonic Community, a retirement community at 4931 Nettleton Road, Medina. Until March 2010, the Bank also occupied a small, full-service, limited-hours office inside Summerville at Camelot (formerly Camelot Place), an assisted living facility located at 49 Leisure Lane, Medina; however, this office was discontinued and its operations merged into the main office.  Rent for both offices is de minimis.





On December 18, 2008, the Company opened a lending office located at 148 E. Liberty Street, Wooster, Ohio.  The Bank entered into an operating lease agreement for approximately 820 square feet of space for this location from a person who was a related party until December 17, 2009.  The lease is for a term of one year beginning December 1, 2008, with annual renewal options.  Rent for 2010 and 2009 was $8,540 and $8,168, respectively.





Item 3.  Legal Proceedings





The Company is not aware of any legal proceedings against it or the Bank.





Item 4.  Removed and Reserved




17




PART II





Item 5.  Market for Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities





The Company's Common Stock was held by approximately 484 holders of record as of December 31, 2010.  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 over-the-counter on the OTCOB under the trading symbol “WRBO.”  The OTCOB is an electronic inter-dealer quotation system operated by OTC Markets Group, Inc.  To date there has been no regular and liquid market for the common stock, and there can be no assurance that a regular and liquid trading market will develop in the foreseeable future although management believes the arrangement with Howe Barnes will provide shareholders with improved liquidity of their shares.  The high and low bid information in the table below has been compiled from NASDAQ.com.  These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.





2010

High


LowFourth quarter

$
20.00


$
6.05Third quarter

$
10.10


$
7.00Second quarter

$
10.85


$
10.10First quarter

$
11.00


$
10.102009

High


LowFourth quarter

$
15.00


$
10.02Third quarter

$
17.00


$
15.00Second quarter

$
15.00


$
15.00First quarter

$
15.00


$
15.00





No cash or other dividends were declared or paid since the Company’s inception on February 25, 1997.  The Company expects that all Company and Bank earnings, if any, will be retained to finance the growth of the Company and the Bank and that no cash dividends will be paid for the foreseeable future.  If and when dividends are declared, the Company will be largely dependent upon dividends paid by the Bank for funds to pay dividends on the Common Stock.  It is also possible, however, that the Company could pay dividends in the future generated from investment income and other activities of the Company.  As part of the conditions of a line of credit with another financial institution described in Note 8 of the Company’s 2010 Annual Report to Shareholders, the Company may, over the life of the loan agreement, declare or pay dividends subject to an aggregate limit of $100,000.





Under Ohio law, the Bank will be restricted as to the maximum amount of dividends it may pay on its Common Stock.  For additional discussion regarding dividend restrictions, please refer to the discussion regarding Supervision and Regulation in Part I of this Form 10-K.





Because the Company sold senior preferred stock to the U.S. Treasury under the CPP, the Company may not pay dividends to common shareholders until all dividends on the senior preferred stock have been paid in full.  In addition, the U. S. Treasury must consent to any increase in dividends paid in the first three years and for any increase in dividend payments exceeding 3% per year thereafter.  The senior preferred stock is expected to be redeemed after no more than ten years, therefore, no dividends may be paid to common shareholders after ten years if the senior preferred stock has not been redeemed.  Refer to Note 17 in the Company’s 2010 Annual Report to Shareholders (incorporated herein by reference) for additional discussion about the Company’s participation in the CPP and related requirements and restrictions.





Item 6.  Selected Financial Data.





This item is not applicable to smaller reporting companies.





18





Item 7.  Management’s Discussion and Analysis and Results of Operations





The information contained in the Company’s 2010 Annual Report to Shareholders under the caption “Management’s Discussion and Analysis” is incorporated by reference.





Item 7A.  Quantitative and Qualitative Disclosures about Market Risk





This item is not applicable to smaller reporting companies.





Item 8.  Financial Statements





The following financial statements and related notes are incorporated by reference to the Company’s 2010 Annual Report to Shareholders under the following captions:





Report of Independent Registered Public Accounting FirmConsolidated Balance SheetsConsolidated Statements of IncomeConsolidated Statements of Changes in Shareholders’ EquityConsolidated Statements of Cash FlowsNotes to Consolidated Financial Statements





Item 9.  Changes in, and Disagreements With, Accountants on Accounting and Financial Disclosure





None.





Item 9A.  Controls and Procedures





As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of Western Reserve Bancorp, Inc.’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)/15d-15(e) under the Securities Exchange Act of 1934).  Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by Western Reserve Bancorp, Inc. in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.





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, 2010.  There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.





19





Item 9B.  Other Information





None.





PART III





Item 10.  Directors, Executive Officers and Corporate Governance





Directors, Executive Officers, Promoters and Control Persons:





A.
Directors.  The information contained in the Company’s Proxy Statement under the caption “Election of Directors” is incorporated by reference.





B.
Executive Officers.  The information contained in the Company’s Proxy Statement under the caption “Summary Compensation Table” is incorporated by reference.





C.
Certain Significant Employees.  None.





D.
Family Relationships.  None.





E.
Business Experience.  The information contained in the Company’s Proxy Statement under the caption “Election of Directors” is incorporated by reference.





F.
Involvement in Certain Legal Proceedings.  None.





G.
Promoters and Control Persons.  None.





Section 16(a) Beneficial Ownership Reporting Compliance.





The information contained in the Company’s Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance is incorporated by reference.





Code of Ethics





Code of Ethics.  As noted above in Part I, Item 1, the Company has adopted a Code of Ethics and Business Conduct applicable to the Company’s Chief Executive Officer, the Chief Financial Officer, the principal accounting officer and other senior financial officers performing accounting, auditing, financial management or similar functions.  A copy of the Code of Ethics and Business Conduct is available free of charge upon request.  Shareholders desiring a copy of the Code should address written requests to Ms. Cynthia A. Mahl, Executive Vice President, Chief Financial Officer and Secretary, Western Reserve Bancorp, Inc., 4015 Medina Road, P.O. Box 585, Medina, Ohio  44258-0585.  A copy of the Company’s Code is available on the Company’s website at www.westernreservebank.com.





Corporate Governance





Audit Committee Financial Expert.  The Company’s Board of Directors has determined that C. Richard Lynham, Chairman of the Audit Committee, is a “financial expert” as defined under the regulations promulgated under the Sarbanes-Oxley Act and is “independent” as that term is defined under the National Association of Securities Dealers (“NASD”) Marketplace Rules.





Identification of the Audit Committee.  The information contained in the Company’s Proxy Statement under the caption “Board Structure and Committees” is incorporated by reference.





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Item 11.  Executive Compensation





The information contained in the Company’s Proxy Statement under the caption “Executive Compensation” is incorporated by reference.





Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters





The information contained in the Company’s Proxy Statement under the caption “Beneficial Ownership” is incorporated by reference.





The information contained in the Company’s Proxy Statement under the caption “Election of Directors” is incorporated by reference.





The Company has a nonqualified stock option plan (the Western Reserve Bancorp, Inc. 1998 Stock Option Plan) that provided for up to 125,000 shares of the Company’s common stock to be available for grant to officers, employees, directors and others.  The plan provided the Board with the authority to compensate directors, officers and employees with stock option awards for their services to the Company during a ten-year period that ended in 2008 and, accordingly, there were no options available to be awarded under the plan in 2010 or 2009.  The exercise price for previously-awarded options is at least the market price at date of grant.  The maximum option term is ten years, and options generally vest over three years as follows: 25% one year from the grant date, 50% after two years, and 100% after three years.  Options granted after 2004 generally vest 100% after five years.  As of December 31, 2010, the following equity securities are authorized for issuance under the plan:





Equity Compensation Plan Information





Number of securities
tobe issued upon

exercise of outstanding

options, warrants and

rights


Weighted-average

exercise price of

outstanding options,

warrants and rights


Number of securities

remaining available for

future issuance under

equity compensation

plans (excluding

securities reflected in

column (a))(a)


(b)


(c)Equity compensation plans approved by security holders


0



n/a



0Equity compensation plans not approved by security holders


98,137


$
18.66



0Total


98,137


$
18.65



0





The Plan provides for adjustment of the number of shares in the event the outstanding shares of stock of the Company are changed into or exchanged for a different number or kind of shares by reason of any merger, consolidation, reorganization, recapitalization, combination, stock split or stock dividend.





Item 13.  Certain Relationships and Related Transactions, and Director Independence





The information contained in the Company’s Proxy Statement under the caption "Transactions with Related Persons, Promoters and Certain Control Persons" is incorporated by reference.  The Company has determined that the following members of its Board of Directors qualify as “independent” ad defined under the NASDAQ Marketplace Rules:  Roland H. Bauer, Bijay K. Jayaswal, Ray E. Laribee, C. Richard Lynham, R. Hal Nichols, Rory H. O’Neil, Glenn M. Smith and Thomas A. Tubbs.





Item 14.  Principal Accountant Fees and Services





The information contained in the Company’s Proxy Statement under the caption "Audit Fees" is incorporated by reference.




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PART IV





Item 15.  Exhibits, Financial Statement Schedules





The Exhibit Index that immediately follows the signature page to this Form 10-K is incorporated by reference.  The exhibits required to be filed with this Form 10-K are included with this Form 10-K and are located immediately following the Exhibit Index to this Form 10-K.





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SIGNATURES





In accordance with Section 13 or 15(d) of the Exchange Act, as amended, the Issuer caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 31, 2011.





WESTERN RESERVE BANCORP, INC.By:
/s/ Edward J. McKeonEdward J. McKeon, President, ChiefExecutive Officer and Director





In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Issuer and in the capacities noted below and on March 31, 2011.





/s/ P. M. Jones

P.M. Jones, Chairman of the Board

/s/ Edward J. McKeon

Edward J. McKeon, President, Chief Executive Officer and Director/s/ Roland H. Bauer

Roland H. Bauer, Director

/s/ Ray E. Laribee

Ray E. Laribee, Director/s/ C. Richard Lynham

C. Richard Lynham, Director

/s/ R. Hal Nichols

R. Hal Nichols, Director/s/ Rory H. O’Neil

Rory H. O’Neil, Director

/s/ Thomas A. Tubbs

Thomas A. Tubbs, Director/s/ Glenn M. Smith

Glenn M. Smith, Director

/s/ Cynthia A. Mahl

Cynthia A. Mahl, Executive Vice President and

Principal Financial and Accounting Officer





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WESTERN RESERVE BANCORP, INC.


EXHIBIT INDEX





Exhibit No.

Description of Exhibits3.1

Amended and Restated Articles of Incorporation of Western Reserve Bancorp, Inc. (incorporated by reference to the Company’s Report on Form 10-Q filed with the Commission on August 14, 2008 and Form 8-K filed with the Commission on May 21, 2009)3.2

Code of Regulations of Western Reserve Bancorp, Inc. (incorporated by reference to the Company’s Report on Form SB-2 filed with the Commission on December 29, 1997)10.1

Employment Agreement of Edward J. McKeon, Dated December 15, 2005, as amended November 19, 2009 (incorporated by reference to the Company’s Report on Form 8-K filed with the Commission on December 19, 2005 and the  Company’s Report on Form 8-K filed with the Commission on November 25, 2009)10.2

Lease Agreement by and between Michael Rose DBA Washington Properties and Western Reserve Bancorp, Inc. (incorporated by reference to the Company’s Report on Form 10-KSB filed with the Commission on March 31, 1999)10.3

Western Reserve Bancorp, Inc. 1998 Stock Option Plan, Amended and Restated as of August 21, 2008 (incorporated by reference to the Company’s Report on Form 8-K filed with the Commission on August 26, 2008)10.4

Agreement by and between Western Reserve Bancorp, Inc. and Brian K. Harr, dated June 18, 2001, as amended February 20, 2002 and November 19, 2009 (incorporated by reference to the Company’s Report on Form 10-KSB filed with the Commission on March 28, 2003 and the  Company’s Report on Form 8-K filed with the Commission on November 25, 2009 )10.5

Agreement by and between Western Reserve Bancorp, Inc. and Cynthia A. Mahl, dated June 18, 2001, as amended February 20, 2002 and November 19, 2009 (incorporated by reference to the Company’s Report on Form 10-KSB filed with the Commission on March 28, 2003 and the  Company’s Report on Form 8-K filed with the Commission on November 25, 2009 )10.6

Loan Agreement between Western Reserve Bancorp, Inc. and TCF National Bank, dated May 5, 2003 (incorporated by reference to the Company’s Report on Form 10-QSB filed with the Commission on August 14, 2003)10.7

Western Reserve Bank Supplemental Executive Retirement Plan, Amended and Restated as of December 21, 2006 (incorporated by reference to the Company’s Report on Form 8-K filed with the Commission on December 27, 2006)10.8

Western Reserve Bancorp, Inc. Employee Stock Purchase Plan, as amended (incorporated by reference to the Company’s Form S-8 filed with the Commission on March 23, 2010)10.9

Lease Agreement by and between Western Reserve of Brecksville, LLC and Western Reserve Bank (incorporated by reference to the Company’s Report on Form 10-KSB filed with the Commission on March 30, 2005)10.10

First amendment to the Loan Agreement by and between Western Reserve Bancorp, Inc. and TCF National Bank, dated March 31, 2005 (incorporated by reference to the Company’s Report on Form 10-QSB filed with the Commission on May 16, 2005)10.11

Second amendment to the Loan Agreement by and between Western Reserve Bancorp, Inc. and TCF National Bank, dated June 30, 2005 (incorporated by reference to the Company’s Report on Form 10-QSB filed with the Commission on August 15, 2005)10.12

Western Reserve Bancorp, Inc. and Western Reserve Bank Executive Incentive Compensation Plan, Amended and Restated as of May 1, 2008 (incorporated by reference to the Company’s Report on Form 8-K filed with the Commission on May 7, 2008)




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Exhibit No.

Description of Exhibits10.13

Third amendment to the Loan Agreement by and between Western Reserve Bancorp, Inc. and TCF National Bank, dated July 20, 2006 (incorporated by reference to the Company’s Report on Form 10-QSB filed with the Commission on November 14, 2006)10.14

Fourth amendment to the Loan Agreement by and between Western Reserve Bancorp, Inc. and TCF National Bank, dated February 6, 2007 (incorporated by reference to the Company’s Report on Form 10-QSB filed with the Commission on August 14, 2007)10.15

Fifth Amendment to the Loan Agreement and Waiver by and between Western Reserve Bancorp, Inc. and TCF National Bank, dated June 21, 2007 (incorporated by reference to the Company’s Report on Form 10-QSB filed with the Commission on August 14, 2007)10.16

Sixth Amendment to the Loan Agreement by and between Western Reserve Bancorp, Inc. and TCF National Bank, dated September 28, 2007 (incorporated by reference to the Company’s Report on Form 10-QSB filed with the Commission on November 14, 2007)10.17

Seventh Amendment to the Loan Agreement by and between Western Reserve Bancorp, Inc. and TCF National Bank, dated July 18, 2008 (incorporated by reference to the Company’s Report on Form 10-Q filed with the Commission on November 14, 2008)10.18

Form of Amendment to the Western Reserve Bancorp, Inc. Stock Option Grant Agreement as of October 16, 2008 (incorporated by reference to the Company’s Report on Form 8-K filed with the Commission on October 22, 2008)10.19

Eighth Amendment to the Loan Agreement by and between Western Reserve Bancorp, Inc. and TCF National Bank, dated July 1, 2009 (incorporated by reference to the Company’s Report on Form 10-Q filed with the Commission on August 14, 2009)10.20

Ninth Amendment to the Loan Agreement by and between Western Reserve Bancorp, Inc. and TCR National Bank, dated September 17, 2010 (incorporated by reference to the Company’s Report on Form 10-Q filed with the Commission on November 15, 2010)11

Statement re: Computation of Per Share Earnings (incorporated by reference to the Company’s 2010 Annual Report to Shareholders)13

2010 Annual Report to Shareholders (Except for sections incorporated by reference into this Form 10-K, the Annual Report to Shareholders shall not be deemed to be “filed” with the Commission.)21

Subsidiary of Western Reserve Bancorp, Inc.23

Consent of Crowe Horwath LLP31.1

Certification under Section 302 of the Sarbanes-Oxley Act by Edward J. McKeon, President and Chief Executive Officer31.2

Certification under Section 302 of the Sarbanes-Oxley Act by Cynthia A. Mahl, Executive Vice President and Chief Financial Officer32.1

Certification under Section 906 of the Sarbanes-Oxley Act by Edward J. McKeon, President and Chief Executive Officer32.2

Certification under Section 906 of the Sarbanes-Oxley Act by Cynthia A. Mahl, Executive Vice President and Chief Financial Officer99.1

Certifications pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2008 (EESA) by Edward J. McKeon, President and Chief Executive Officer and Cynthia A. Mahl, Executive Vice President and Chief Financial Officer





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