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U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C.
20549
 FORM 10-KSB
 þ
    
    Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended December 31, 2004o
    
    Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from  to
 Commission file number
333-43361 Western Reserve Bancorp, Inc. 
  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)
 (330) 764-3131 
  Securities registered under Section 12(b) of the Exchange Act:
None Securities registered under Section 12(g) of the Exchange Act:
None Check whether the Issuer (1) 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. þ o
 Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B
contained in this form, and no disclosure will be contained, to the best of Issuers knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. þ The Issuers gross revenues for its most recent fiscal year were $6,539,755. The aggregate market value of the voting stock held by non-affiliates of the Issuer as of March 25,
2005 was approximately $11,657,670 (which excludes 67,135 shares held by directors and executive
officers). As of said date, the Issuer had 455,724 shares of Common Stock issued and outstanding. Documents incorporated by reference: Parts I and II:
    
    Portions of Registrants 2004 Annual Report to ShareholdersPart III:
    
    Portions of Registrants 2004 Proxy Statement for the Annual Meeting of Shareholders
to be held April 27, 2005
 Transitional Small Business
Disclosure Format (check one): Yes
o    No þ




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TABLE OF CONTENTS  PART IItem 1. Description of BusinessItem 1. Business-Statistical DisclosureItem 2. Description of PropertyItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Common Equity and Related Stockholder MattersItem 6. Managements Discussion and Analysis of Financial Condition or Plan of OperationItem 7. Financial StatementsItem 8. Changes in and Disagreements With Accountants on Accounting and Financial DisclosureItem 8A. Controls and ProceduresItem 8B. Other InformationPART IIIItem 9. Directors and Executive Officers of the RegistrantItem 10. Executive CompensationItem 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 12. Certain Relationships and Related TransactionsItem 13. ExhibitsItem 14. Principal Accountant Fees and ServicesSIGNATURESExhibit 4.2 Legend to be Placed on Certificates Representing Shares Issued Pursuant to Offering Exempt from Registration Under the Federal Securities LawExhibit 10.9 Lease AgreementExhibit 13.1 2004 Annual Report to ShareholdersExhibit 21.1 Subsidiary of Western Reserve BancorpExhibit 23 Consent of Crowe Chizek and Co. LLCExhibit 31.1 CertificationExhibit 31.2 CertificationExhibit 32.1 CertificationExhibit 32.2 Certification    Table of Contents  
 PART I 
 Item 1.Description of Business General 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 located 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 500,000 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 320,267 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 67,785 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 66,622 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 net proceeds, net of offering costs, of
approximately $1,968,000. The Company and the Bank currently maintain their offices at 4015 Medina Road, Suite 100, Medina,
Ohio 44256. On October 4, 2004, the Bank opened a second full service office 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 rather works with a mortgage company to assist the Banks
customers in obtaining fixed rate mortgage loans. The Bank also offers other services, including
credit, debit and ATM cards with access to regional and national automated teller networks, a
courier service for business deposits, 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, 2004, the Banks legal
lending limit was approximately $1,730,000. The Board of Directors has established an in-house
lending limit of $1,500,000, 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 fifteen commercial banks, savings
institutions and credit unions with multiple offices in the Banks primary service areas of Medina
and Brecksville. In recent years, several banks and savings institutions headquartered outside of
Medina County acquired or opened new branches in the Medina area. However, in the past few years,
many of the areas financial institutions have been acquired by large regional organizations
headquartered outside of the Medina area. As a result of such consolidation, the organizers of the
Company believed that the competitive and economic environment was right for a new, independent,
locally owned and managed bank such as Western Reserve Bank to serve the financial needs of Medina
area residents and businesses. The rapid growth of the Bank in the six years since it opened has
confirmed that belief. The Bank also faces competition from 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, 2004, the Bank has 31 full-time-equivalent employees (27 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. 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 is intended primarily for the protection of the
FDICs deposit insurance funds and the depositors, rather than the shareholders, of financial
institutions. 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




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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 new regulatory framework. The Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 contains important new
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 now 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 now
required to certify that the Company has effective disclosure controls and procedures, and, in
accordance with Section 404 of the Sarbanes-Oxley Act, the Company is also in the process of
implementing a new program designed to monitor the Companys internal control over financial
reporting. This new program will include 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. This program must
be fully implemented for the preparation of the Companys annual report for its fiscal year ended
December 31,




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2006. See Item 8A of the Companys annual report on Form 10-KSB for more information
regarding managements evaluation of the Companys disclosure controls and procedures, and the
Companys internal control over financial reporting. Also in response to the Sarbanes-Oxley Act, the Company adopted a series of policies and procedures
to improve its corporate governance practices, including the adoption of charters for the Audit
Committee, the Compensation Committee and the newly created 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. 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
FDIC to the fullest extent permitted by law and, therefore, the Bank is subject to FDIC
regulations. Deposit Insurance.As an FDIC-insured institution, the Bank is required to pay deposit
insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system
under which all insured depository institutions are placed into one of nine categories and assessed
insurance premiums based upon their respective levels of capital and results of supervisory
evaluations. Institutions classified as well-capitalized (as defined by the FDIC) and considered
healthy pay the lowest premium while institutions that are less than adequately capitalized (as
defined by the FDIC) and considered of substantial supervisory concern pay the highest premium.
Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment
period. For the year ended December 31, 2004, Bank Insurance Fund (BIF) assessments ranged from
0.00% of deposits to 0.27% of deposits. For the semi-annual assessment period beginning January 1,
2005, BIF assessment rates will continue to range from 0.00% of deposits to 0.27% of deposits.
Because the bank is well capitalized for purposes of its deposit insurance premiums, it expects
its FDIC BIF premium to continue to be the statutory minimum. 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. FICO Assessments. Since 1987, a portion of the deposit insurance assessments paid by
Savings Association Insurance Fund (SAIF) members has been used to cover interest payments due on
the outstanding obligations of the Financing Corporation (FICO), the entity created to finance
the recapitalization of the Federal Savings and Loan Insurance Corporation, the SAIFs predecessor
insurance fund. Pursuant to federal legislation enacted September 30, 1996, commencing January 1,
1997, both SAIF members and BIF members became subject to assessments to cover the interest
payments on outstanding FICO obligations. Such FICO assessments are in addition to amounts
assessed by the FDIC for deposit insurance. During the year ended December 31, 2004 the FICO
assessment rate for both BIF and SAIF members was approximately 0.0146% of deposits. During the
year ended December 31, 2004 the Bank paid approximately $13,800 in FICO assessments. For the
first quarter of 2005, the




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annualized FICO assessment rate will be 0.0144%. Management expects the
amounts paid for FICO assessments will increase as the Banks deposits continue to increase. 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 and the
Company 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 and Company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. As of December 31, 2004, the Bank exceeded its minimum regulatory capital requirements with a total
risk-based capital ratio of 10.2%, a Tier 1 risk-based capital ratio of 7.6% and a leverage ratio
of 6.9%. As a result of the Corporations equity offering in the second half of 2000, the Bank, on
January 2, 2001, issued $1,500,000 of subordinated debt to the Corporation. This debt is treated
as Tier 2 capital (subject to certain limitations) for the Banks risk-based capital calculations.
Also, as a result of the Companys equity offering in 2004, the Company has approximately $900,000
available to invest in the Bank as the Bank needs additional capital. The Bank has grown rapidly in its six-year history, and continued rapid growth will require it to
consider capital strategies to support that growth. In 2003, the Company obtained a $3,000,000
line of credit through an unaffiliated financial institution. At the end of the third quarter of
2003, the Company borrowed $500,000 and invested the proceeds in the Bank as additional paid in
capital. During the first quarter of 2004, the Company borrowed an additional $300,000 against the
line of credit and invested the proceeds in the same manner. In October 2004 the Company paid down
the $800,000 balance outstanding on the line of credit, bringing the available balance to its
original amount of $3,000,000. By borrowing against the line of credit and then investing the
funds into the Bank as capital, the Bank is able to manage its capital ratios. Other strategies
that the Company could consider in the future include selling more common stock, issuing trust
preferred securities or issuing subordinated debt at the Bank level. 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 is 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).
At December 31, 2004, the Bank satisfied all requirements for inclusion in the well capitalized
category.




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Dividends. 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. Accordingly, the Bank will have approximately $693,000, plus
its net income in 2005, available to be paid as dividends to the Company. 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. As described above, the Bank exceeded its
minimum capital requirements under applicable guidelines as of December 31, 2004. 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 novointerstate 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. After extensive study and evaluation throughout 2003, the Board authorized the Bank to pursue
expansion into the Brecksville, Ohio market area. In December 2003, the Ohio Division of Financial
Institutions approved the Banks application to establish a banking office in Brecksville. The
City of Brecksville granted its approval for the project, and remodeling began in March 2004 of a
building located at 8751 Brecksville Road. The Bank became the anchor tenant of this building in
October 2004, leasing nearly half of the available square footage. This office has a Regional
President and offers all of the services and amenities that are offered in the Medina banking
office. There is also a local advisory board of directors that offers guidance and assistance. 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 GLB, 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 GLB affect how consumer information is transmitted through diversified financial companies and
conveyed to outside vendors. Federal Home Loan Bank. The Federal Home Loan Banks (FHLBs) provide credit to their
members in the form of advances. As a member of an FHLB, the Bank must maintain an investment in
the capital stock of an FHLB in an amount equal to the greater of 1% of the aggregate outstanding
principal amount of the Banks residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 5% of its advances from the FHLB. 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




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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 have a material effect on the earnings of the Bank. Additional and Pending 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 and Regulation Z, the Federal Equal Credit
Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Truth in Savings Act, the
Community Reinvestment Act, anti-redlining legislation and antitrust laws. Congress regularly considers legislation that may have an impact upon the operation of the Company
and the Bank. At this time, the Company is unable to predict whether any proposed legislation will
be enacted and, therefore, is unable to predict the impact such legislation may have on the
operations of the Company and the Bank.




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##### Table of Contents



Item 1.Business-Statistical Disclosure  I.
    DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS EQUITY; INTEREST RATES AND INTEREST
DIFFERENTIAL  A.
    The following are the average balance sheets for the years ending December 31: 2004Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    RateASSETSInterest-earning assetsFederal funds sold and other short-term
Funds
    
    $
    4,909,047
    
    
    $
    62,836
    
    
    
    1.28
    %Securities available for sale (at cost)
    
    
    1,569,889
    
    
    
    59,275
    
    
    
    3.78Federal Reserve Bank stock
    
    
    195,767
    
    
    
    11,744
    
    
    
    6.00Federal Home Loan Bank stock
    
    
    255,587
    
    
    
    10,559
    
    
    
    4.13Loans receivable and held for sale (1)
    
    
    103,193,767
    
    
    
    5,959,491
    
    
    
    5.78Total interest-earning assets
    
    
    110,124,057
    
    
    
    6,103,905
    
    
    
    5.54Noninterest-earning assetsCash and due from banks
    
    
    2,194,890Unrealized gain (loss) on available-for-sale securities
    
    
    6,655Allowance for loan losses
    
    
    (1,634,369
    )Premises and equipment, net
    
    
    834,891Accrued interest receivable and
other assets
    
    
    1,416,403$
    112,942,527LIABILITIES AND SHAREHOLDERS EQUITYInterest-bearing liabilitiesInterest-bearing transaction accounts
    
    $
    6,431,519
    
    
    
    38,612
    
    
    
    0.60
    %Savings and money market accounts
    
    
    29,184,606
    
    
    
    334,825
    
    
    
    1.15Certificates of deposit and IRAs
    
    
    51,535,151
    
    

    
    1,478,681
    
    
    
    2.86Other borrowings
    
    
    548,361
    
    
    
    19,235
    
    
    
    3.51Federal Home Loan Bank advances
    
    
    4,100,273
    
    
    
    153,204
    
    
    
    3.74Total interest-bearing liabilities
    
    
    91,799,910
    
    
    
    2,024,557
    
    
    
    2.21Noninterest-bearing liabilitiesDemand deposits
    
    
    11,322,887Accrued interest payable and
other liabilities
    
    
    274,196103,396,993Shareholders equity
    
    
    9,545,534$
    112,942,527Net interest income/spread
    
    
    
    
    
    $
    4,079,348
    
    
    
    3.33
    %Net interest income as a percent
of average interest earning assets
    
    
    
    
    
    
    
    
    
    
    3.70
    %Average interest earning assets to
interest bearing liabilities
    
    
    120.0
    %
   (1)
    
    Includes loan fees of $133,180. Nonaccrual loans are included in loans receivable at 0.00%
interest.




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##### Table of Contents



I.
    DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS EQUITY; INTEREST RATES AND INTEREST
DIFFERENTIAL(Continued) 2003Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    RateASSETSInterest-earning assetsFederal funds sold and other short-term
Funds
    
    $
    4,342,398
    
    
    $
    44,457
    
    
    
    1.02
    %Securities available for sale (at cost)
    
    
    1,748,694
    
    
    
    69,110
    
    
    
    3.95Federal Reserve Bank stock
    
    
    173,467
    
    
    
    10,403
    
    
    
    6.00Federal Home Loan Bank stock
    
    
    190,663
    
    
    
    7,626
    
    
    
    4.00Loans receivable and held for sale (1)
    
    
    84,946,590
    
    
    
    5,113,721
    
    
    
    6.02Total interest-earning assets
    
    
    91,401,812
    
    
    
    5,245,317
    
    
    
    5.74Noninterest-earning assetsCash and due from banks
    
    
    1,798,639Unrealized gain (loss) on available-for-sale securities
    
    
    29,224Allowance for loan losses
    
    
    (1,243,004
    )Premises and equipment, net
    
    
    713,840Accrued interest receivable and
other assets
    
    
    976,239$
    93,676,750LIABILITIES AND SHAREHOLDERS EQUITYInterest-bearing liabilitiesInterest-bearing transaction accounts
    
    $
    5,171,521
    
    
    
    36,625
    
    
    
    0.71
    %Savings and money market accounts
    
    
    26,376,390
    
    
    
    207,613
    
    
    
    0.79Certificates of deposit and IRAs
    
    
    40,021,146
    
    
    
    1,281,809
    
    
    
    3.20Short-term borrowings
    
    
    84,501
    
    
    
    333
    
    
    
    0.39Other borrowings
    
    
    129,167
    
    
    
    4,198
    
    
    
    3.25Federal Home Loan Bank advances
    
    
    3,200,000
    
    
    
    135,010
    
    
    
    4.22Total interest-bearing liabilities
    
    
    74,982,725
    
    
    
    1,665,588
    
    
    
    2.22Noninterest-bearing liabilitiesDemand deposits
    
    
    10,251,709Accrued interest payable and
other liabilities
    
    
    209,38085,443,814Shareholders equity
    
    
    8,232,936$
    93,676,750Net interest income/spread
    
    
    
    
    
    $
    3,579,729
    
    
    
    3.52
    %Net interest income as a percent
of average interest earning assets
    
    
    
    
    
    
    
    
    
    
    3.92
    %Average interest earning assets to
interest bearing liabilities
    
    
    121.9
    %
   (1)
    
    Includes loan fees of $144,475. Nonaccrual loans are included in loans receivable at 0.00%
interest.




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##### Table of Contents



I.
    
    
    DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS EQUITY; INTEREST RATES AND INTEREST
DIFFERENTIAL(Continued)
  B.
    The following tables set forth 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 Income 2004 vs. 2003
    
    
    2003 vs. 2002Increase (Decrease) Due to
    
    
    Increase (Decrease) Due toVolume
    
    
    Rate
    
    
    Net
    
    
    Volume
    
    
    Rate
    
    
    NetInterest income:Loans receivable
    
    $
    1,016,663
    
    
    $
    (170,893
    )
    
    $
    845,770
    
    
    $
    1,126,576
    
    
    $
    (423,554
    )
    
    $
    703,022Federal funds sold
    
    
    11,779
    
    
    
    12,019
    
    
    
    23,798
    
    
    
    (5,053
    )
    
    
    (20,189
    )
    
    
    (25,242
    )Interest-bearing deposits in
financial institutions
    
    
    (4,399
    )
    
    
    (1,021
    )
    
    
    (5,420
    )
    
    
    8,858
    
    
    
    
    
    
    
    8,856Securities available-for-sale
    
    
    (6,848
    )
    
    
    (2,988
    )
    
    
    (9,836
    )
    
    
    (50,833
    )
    
    
    (21,169
    )
    
    
    (72,002
    )Federal Reserve Bank stock
    
    
    1,340
    
    
    
    
    
    
    
    1,340
    
    
    
    235
    
    
    
    
    
    
    
    235Federal Home Loan Bank stock
    
    
    2,675
    
    
    
    258
    
    
    
    2,933
    
    
    
    2,011
    
    
    
    (990
    )
    
    
    1,021Total interest-earning assets
    
    
    1,021,210
    
    
    
    (162,625
    )
    
    
    858,585
    
    
    
    1,081,794
    
    
    
    (465,904
    )
    
    
    615,890Interest expense:Interest-bearing transaction
accounts
    
    
    (8,087
    )
    
    
    6,100
    
    
    
    (1,987
    )
    
    
    7,008
    
    
    
    (24,622
    )
    
    
    (17,614
    )Savings and money market
    
    
    (24,013
    )
    
    
    (103,199
    )
    
    
    (127,212
    )
    
    
    (44,465
    )
    
    
    (174,414
    )
    
    
    (218,879
    )Certificates of deposit and IRAs
    
    
    (328,053
    )
    
    
    131,184
    
    
    
    (196,869
    )
    
    
    594,791
    
    
    
    (185,182
    )
    
    
    409,609Short-term funds
    
    
    333
    
    
    
    
    
    
    
    333
    
    
    
    (881
    )
    
    
    (828
    )
    
    
    (1,709
    )Other borrowings
    
    
    (14,678
    )
    
    
    (359
    )
    
    
    (15,037
    )
    
    
    4,198
    
    
    
    
    
    
    
    4,198FHLB borrowings
    
    
    (34,894
    )
    
    
    16,700
    
    
    
    (18,194
    )
    
    
    20,633
    
    
    
    (167
    )
    
    
    20,466Total interest-bearing
liabilities
    
    
    (409,392
    )
    
    
    50,426
    
    
    
    (358,966
    )
    
    
    581,284
    
    
    
    (385,213
    )
    
    
    (196,071
    )Change in net interest income
    
    $
    611,818
    
    
    $
    (112,199
    )
    
    $
    499,619
    
    
    $
    500,510
    
    
    $
    (80,691
    )
    
    $
    419,819




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##### Table of Contents



II.
    INVESTMENT PORTFOLIOThe amortized cost and estimated fair values of securities available for sale at December
31, 2004 and 2003 are as follows: Gross
    
    
    Gross
    
    
    
    
    
    
    WeightedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair
    
    
    AverageCost
    
    
    Gains
    
    
    Losses
    
    
    Value
    
    
    Yield2004U.S. government
sponsored agencies
    
    $
    500,507
    
    
    $
    1,658
    
    
    $
    
    
    
    $
    502,165
    
    
    
    3.78
    %Mortgage-backed
    
    
    708,446
    
    
    
    430
    
    
    
    (6,355
    )
    
    
    702,521
    
    
    
    3.68
    %$
    1,208,953
    
    
    $
    2,088
    
    
    $
    (6,355
    )
    
    $
    1,204,686
    
    
    
    3.72
    %2003U.S. government
sponsored agencies
    
    $
    758,810
    
    
    $
    18,791
    
    
    $
    
    
    
    $
    777,601
    
    
    
    3.75
    %Mortgage-backed
    
    
    955,881
    
    
    
    1,215
    
    
    
    (935
    )
    
    
    956,161
    
    
    
    3.77
    %$
    1,714,691
    
    
    $
    20,006
    
    
    $
    (935
    )
    
    $
    1,733,762
    
    
    
    3.76
    %
 Maturities of Investment SecuritiesWeightedFair
    
    
    AverageValue
    
    
    YieldU.S. government
sponsored agencies
    
    $
    502,165
    
    
    
    3.78
    %Due in one year
or less
    
    $
    502,165
    
    
    
    3.78
    %Due in one to
five years
    
    
    Due in five to
ten years
    
    
    Mortgage-backed
    
    
    702,521
    
    
    
    3.68
    %$
    1,204,686
    
    
    
    3.72
    %
  Actual maturities may differ from contractual maturities because issuers may have the right to
call or prepay obligations.  III.
    LOAN PORTFOLIO  A.
    Types of Loans  Total loans on the balance sheet are comprised of the
following classifications at December 31, 2004 and 2003. 2004
    
    
    2003Commercial
    
    $
    92,455,886
    
    
    $
    84,199,271Home equity lines of credit
    
    
    9,857,867
    
    
    
    8,415,148Residential mortgage and construction
    
    
    821,658
    
    
    
    1,390,523Consumer installment
    
    
    1,308,084
    
    
    
    1,248,743Credit card and other
    
    
    291,760
    
    
    
    294,601$
    104,735,255
    
    
    $
    95,548,286




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##### Table of Contents



Concentrations of Credit Risk: Western Reserve Bank grants commercial, residential real
estate mortgage and installment loans to businesses and individuals mainly in Medina and
contiguous counties
in Ohio. Commercial loans include loans collateralized by business assets. At December
31, 2004, commercial loans secured by real estate make up approximately 56.2% of the loan
portfolio. Other commercial loans to businesses comprise 32.1% 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 9.3% of the loan portfolio and are
collateralized by residential real estate. Residential mortgage and construction loans
are 0.8% of the loan portfolio and are secured primarily by first mortgages on residential
property. Installment and credit card loans to individuals make up approximately 1.5% of
the loan portfolio and are primarily collateralized by consumer assets or are unsecured.
At December 31, 2004, approximately 2.2% 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, 2004. 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. Loan Maturities and Sensitivity to Changes in Interest Rates Within
    
    
    1-5
    
    
    After1 year
    
    
    years
    
    
    5 years
    
    
    TotalCommercial
    
    $
    66,945,935
    
    
    $
    25,127,863
    
    
    $
    382,088
    
    
    $
    92,455,886Home equity lines of credit
    
    
    9,857,867
    
    
    
    
    
    
    
    
    
    
    
    9,857,867Residential mortgage
and construction
    
    
    459,470
    
    
    
    115,710
    
    
    
    246,478
    
    
    
    821,658Consumer installment
    
    
    956,503
    
    
    
    284,574
    
    
    
    67,007
    
    
    
    1,308,084Credit card and other
    
    
    291,760
    
    
    
    
    
    
    
    
    
    
    
    291,760$
    78,511,535
    
    
    $
    25,528,147
    
    
    $
    695,573
    
    
    $
    104,735,255
  Of the loans due after one year, approximately $19,943,000 have variable interest rates,
and $6,280,000 have fixed interest rates.  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. 2004
    
    
    2003(a)
    
    Loans accounted for on a nonaccrual basis
    
    $
    1,114,668
    
    
    $
    1,126,075(b)
    
    Accruing loans which are contractually past due 90
days or more as to interest or principal payments
    
    
    
    
    
    
    (c)
    
    Loans not included in (a) or (b) which are
Troubled Debt Restructurings as defined by
Statement of Financial Accounting Standards No. 15
    
    
    
    
    
    
    (d)
    
    Other loans defined as impaired
    
    
    174,884
    
    
    
    183,346$
    1,289,552
    
    
    $
    1,309,521Percentage of allowance to non-performing loans
    
    
    125
    %
    
    
    115
    %




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##### Table of Contents



III.
    LOAN PORTFOLIO (continued)  Management believes the allowance for loan losses at December 31, 2004 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 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. 2004Gross interest income that would have been recorded in 2004 on nonaccrual loans
outstanding at December 31, 2004 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
    
    $
    119,356Interest income actually recorded on nonaccrual loans and
included in net income for the period
    
    $
    4,178Interest income not recognized during the period
    
    $
    115,178
  Discussion of the Nonaccrual PolicyThe 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 in the current period 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.2.
    Potential Problem LoansAs of December 31, 2004, in addition to the $1,289,552 of loans reported under Item
III, C.1., there are $-0- in 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 OutstandingNone4.
    Loan ConcentrationsAs of December 31, 2004, commercial loans to entities classified as real estate
holding companies comprise $21,821,000, or 20.8% 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.




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##### Table of Contents



III. LOAN PORTFOLIO (continued)  D.
    Other Interest-Bearing AssetsThere are no other interest-bearing assets as of December 31, 2004 that would be required
to be disclosed under Item III. C.1 or 2 if such assets were loans. 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: 2004
    
    
    2003LoansLoans outstanding at end of period
    
    $
    104,735,255
    
    
    $
    95,548,288Average loans outstanding during period
    
    $
    102,726,927
    
    
    $
    84,946,590Allowance for loan lossesBalance at beginning of period
    
    $
    1,502,688
    
    
    $
    1,042,309Loans charged-offCommercial
    
    
    1,321,207
    
    
    
    Residential mortgage and construction
    
    
    
    
    
    
    Consumer installment
    
    
    
    
    
    
    Credit card
    
    
    
    
    
    
    1,321,207
    
    
    
    Recoveries of loans previously charged-offCommercial
    
    
    99,688
    
    
    
    24,979Residential mortgage and construction
    
    
    
    
    
    
    Consumer installment
    
    
    
    
    
    
    4,300Credit card
    
    
    
    
    
    
    99,688
    
    
    
    29,279Net loans charged-off (recoveries)
    
    
    1,221,519
    
    
    
    (29,279
    )Provision for loan losses
    
    
    1,324,764
    
    
    
    431,100Balance at end of period
    
    $
    1,605,933
    
    
    $
    1,502,688Ratio of net charge-offs during the period to
average loans outstanding during the period
    
    
    1.19
    %
    
    
    (0.03
    )%
  The allowance for loan losses balance and the provision for loan losses are judgmentally
determined by management based upon periodic reviews of the loan portfolio. In addition,
management considered the level of charge-offs on loans as well as the fluctuations of
charge-offs and recoveries on loans including the factors which caused these changes.
Estimating the risk of loss and the amount of loss is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered adequate to
cover losses that are currently probable based on past loss experience, 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.




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##### Table of Contents



IV.
    SUMMARY OF LOAN LOSS EXPERIENCE(Continued)  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 Loans2004
    
    
    2003
    
    
    2004
    
    
    2003Commercial
    
    $
    1,526,102
    
    
    $
    1,428,543
    
    
    
    88.3
    %
    
    
    88.1
    %Home equity lines of credit
    
    
    49,289
    
    
    
    42,076
    
    
    
    9.4
    
    
    
    8.8Residential mortgage & construction
    
    
    2,465
    
    
    
    4,918
    
    
    
    0.8
    
    
    
    1.5Installment and credit card
loans to individuals
    
    
    28,000
    
    
    
    27,058
    
    
    
    1.5
    
    
    
    1.6Unallocated
    
    
    77
    
    
    
    93
    
    
    
    0.0
    
    
    
    0.0Total
    
    $
    1,605,933
    
    
    $
    1,502,688
    
    
    
    100.0
    %
    
    
    100.0
    %
  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.
    DEPOSITSThe average amount of deposits and average rates paid are summarized as follows for the
year ended December 31: 2004
    
    
    2003Average
    
    
    Average
    
    
    Average
    
    
    AverageAmount
    
    
    Rate
    
    
    Amount
    
    
    RateNoninterest bearing demand deposits
    
    $
    11,322,887
    
    
    
    0.00
    %
    
    $
    10,251,709
    
    
    
    0.00
    %Interest bearing demand deposits
    
    
    6,431,519
    
    
    
    0.60
    
    
    
    5,171,521
    
    
    
    0.71Savings and money market accounts
    
    
    29,184,606
    
    
    
    1.14
    
    
    
    26,376,390
    
    
    
    0.79Certificates of deposit and IRAs
    
    
    51,535,151
    
    
    
    2.86
    
    
    
    40,021,146
    
    
    
    3.20$
    98,474,163
    
    
    
    1.88
    
    
    $
    81,820,766
    
    
    
    1.86
  At December 31, 2004, the Bank had $18,598,678 of time certificates of deposit of $100,000 or
more outstanding. Remaining maturities of these time deposits are as follows: Three months or less
    
    $
    9,566,727Over three through six months
    
    
    504,702Over six through twelve months
    
    
    1,054,556Over twelve months
    
    
    7,472,693$
    18,598,678




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VI.
    RETURN ON EQUITY AND ASSETSThe ratio of net income to average shareholders equity and average total assets and
certain other ratios are as follows: 2004
    
    
    2003Average total assets
    
    $
    112,943,000
    
    
    $
    93,677,000Average shareholders equity
    
    $
    9,546,000
    
    
    $
    8,233,000Net income
    
    $
    24,480
    
    
    $
    623,060Return on average total assets
    
    
    0.02
    %
    
    
    0.67
    %Return on average shareholders equity
    
    
    0.25
    %
    
    
    7.57
    %Cash dividends declared
    
    $
    0.00
    
    
    $
    0.00Dividend payout percentage
    
    
    n/a
    
    
    
    n/aAverage shareholders equity to average total assets
    
    
    8.45
    %
    
    
    8.79
    %
  VII.
    SHORT-TERM BORROWINGSThe Company did not have any reportable categories of short-term borrowings during or at the end of the reported periods. 
 Item 2.Description of Property The Company leases premises for the Banks main office at 4015 Medina Road, Suite 100, Medina,
Ohio, which also serve as the Companys corporate headquarters. The leased premises consist of
approximately 7,884 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 and a night
depository facility. During 2002, the Bank leased additional office space in an adjacent building in the same office
complex to accommodate the growth of the commercial lending department. There are approximately
2,500 square feet in this area. In February 2004, the Bank leased approximately 3,900 additional square feet of office space
adjacent to its headquarters at 4015 Medina Road, and the Loan Department moved back into the main
building. The Bank sublet this space to its previous occupant for four months and offset the rent
expense with rental income of $39,160. The leases described above have a primary term of ten years with options for two five-year
extensions. The annual lease payment was $233,303 for 2004 and $139,884 for 2003, and is subject
to increases each subsequent year. The facility is leased under an operating lease from a member
of the Board of Directors. Refer to Note 5 on page 19 of the Companys 2004 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 with an unrelated
entity for approximately 5,600 square feet of space for this location. The lease is for a term of
ten years beginning October 1, 2004, with two five-year renewal options. Rent for the first twelve
months under the lease is $150,924, with a provision for annual increases of two percent. The Bank occupies a small office inside Western Reserve Masonic Community, a retirement community
at 4931 Nettleton Road, Medina. The Bank also occupies a small office inside Camelot Place, an
assisted living facility located at 49 Leisure Lane, Medina. The Bank operates a full-service,
limited-hours branch at each location. Rent for both offices is de minimis.




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##### Table of Contents



Item 3.Legal Proceedings The Company is not aware of any legal proceedings against it or the Bank. 
 Item 4.Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of the Companys security holders during the fourth quarter of
2004. 
 PART II 
 Item 5.Market for Common Equity and Related Stockholder Matters. The Companys Common Stock was held by approximately 566 holders of record as of December 31, 2004,
and is not listed any stock exchange and is not traded over the counter. The stock, which has not
yet been assigned a symbol, trades in private transactions facilitated by Robert W. Baird & Co.
(Baird). Baird does not make a market but acts as a liaison between buyers and sellers of the
Companys common stock. The Companys representative at Baird is Richard Comstock and shareholders
may contact him at 877-792-7868. 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. During 2004, there were five transactions of the Companys common stock reported by Baird in the
Companys stock. Four of these transactions occurred in early 2004 at $26.00 per share and one at
$30.00 per share in November, 2004. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission. Certain other private transactions may have occurred during the
periods indicated of which the Company has no knowledge. The Company will file a Registration Statement on Form 8-A with the SEC prior to April 30, 2005 to
register its common shares under Section 12(g) of the 1934 Act. The Company began an offering of up to 83,333 shares of its common stock on May 15, 2004. The
offering price was $30.00 per share. The offering closed on November 30, 2004. In the fourth
quarter of 2004, 28,222 shares were issued under the offering. A total of 66,622 shares were
issued in the offering. The Company did not employ an underwriter or broker to sell the shares.
Instead, the shares were sold directly by the Company through its officers and directors without
the payment of any commissions. The shares sold pursuant to
this offering were not registered under the Federal securities laws in reliance upon Section 3(a)(11) of the Securities Act of 1933 and Rule 147
promulgated thereunder, which provides an exemption from registration
for sales made solely to residents of the State of Ohio. A registration statement on Form
6(A)(1) was filed on May 3, 2004, with the Ohio Division of Securities pursuant to Section
1707.06(A)(1) of the Ohio Revised Code. Because of the requirements of Rule 147, the shares issued
under the offering cannot be sold outside of the State of Ohio for nine (9) months after issuance.
A copy of the legend to be placed on the shares is attached hereto as Exhibit 4.2. The proceeds raised through the sale of the shares in the offering will be used for general
corporate purposes. The majority of the proceeds will be used to augment the capital of Western
Reserve Bank, the Companys wholly owned commercial bank subsidiary. The Company also has a nonqualified stock option plan, the Western Reserve Bancorp, Inc. 1998 Stock
Option Plan, as Amended. During the fourth quarter of 2004, there were 250 shares of the Companys
common stock issued at $20.00 per share through the exercise of a stock option under the Plan. The shares reserved for
issuance under this plan have not been registered under the Federal
securities laws, and any issuances under this plan are made in reliance upon Section 3(a)(11) of the Securities Act of 1933 and Rule 147
promulgated thereunder. Because of the requirements of Rule 147, the shares issued under the
offering cannot be sold outside of the State of Ohio for nine
(9) months after issuance. A copy of the legend to be placed on the shares issued under this plan is attached hereto as Exhibit 4.2. 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 probably 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. 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-KSB. 
 Item 6.Managements Discussion and Analysis of Financial Condition or Plan of Operation The information on pages 33-44 of the Companys 2004 Annual Report to Shareholders under the
caption Managements Discussion and Analysis is incorporated by reference. 
 Item 7.Financial Statements The following financial statements and related notes from the 2004 Annual Report to Shareholders
are incorporated by reference:




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##### Table of Contents



Annual ReportPage No.Report of Independent Registered Public Accounting Firm
    
    
    6Consolidated Balance Sheets
    
    
    7Consolidated Statements of Income
    
    
    8Consolidated Statements of Changes in Shareholders Equity
    
    
    9Consolidated Statements of Cash Flows
    
    
    10Notes to Consolidated Financial Statements
    
    
    11-31
 
 Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. 
 Item 8A.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 our
disclosure controls and procedures (as defined in Rule 13a-14(c)/15d-14(d) 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. There was no change in the Companys internal control over financial reporting that occurred
during the Companys fiscal quarter ended December 31, 2004 that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial reporting. 
 Item 8B.Other Information There are no matters to be reported under this item. 
 PART III 
 Item 9.Directors and Executive Officers of the Registrant  A.
    Directors. The information on pages 5-7 of the Companys 2004 Proxy Statement under the
caption Election of Directors is incorporated by reference.B.
    Executive Officers. The information on page 11 of the Companys 2004 Proxy Statement
regarding the Executive Officers of the Company is incorporated by reference.C.
    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 in accordance with
Rule 4200(1) of the National Association of Securities Dealers (NASD) listing standards.D.
    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, Senior Vice President, Chief Financial




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##### Table of Contents



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
was attached to the 2003 Form 10-KSB as Exhibit 14. 
 Item 10.Executive Compensation The information on pages 12-14 of the 2004 Proxy Statement under the caption Compensation of
Executive Officers is incorporated by reference. 
 Item 11.Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters The information on page 5 of the 2004 Proxy Statement, under the caption Beneficial Ownership is
incorporated by reference. The information on page 7 of the 2004 Proxy Statement under the caption Election of Directors is
incorporated by reference. The Company has a nonqualified stock option plan that provides for up to 100,000 shares of the
Companys common stock to be available for grant to officers, employees, directors and others. The
exercise price is at least the market price at date of grant. The maximum option term is ten
years, and options vest over three years as follows: 25% one year from the grant date, 50% after
two years, and 100% after three years. As of December 31, 2004, the following equity securities
are authorized for issuance under the plan: Equity Compensation Plan Information Number of securitiesremaining available forNumber of securities
    
    
    
    
    
    
    future issuance underto be issued upon
    
    
    
    Weighted-average
    
    
    equity compensationexercise of outstanding
    
    
    
    exercise price of
    
    
    plans (excludingoptions, warrants and
    
    
    
    outstanding options,
    
    
    securities reflected inrights
    
    
    
    warrants and rights
    
    
    column (a))(a)
    
    
    
    (b)
    
    
    
    (c)Equity compensation plans
approved by security holders
    
    
    
    0
    
    
    
    n/a
    
    
    
    0Equity compensation plans not
approved by security holders
    
    
    
    92,162
    
    
    
    $23.09
    
    
    
    7,588Total
    
    
    
    92,162
    
    
    
    $23.09
    
    
    
    7,588
 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 12.Certain Relationships and Related Transactions The information on page 14 of the 2004 Proxy Statement under the caption Transactions with
Management and Others is incorporated by reference. 
 Item 13.Exhibits




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##### Table of Contents



The Exhibit Index that immediately follows the signature page to this Form 10-KSB is incorporated
by reference. The exhibits required to be filed with this Form 10-KSB are included with this Form
10-KSB and are located immediately following the Exhibit Index to this Form 10-KSB. 
 Item 14.Principal Accountant Fees and Services The information on page 11 of the 2004 Proxy Statement under the caption Audit Fees is
incorporated by reference.




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##### Table of Contents



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 30, 2005. WESTERN RESERVE BANCORP, INC.By:
    
    /s/ Edward J. McKeonEdward J. McKeon, President, ChiefExecutive Officer and DirectorBy:
    
    /s/ Cynthia A. MahlCynthia A. Mahl, Senior Vice President,Principal Financial and Accounting Officer
 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 30, 2005. /s/ P.M. Jones
    
    /s/ Edward J. McKeonP.M. Jones, Chairman of the Board
    
    Edward J. McKeon, President, ChiefExecutive Officer and Director/s/ Roland H. Bauer
    
    /s/ Bijay K. JayaswalRoland H. Bauer, Director
    
    Bijay K. Jayaswal, Director/s/ Ray E. Laribee
    
    /s/ C. Richard LynhamRay E. Laribee, Director
    
    C. Richard Lynham, Director/s/ R. Hal Nichols
    
    /s/ Rory H. ONeilR. Hal Nichols, Director
    
    Rory H. ONeil, Director/s/ Michael R. Rose
    
    /s/ Glenn M. SmithMichael R. Rose, Director
    
    Glenn M. Smith, Director/s/ Thomas A. TubbsThomas A. Tubbs, Director




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
EXHIBIT INDEX Exhibit No.
    
    Description of Exhibits3.1
    
    Articles of Incorporation of Western Reserve Bancorp, Inc. (incorporated by
reference to the Companys Report on Form SB-2 filed with the Commission on
December 29, 1997)3.2
    
    Code of Regulations of Western Reserve Bancorp, Inc. (incorporated by
reference to the Companys Report on Form SB-2 filed with the Commission on
December 29, 1997)4.2
    
    Legend to be Placed on Certificates
Representing Shares Issued Pursuant to Offerings Exempt From
Registration Under the Federal Securities Law10.1
    
    Employment Agreement of Edward J. McKeon, Dated December 14, 2001.
(incorporated by reference to the Companys Report on Form 10-KSB filed with
the Commission on April 1, 2002)10.2
    
    Lease Agreement by and between Michael Rose DBA Washington Properties and
Western Reserve Bancorp, Inc. (incorporated by reference to the Companys
Report on Form 10-KSB filed with the Commission on March 31, 1999)10.3
    
    Western Reserve Bancorp, Inc. 1998 Stock Option Plan, Amended and Restated as
of April 20, 2000 (incorporated by reference to the Companys Report on Form
10-QSB filed with the Commission on August 13, 2000)10.4
    
    Agreement by and between Western Reserve Bancorp, Inc. and Brian K. Harr,
dated June 18 2001, as amended February 20, 2002 (incorporated by reference to
the Companys Report on Form 10-KSB filed with the Commission on March 28,
2003)10.5
    
    Agreement by and between Western Reserve Bancorp, Inc. and Cynthia A. Mahl,
dated June 18 2001, as amended February 20, 2002 (incorporated by reference to
the Companys Report on Form 10-KSB filed with the Commission on March 28,
2003)10.6
    
    Loan Agreement between Western Reserve Bancorp, Inc. and TCF National Bank,
dated May 5, 2003 (incorporated by reference to the Companys Report on Form
10-QSB filed with the Commission on August 14, 2003)10.7
    
    Western Reserve Bank Supplemental Executive Retirement Plan, dated May 15,
2003 (incorporated by reference to the Companys Report on Form 10-QSB filed
with the Commission on August 14, 2003)10.8
    
    Western Reserve Bancorp, Inc. Employee Stock Purchase Plan (incorporated by
reference to the Companys Report on Form 10-QSB filed with the Commission on
November 14, 2003)10.9
    
    Lease Agreement by and between Western Reserve of Brecksville, LLC and Western
Reserve Bank11
    
    Statement re: Computation of Per Share Earnings (incorporated by reference to
page 31 of the Companys 2004 Annual Report to Shareholders)13.1
    
    2004 Annual Report to Shareholders (Except for sections incorporated by
reference into this Form 10-KSB, the Annual Report to Shareholders shall not
be deemed to be filed with the Commission.)14
    
    Western Reserve Bancorp, Inc. Code of Ethics and Business Conduct
(incorporated by reference to the Companys Report on Form 10-KSB filed with
the Commission on March 30, 2004)21.1
    
    Subsidiary of Western Reserve Bancorp, Inc.23
    
    Consent of Crowe Chizek and Company LLC




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##### Table of Contents



Exhibit No.
    
    Description of Exhibits31.1
    
    Certification under Section 302 of the Sarbanes-Oxley Act by Edward J. McKeon,
President and Chief Executive Officer31.2
    
    Certification under Section 302 of the Sarbanes-Oxley Act by Cynthia A. Mahl,
Senior Vice President and Chief Financial Officer32.1
    
    Certification under Section 906 of the Sarbanes-Oxley Act by Edward J. McKeon,
President and Chief Executive Officer32.2
    
    Certification under Section 906 of the Sarbanes-Oxley Act by Cynthia A. Mahl,
Senior Vice President and Chief Financial Officer99.3
    
    Proxy Statement and form of proxy for the Annual Meeting of Shareholders to be
held April 27, 2005. (incorporated by reference to the Companys Form 14A
filed with the Commission on March 28, 2005) (Except for sections
incorporated by reference into this Form 10-KSB, the proxy materials shall not
be deemed to be filed with the Commission.)