Exhibit 13
 WESTERN RESERVE BANCORP, INC.
 ANNUAL REPORT




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##### 



WESTERN RESERVE BANCORP, INC.
Medina, Ohio
 ANNUAL REPORT
December 31, 2008
 CONTENTS
 LETTER TO SHAREHOLDERS
    
    
    1MANAGEMENTS REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
    
    
    4REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    5CONSOLIDATED FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETS
    
    
    6CONSOLIDATED STATEMENTS OF INCOME
    
    
    7CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY
    
    
    8CONSOLIDATED STATEMENTS OF CASH FLOWS
    
    
    9NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    10COMPARATIVE SUMMARY OF SELECTED FINANCIAL DATA
    
    
    32MANAGEMENTS DISCUSSION AND ANALYSIS
    
    
    33
 Cover design by Renée W. Gareau, Berea, Ohio. Phone: (216) 650-6347.




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Subprime Loans: not
 Fannie Mae & Freddie Mac Preferred Stock not
 High Risk Mortgage Related Securities not
 High Risk Home Equity Loans not
  Loan Growth
  2008 Income
   1.




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##### 



2009
   Year
    
    Cost2006
    
    $
    14,0002007
    
    $
    95,0002008
    
    $
    109,0002009
    
    $560,000 (estimated)
   Capital
 we need your approval for
this transaction
  2.




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##### 



I want to emphasize that management and the Board strongly recommend approval of authorizing
us to issue preferred stock so that we can accept the Capital Purchase Program funds which will
allow us to continue to grow and take advantage of opportunities at a time when so
many large banks operating in our market have retrenched due to the financial damage they have
experienced.
 Please sign and return your proxy as soon as possible.
      
  3.




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Internal ControlIntegrated Framework Guidance for Smaller Public
Companies
  Edward J. McKeon
    
    Cynthia A. MahlPresident and
    
    Executive Vice President andChief Executive Officer
    
    Chief Financial Officer
   4.




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5.




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##### 



2008
    
    
    2007ASSETSCash and due from financial institutions
    
    $
    2,302,786
    
    
    $
    2,486,243Interest-bearing deposits in other financial institutions
    
    
    18,908,677
    
    
    
    6,855,197Federal funds sold and other short-term funds
    
    
    91,000
    
    
    
    14,477,088Cash and cash equivalents
    
    
    21,302,463
    
    
    
    23,818,528Securities available for sale
    
    
    10,214,322
    
    
    
    10,982,965Restricted stock
    
    
    728,400
    
    
    
    593,400Loans
    
    
    143,625,431
    
    
    
    121,628,057Allowance for loan losses
    
    
    (1,743,470
    )
    
    
    (1,605,766
    )Loans, net
    
    
    141,881,961
    
    
    
    120,022,291Premises and equipment, net
    
    
    1,006,081
    
    
    
    1,187,302Bank owned life insurance
    
    
    2,231,665
    
    
    
    1,142,580Foreclosed assets
    
    
    290,000
    
    
    
    371,000Accrued interest receivable and other assets
    
    
    1,457,347
    
    
    
    1,241,651$
    179,112,239
    
    
    $
    159,359,717LIABILITIES AND SHAREHOLDERS EQUITYDepositsNoninterest-bearing
    
    $
    16,942,194
    
    
    $
    17,080,851Interest-bearing
    
    
    139,775,662
    
    
    
    124,348,417Total deposits
    
    
    156,717,856
    
    
    
    141,429,268Other borrowings
    
    
    500,000
    
    
    
    Federal Home Loan Bank advances
    
    
    6,500,000
    
    
    
    3,500,000Accrued interest payable and other liabilities
    
    
    683,663
    
    
    
    501,476Total Liabilities
    
    
    164,401,519
    
    
    
    145,430,744Shareholders EquityCommon stock, no par value, $1 stated value
1,500,000 shares authorized, 583,330 and
579,059 shares issued and outstanding as of
December 31, 2008 and December 31, 2007
    
    
    583,330
    
    
    
    579,059Additional paid-in capital
    
    
    9,912,293
    
    
    
    9,702,632Retained earnings
    
    
    4,041,215
    
    
    
    3,587,907Accumulated other comprehensive income
    
    
    173,882
    
    
    
    59,375Total Shareholders Equity
    
    
    14,710,720
    
    
    
    13,928,973$
    179,112,239
    
    
    $
    159,359,717
   6.




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##### 



2008
    
    
    2007Interest and dividend incomeLoans, including fees
    
    $
    8,799,288
    
    
    $
    9,293,550Securities:Taxable
    
    
    329,558
    
    
    
    312,446Tax exempt
    
    
    172,923
    
    
    
    171,884Dividends on restricted stock
    
    
    34,299
    
    
    
    36,369Federal funds sold and other
short-term funds
    
    
    273,669
    
    
    
    1,050,1129,609,737
    
    
    
    10,864,361Interest expenseDeposits
    
    
    3,567,366
    
    
    
    5,280,842Borrowings
    
    
    203,089
    
    
    
    126,9503,770,455
    
    
    
    5,407,792Net interest income
    
    
    5,839,282
    
    
    
    5,456,569Provision for loan losses
    
    
    529,174
    
    
    
    116,202Net interest income after provision for loan losses
    
    
    5,310,108
    
    
    
    5,340,367Noninterest incomeService charges on deposit accounts
    
    
    177,413
    
    
    
    155,468Net gains on sales of loans
    
    
    1,446
    
    
    
    33,166Other
    
    
    210,572
    
    
    
    195,391389,431
    
    
    
    384,025Noninterest expenseSalaries and employee benefits
    
    
    2,456,586
    
    
    
    2,137,368Premises and equipment, net
    
    
    928,604
    
    
    
    876,856Data processing
    
    
    374,629
    
    
    
    342,525Professional fees
    
    
    213,435
    
    
    
    190,677Taxes other than income and payroll
    
    
    149,049
    
    
    
    134,584Directors fees
    
    
    144,000
    
    
    
    177,350FDIC insurance
    
    
    109,051
    
    
    
    94,959Marketing and advertising
    
    
    103,833
    
    
    
    123,118Community relations and contributions
    
    
    93,409
    
    
    
    90,346Supplies, printing and postage
    
    
    74,751
    
    
    
    77,376Other
    
    
    479,018
    
    
    
    329,0365,126,365
    
    
    
    4,574,195Income before income taxes
    
    
    573,174
    
    
    
    1,150,197Income tax expense
    
    
    119,866
    
    
    
    332,983Net income
    
    $
    453,308
    
    
    $
    817,214Earnings per share:Basic
    
    $
    0.78
    
    
    $
    1.42Diluted
    
    $
    0.77
    
    
    $
    1.36
   7.




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##### 



AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalCommon
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    ShareholdersStock
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    EquityBalance January 1, 2007
    
    $
    573,277
    
    
    $
    9,572,861
    
    
    $
    2,770,693
    
    
    $
    14,562
    
    
    $
    12,931,393Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    817,214
    
    
    
    
    
    
    
    817,214Change in unrealized gain on securities
available for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,813
    
    
    
    44,813Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    862,027Stock based compensation expense:Stock options recognized over
the vesting period
    
    
    
    
    
    
    1,696
    
    
    
    
    
    
    
    
    
    
    
    1,696Stock grant (500 shares)
    
    
    500
    
    
    
    15,250
    
    
    
    
    
    
    
    
    
    
    
    15,750Exercise of stock options (4,625 shares)
    
    
    4,625
    
    
    
    76,575
    
    
    
    
    
    
    
    
    
    
    
    81,200Tax benefit related to exercise of
stock options
    
    
    
    
    
    
    17,654
    
    
    
    
    
    
    
    
    
    
    
    17,654Common stock issued (657 shares)
under Employee Stock Purchase
Plan (ESPP)
    
    
    657
    
    
    
    18,596
    
    
    
    
    
    
    
    
    
    
    
    19,253Balance, December 31, 2007
    
    
    579,059
    
    
    
    9,702,632
    
    
    
    3,587,907
    
    
    
    59,375
    
    
    
    13,928,973Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    453,308
    
    
    
    
    
    
    
    453,308Change in unrealized gain on securities
available for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114,507
    
    
    
    114,507Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    567,815Stock based compensation expense:Stock options recognized over
the vesting period
    
    
    
    
    
    
    3,025
    
    
    
    
    
    
    
    
    
    
    
    3,025Modification of stock options
    
    
    
    
    
    
    131,851
    
    
    
    
    
    
    
    
    
    
    
    131,851Exercise of stock options (3,125 shares)
    
    
    3,125
    
    
    
    51,675
    
    
    
    
    
    
    
    
    
    
    
    54,800Tax benefit related to exercise of
stock options
    
    
    
    
    
    
    2,618
    
    
    
    
    
    
    
    
    
    
    
    2,618Common stock issued (1,146 shares)
under Employee Stock Purchase
Plan (ESPP)
    
    
    1,146
    
    
    
    20,492
    
    
    
    
    
    
    
    
    
    
    
    21,638Balance, December 31, 2008
    
    $
    583,330
    
    
    $
    9,912,293
    
    
    $
    4,041,215
    
    
    $
    173,882
    
    
    $
    14,710,720
   8.




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##### 



2008
    
    
    2007Cash flows from operating activitiesNet income
    
    $
    453,308
    
    
    $
    817,214Adjustments to reconcile net income to net cash
from operating activities:Provision for loan losses
    
    
    529,174
    
    
    
    116,202Depreciation
    
    
    187,944
    
    
    
    188,654Net amortization (accretion) of securities
    
    
    (12,722
    )
    
    
    (16,863
    )Stock-based compensation
    
    
    134,876
    
    
    
    17,446Loans originated for sale
    
    
    (97,500
    )
    
    
    (1,528,000
    )Proceeds from sales of loan originations
    
    
    98,946
    
    
    
    1,561,166Gains on sales of loans
    
    
    (1,446
    )
    
    
    (33,166
    )Loss on disposal of fixed assets
    
    
    59,295
    
    
    
    Loss (gain) on sale of other real estate owned
    
    
    4,381
    
    
    
    (2,285
    )Federal Home Loan Bank stock dividends
    
    
    (14,500
    )
    
    
    Increase in cash surrender value of bank owned
life insurance
    
    
    (89,085
    )
    
    
    (50,107
    )Net change in other assets and other liabilities
    
    
    (92,497
    )
    
    
    (102,782
    )Net cash from operating activities
    
    
    1,160,174
    
    
    
    967,479Cash flows from investing activitiesAvailable for sale securities:Purchases
    
    
    (2,020,806
    )
    
    
    (1,253,378
    )Maturities, repayments and calls
    
    
    2,975,666
    
    
    
    1,319,957Purchase of restricted stock
    
    
    (120,500
    )
    
    
    (24,600
    )Net (increase) decrease in interest-bearing deposits in other banks
    
    
    
    
    
    
    2,200,000Net (increase) decrease in loans
    
    
    (17,695,214
    )
    
    
    (11,904,749
    )Purchases of auto loan portfolio
    
    
    (4,693,630
    )
    
    
    Purchases of premises and equipment
    
    
    (66,018
    )
    
    
    (138,195
    )Purchase of bank owned life insurance
    
    
    (1,000,000
    )
    
    
    Proceeds from sale of other real estate owned
    
    
    76,619
    
    
    
    267,285Net cash from investing activities
    
    
    (22,543,883
    )
    
    
    (9,533,680
    )Cash flows from financing activitiesNet increase in deposits
    
    
    15,288,588
    
    
    
    14,170,145Net borrowings on line of credit
    
    
    500,000
    
    
    
    Net proceeds from FHLB advances
    
    
    3,000,000
    
    
    
    Proceeds from issuance of common stock under ESPP
    
    
    21,638
    
    
    
    19,253Proceeds and income tax benefit from exercise of stock options
    
    
    57,418
    
    
    
    98,854Net cash from financing activities
    
    
    18,867,644
    
    
    
    14,288,252Change in cash and cash equivalents
    
    
    (2,516,065
    )
    
    
    5,722,051Cash and cash equivalents at beginning of period
    
    
    23,818,528
    
    
    
    18,096,477Cash and cash equivalents at end of period
    
    $
    21,302,463
    
    
    $
    23,818,528Supplemental cash flow information:Interest paid
    
    $
    3,728,984
    
    
    $
    5,438,997Income taxes paid
    
    
    275,000
    
    
    
    395,000Supplemental disclosure of noncash investing activities:Non cash transfer from loans to other real estate owned
    
    $
    
    
    
    $
    327,283Non cash transfer from other real estate owned to other liabilities
    
    
    
    
    
    
    43,717
   9.




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NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Principles of Consolidation
 Nature of Operations
 Use of Estimates
 Cash and Cash Equivalents
 Securities
   Concentrations of Credit Risk
   10.




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NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Loans Held for Sale
 Loans
  Allowance for Loan Losses
  Transfers of Financial Assets
   11.




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NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Foreclosed Assets
 Premises and Equipment
 Restricted Stock
 Bank-Owned Life Insurance
 Long-Term Assets
 Loan Commitments and Related Financial Instruments
 Income Taxes
    12.




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NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Retirement Plans
 Earnings per Common Share
 Stock-Based Compensation
 Comprehensive Income
 Loss Contingencies
 Restrictions on Cash
  Dividend Restriction
   13.




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NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Fair Values of Financial Instruments
 Operating Segments
 Reclassifications
 Adoption of New Accounting Standards .
     14.




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NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
   Effect of Newly Issued But Not Yet Effective Accounting Standards
     15.




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##### 



NOTE 2  SECURITIES
  Gross
    
    
    GrossUnrealized
    
    
    UnrealizedFair Value
    
    
    Gains
    
    
    Losses2008U.S. Government-sponsored enterprises
    
    $
    516,032
    
    
    $
    16,032
    
    
    $
    Mortgage-backed
    
    
    5,378,328
    
    
    
    191,220
    
    
    
    (1,884
    )Municipal
    
    
    4,319,962
    
    
    
    75,183
    
    
    
    (17,093
    )$
    10,214,322
    
    
    $
    282,435
    
    
    $
    (18,977
    )2007U.S. Government-sponsored enterprises
    
    $
    2,505,914
    
    
    $
    6,412
    
    
    $
    (518
    )Mortgage-backed
    
    
    3,931,094
    
    
    
    54,803
    
    
    
    (5,483
    )Municipal
    
    
    4,545,957
    
    
    
    46,929
    
    
    
    (12,181
    )$
    10,982,965
    
    
    $
    108,144
    
    
    $
    (18,182
    )
  Due in one year or less
    
    $
    Due from one to five years
    
    
    349,998Due from five to ten years
    
    
    2,879,163Due from ten to fifteen years
    
    
    1,606,833Mortgage-backed
    
    
    5,378,328$
    10,214,322
   Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    LossDecember 31, 2008:Mortgage-backed
    
    $
    
    
    
    $
    
    
    
    $
    96,270
    
    
    $
    (1,884
    )
    
    $
    96,270
    
    
    $
    (1,884
    )Municipal
    
    
    208,969
    
    
    
    (15,114
    )
    
    
    629,768
    
    
    
    (1,979
    )
    
    
    838,737
    
    
    
    (17,093
    )Total
    
    $
    208,969
    
    
    $
    (15,114
    )
    
    $
    726,038
    
    
    $
    (3,863
    )
    
    $
    935,007
    
    
    $
    (18,977
    )
   16.




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##### 



NOTE 2  SECURITIES
 Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    LossDecember 31, 2007:U.S. Government-sponsored enterprises
    
    $
    249,482
    
    
    $
    (518
    )
    
    $
    
    
    
    $
    
    
    
    $
    249,482
    
    
    $
    (518
    )Mortgage-backed
    
    
    14,026
    
    
    
    (27
    )
    
    
    304,772
    
    
    
    (5,456
    )
    
    
    318,798
    
    
    
    (5,483
    )Municipal
    
    
    663,556
    
    
    
    (4,409
    )
    
    
    846,133
    
    
    
    (7,772
    )
    
    
    1,509,689
    
    
    
    (12,181
    )Total
    
    $
    927,064
    
    
    $
    (4,954
    )
    
    $
    1,150,905
    
    
    $
    (13,228
    )
    
    $
    2,077,969
    
    
    $
    (18,182
    )
   NOTE 3  LOANS
  2008
    
    
    2007Commercial business
    
    $
    40,538,308
    
    
    $
    35,391,508Commercial real estate
    
    
    83,252,004
    
    
    
    73,122,859Commercial construction
    
    
    3,917,279
    
    
    
    1,919,310Home equity
    
    
    7,734,516
    
    
    
    6,663,412Residential mortgage
and construction
    
    
    1,277,501
    
    
    
    1,513,902Consumer installment
    
    
    3,298,283
    
    
    
    2,985,560Purchased auto loans
    
    
    3,577,953
    
    
    
    Other
    
    
    29,587
    
    
    
    31,506$
    143,625,431
    
    
    $
    121,628,057
  2008
    
    
    2007Beginning balance
    
    $
    1,605,766
    
    
    $
    1,588,217Provision for loan losses
    
    
    529,174
    
    
    
    116,202Loans charged off
    
    
    (394,710
    )
    
    
    (203,668
    )Recoveries
    
    
    3,240
    
    
    
    105,015Ending balance
    
    $
    1,743,470
    
    
    $
    1,605,766
   17.




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##### 



NOTE 3  LOANS
   2008
    
    
    2007Year-end loans with no allocated
allowance for loan losses
    
    $
    1,108,795
    
    
    $
    720,356Year-end loans with allocated
allowance loan losses
    
    
    393,835
    
    
    
    $
    1,502,630
    
    
    $
    720,356Amount of the allowance for
loan losses allocated
    
    $
    69,766
    
    
    $
    Average of impaired loans
during the year
    
    $
    1,137,217
    
    
    $
    877,810
   Beginning balance
    
    $
    2,027,542New loans
    
    
    1,193,566Repayments
    
    
    (243,815
    )Ending balance
    
    $
    2,977,293
 NOTE 4  FAIR VALUE
        18.




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##### 



NOTE 4  FAIR VALUE
   Fair Value Measurementsat December 31, 2008 UsingQuoted Prices in
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    Inputs(Level One)
    
    
    (Level Two)
    
    
    (Level Three)Assets and liabilities measured at fair value
on a recurring basis:Available for sale securities
    
    
    
    
    
    $
    10,214,322
    
    
    
    Assets and liabilities measured at fair value
on a nonrecurring basis:Impaired loans
    
    
    
    
    
    
    
    
    
    $
    324,069
  NOTE 5  PREMISES AND EQUIPMENT, NET
  2008
    
    
    2007Leasehold improvements
    
    $
    1,181,817
    
    
    $
    1,281,280Furniture and equipment
    
    
    1,086,422
    
    
    
    1,020,4042,268,239
    
    
    
    2,301,684Less accumulated depreciation
    
    
    (1,262,158
    )
    
    
    (1,114,382
    )$
    1,006,081
    
    
    $
    1,187,302
   19.




---



##### 



NOTE 5  PREMISES AND EQUIPMENT, NET
    2009
    
    $
    410,9822010
    
    
    419,2022011
    
    
    427,5862012
    
    
    436,1372013
    
    
    399,597Thereafter
    
    
    135,276$
    2,228,780
 NOTE 6  DEPOSITS
  2008
    
    
    2007Interest-bearing demand
    
    $
    6,958,911
    
    
    $
    6,662,678Savings
    
    
    41,734,003
    
    
    
    50,365,334Money market
    
    
    25,148,086
    
    
    
    29,622,534Time under $100,000
    
    
    35,433,397
    
    
    
    22,604,561Time $100,000 and over
    
    
    30,501,265
    
    
    
    15,093,310$
    139,775,662
    
    
    $
    124,348,417
  2009
    
    $
    39,018,5982010
    
    
    14,385,4822011
    
    
    6,500,5262012
    
    
    1,593,0672013
    
    
    4,327,931Thereafter
    
    
    109,058$
    65,934,662
   20.




---



##### 



NOTE 6  DEPOSITS
    NOTE 7  FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
  Rate or
    
    
    AverageRange of Rates
    
    
    Rate
    
    
    2008
    
    
    2007Fixed-rate advances:Maturing March 2009
    
    
    2.39%-3.25
    %
    
    
    3.08
    %
    
    $
    3,100,000
    
    
    $
    2,500,000Maturing March 2010
    
    
    2.70
    %
    
    
    2.70
    %
    
    
    500,000
    
    
    
    Maturing April 2010
    
    
    4.57
    %
    
    
    4.57
    %
    
    
    1,000,000
    
    
    
    1,000,000Maturing March 2011
    
    
    3.06
    %
    
    
    3.06
    %
    
    
    400,000
    
    
    
    Maturing June 2011
    
    
    3.65
    %
    
    
    3.65
    %
    
    
    1,000,000
    
    
    
    Maturing March 2012
    
    
    3.50
    %
    
    
    3.50
    %
    
    
    300,000
    
    
    
    Maturing March 2013
    
    
    3.75
    %
    
    
    3.75
    %
    
    
    200,000
    
    
    
    $
    6,500,000
    
    
    $
    3,500,000
     21.




---



##### 



NOTE 7  FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
   NOTE 8  EMPLOYEE BENEFITS
        22.




---



##### 



NOTE 9  INCOME TAXES
  2008
    
    
    2007Current
    
    $
    223,149
    
    
    $
    432,444Deferred
    
    
    (103,283
    )
    
    
    (99,461
    )Total income tax expense
    
    $
    119,866
    
    
    $
    332,983
  2008
    
    
    2007Income tax expense at statutory rate
    
    $
    194,879
    
    
    $
    391,067Tax-exempt income
    
    
    (51,876
    )
    
    
    (47,607
    )Income from life insurance contracts
    
    
    (30,289
    )
    
    
    (16,875
    )Other, net
    
    
    7,152
    
    
    
    6,398Total income tax expense
    
    $
    119,866
    
    
    $
    332,983
  2008
    
    
    2007Deferred tax assets:Bad debt deduction
    
    $
    478,938
    
    
    $
    441,163Deferred loan fees and costs
    
    
    5,271
    
    
    
    Deferred compensation
    
    
    75,370
    
    
    
    57,761Accrued expenses
    
    
    1,020
    
    
    
    25,500Stock option expense
    
    
    47,431
    
    
    
    1,573608,030
    
    
    
    525,997Deferred tax liabilities:Deferred loan fees and costs
    
    
    
    
    
    
    (2,291
    )Unrealized gain on securities available for sale
    
    
    (89,576
    )
    
    
    (30,587
    )Prepaid expenses
    
    
    (35,866
    )
    
    
    (38,285
    )Depreciation
    
    
    (13,956
    )
    
    
    (35,426
    )FHLB stock dividends
    
    
    (27,710
    )
    
    
    (22,780
    )(167,108
    )
    
    
    (129,369
    )Net deferred tax asset
    
    $
    440,922
    
    
    $
    396,628
     23.




---



##### 



NOTE 10  STOCK OPTIONS
   Year Ended December 31, 2008Weighted AverageShares
    
    
    Exercise PriceOptions outstanding at beginning of year
    
    
    109,886
    
    
    $
    18.71Granted
    
    
    
    
    
    
    Exercised
    
    
    (3,125
    )
    
    
    17.54Forfeited
    
    
    (625
    )
    
    
    25.60Options outstanding at end of year
    
    
    106,136
    
    
    $
    18.70Options exercisable at year-end
    
    
    104,511
    
    
    $
    18.57
     24.




---



##### 



NOTE 10  STOCK OPTIONS
  Outstanding
    
    
    ExercisableWeightedAverage
    
    
    
    
    
    
    WeightedRemaining
    
    
    
    
    
    
    AverageContractual
    
    
    
    
    
    
    ExerciseRange of Exercise Prices
    
    Number
    
    
    Life (years)
    
    
    Number
    
    
    Price$16.00-$19.99
    
    
    79,366
    
    
    
    3.2
    
    
    
    79,366
    
    
    $
    16.76$20.00-$23.99
    
    
    12,812
    
    
    
    2.5
    
    
    
    12,812
    
    
    
    20.08$24.00-$31.99
    
    
    9,951
    
    
    
    5.4
    
    
    
    8,326
    
    
    
    27.09$32.00
    
    
    4,007
    
    
    
    4.8
    
    
    
    4,007
    
    
    
    32.00Outstanding at year-end
    
    
    106,136
    
    
    
    3.4
    
    
    
    104,511
    
    
    $
    18.57
   2008Risk-free interest rate
    
    2.84% to 3.09%Expected option life (years)
    

    5.0 to 6.3Expected stock price volatility
    
    14.7% to 16.5%Dividend yield

    
    0.00%
  2008
    
    
    2007Proceeds of options exercised
    
    $
    54,800
    
    
    $
    81,200Related tax benefit recognized
    
    
    2,618
    
    
    
    17,654Intrinsic value of options exercised
    
    
    7,700
    
    
    
    51,925
  Compensation Costs2009
    
    $
    2,4022010
    
    
    2,2632011
    
    
    1,5662012
    
    
    1,337Total
    
    $
    7,568
   25.




---



##### 



NOTE 11  LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
   2008
    
    
    2007Fixed
    
    
    Variable
    
    
    Fixed
    
    
    VariableRate
    
    
    Rate
    
    
    Rate
    
    
    RateCommitments to extend credit
(net of participations)
    
    $
    4,253,000
    
    
    $
    8,084,000
    
    
    $
    4,504,000
    
    
    $
    6,285,000Unused credit card, home equity
and overdraft lines of credit
    
    
    
    
    
    
    9,923,000
    
    
    
    
    
    
    
    9,376,000Unused commercial lines
of credit
    
    
    812,000
    
    
    
    13,087,000
    
    
    
    400,000
    
    
    
    17,121,000
       26.




---



##### 



NOTE 12  FAIR VALUES OF FINANCIAL INSTRUMENTS
  2008
    
    
    2007Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueCash and cash equivalents
    
    $
    21,302,463
    
    
    $
    21,302,000
    
    
    $
    23,818,528
    
    
    $
    23,819,000Securities available for sale
    
    
    10,214,322
    
    
    
    10,214,000
    
    
    
    10,982,965
    
    
    
    10,983,000Loans, net of allowance
    
    
    141,881,961
    
    
    
    141,702,000
    
    
    
    120,022,291
    
    
    
    120,715,000Accrued interest receivable
    
    
    490,783
    
    
    
    491,000
    
    
    
    631,436
    
    
    
    631,000Demand and savings deposits
    
    
    (90,783,194
    )
    
    
    (90,783,000
    )
    
    
    (103,731,397
    )
    
    
    (103,731,000
    )Time deposits
    
    
    (65,934,662
    )
    
    
    (66,530,000
    )
    
    
    (37,697,871
    )
    
    
    (37,848,000
    )Federal Home Loan Bank
advances
    
    
    (6,500,000
    )
    
    
    (6,632,000
    )
    
    
    (3,500,000
    )
    
    
    (3,524,000
    )Other borrowings
    
    
    (500,000
    )
    
    
    (500,000
    )
    
    
    
    
    
    
    Accrued interest payable
    
    
    (156,683
    )
    
    
    (157,000
    )
    
    
    (115,212
    )
    
    
    (115,000
    )
   NOTE 13  REGULATORY CAPITAL MATTERS
     27.




---



##### 



NOTE 13  REGULATORY CAPITAL MATTERS
   Minimum To BeWell-CapitalizedMinimum Required
    
    
    Under PromptWestern Reserve
    
    
    For Capital
    
    
    Corrective ActionBank
    
    
    Adequacy Purposes
    
    
    Provisions($ in thousands)
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio2008Total Capital to
risk-weighted assets
    
    $
    16,617
    
    
    
    11.0
    %
    
    $
    12,067
    
    
    
    8.0
    %
    
    $
    15,084
    
    
    
    10.0
    %Tier 1 (Core) Capital to
risk-weighted assets
    
    
    14,874
    
    
    
    9.9
    %
    
    
    6,034
    
    
    
    4.0
    %
    
    
    9,050
    
    
    
    6.0
    %Tier 1 (Core) Capital to
average assets
    
    
    14,874
    
    
    
    8.5
    %
    
    
    7,023
    
    
    
    4.0
    %
    
    
    8,779
    
    
    
    5.0
    %2007Total Capital to
risk-weighted assets
    
    $
    14,289
    
    
    
    10.9
    %
    
    $
    10,449
    
    
    
    8.0
    %
    
    $
    13,061
    
    
    
    10.0
    %Tier 1 (Core) Capital to
risk-weighted assets
    
    
    11,783
    
    
    
    9.0
    %
    
    
    5,224
    
    
    
    4.0
    %
    
    
    7,837
    
    
    
    6.0
    %Tier 1 (Core) Capital to
average assets
    
    
    11,783
    
    
    
    7.3
    %
    
    
    6,462
    
    
    
    4.0
    %
    
    
    8,077
    
    
    
    5.0
    %
   28.




---



##### 



NOTE 14  PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
  
 2008
    
    
    2007ASSETSCash and cash equivalents
    
    $
    97,729
    
    
    $
    544,053Investment in bank subsidiary
    
    
    15,047,947
    
    
    
    11,842,086Restricted stock
    
    
    25,000
    
    
    
    25,000Subordinated debt due from bank subsidiary
    
    
    
    
    
    
    1,500,000Other assets
    
    
    53,660
    
    
    
    19,034Total assets
    
    $
    15,224,336
    
    
    $
    13,930,173LIABILITIES AND SHAREHOLDERS EQUITYNote payable
    
    $
    500,000
    
    
    $
    Other liabilities
    
    
    13,616
    
    
    
    1,200Shareholders equity
    
    
    14,710,720
    
    
    
    13,928,973Total liabilities and shareholders equity
    
    $
    15,224,336
    
    
    $
    13,930,173
 
 2008
    
    
    2007Interest and dividend income
    
    $
    20,037
    
    
    $
    76,381Operating expenses
    
    
    228,127
    
    
    
    80,077Income (loss) before income tax and undistributed
income of bank subsidiary
    
    
    (208,090
    )
    
    
    (3,696
    )Income tax (expense) benefit
    
    
    70,044
    
    
    
    1,264Equity in undistributed income of bank subsidiary
    
    
    591,354
    
    
    
    819,646Net income
    
    $
    453,308
    
    
    $
    817,214
   29.




---



##### 



NOTE 14  PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
 
 2008
    
    
    2007Cash flow from operating activitiesNet income
    
    $
    453,308
    
    
    $
    817,214Stock based compensation
    
    
    134,876
    
    
    
    17,446Equity in undistributed
income of bank subsidiary
    
    
    (591,354
    )
    
    
    (819,646
    )Change in other assets and liabilities
    
    
    (22,210
    )
    
    
    (15,421
    )Net cash from operating activities
    
    
    (25,380
    )
    
    
    (407
    )Cash flows from investing activitiesNet decrease in loans
    
    
    1,500,000
    
    
    
    Investment in bank subsidiary
    
    
    (2,500,000
    )
    
    
    (300,000
    )Net cash from investing activities
    
    
    (1,000,000
    )
    
    
    (300,000
    )Cash flows from financing activitiesNet increase in borrowings
    
    
    500,000
    
    
    
    Proceeds and income tax benefit from
exercise of stock options
    
    
    57,418
    
    
    
    98,854Proceeds from issuance of common stock
under Employee Stock Purchase Plan
    
    
    21,638
    
    
    
    19,253Net cash from financing activities
    
    
    579,056
    
    
    
    118,107Change in cash and cash equivalents
    
    
    (446,324
    )
    
    
    (182,300
    )Cash and cash equivalents at beginning of year
    
    
    544,053
    
    
    
    726,353Cash and cash equivalents at end of year
    
    $
    97,729
    
    
    $
    544,053
 NOTE 15  OTHER COMPREHENSIVE INCOME
  2008
    
    
    2007Unrealized holding gains on available
for sale securities arising during the period
    
    $
    173,496
    
    
    $
    67,898Tax effect
    
    
    (58,989
    )
    
    
    (23,085
    )Net-of-tax amount
    
    $
    114,507
    
    
    $
    44,813
   30.




---



##### 



NOTE 16  EARNINGS PER SHARE
   2008
    
    
    2007BasicNet income
    
    $
    453,308
    
    
    $
    817,214Weighted average common shares outstanding
    
    
    582,230
    
    
    
    575,261Basic earnings per common share
    
    $
    0.78
    
    
    $
    1.42DilutedNet income
    
    $
    453,308
    
    
    $
    817,214Weighted average common shares outstanding
for basic earnings per common share
    
    
    582,230
    
    
    
    575,261Add: Dilutive effects of assumed exercises of stock options
    
    
    9,951
    
    
    
    25,571Average shares and dilutive potential common shares
    
    
    592,181
    
    
    
    600,832Diluted earnings per common share
    
    $
    0.77
    
    
    $
    1.36
  NOTE 17  PARTICIPATION IN THE TREASURY CAPITAL PURCHASE PROGRAM
 
  31.




---



##### 



($000s except per share data)
    
    2008
    
    
    2007Balance Sheet Data:Total assets
    
    $
    179,112
    
    
    $
    159,360Securities available for sale
    
    
    10,214
    
    
    
    10,983Total loans
    
    
    143,625
    
    
    
    121,628Allowance for loan losses
    
    
    1,743
    
    
    
    1,606Total deposits
    
    
    156,718
    
    
    
    141,429Shareholders equity
    
    
    14,711
    
    
    
    13,929Income Statement Data:Total interest income
    
    $
    9,610
    
    
    $
    10,864Total interest expense
    
    
    3,771
    
    
    
    5,408Net interest income
    
    
    5,839
    
    
    
    5,456Provision (credit) for loan losses
    
    
    529
    
    
    
    116Net interest income after provision (credit) for loan losses
    
    
    5,310
    
    
    
    5,340Noninterest income
    
    
    389
    
    
    
    384Noninterest expense
    
    
    5,126
    
    
    
    4,574Income before income tax
    
    
    573
    
    
    
    1,150Income tax expense
    
    
    120
    
    
    
    333Net income
    
    $
    453
    
    
    $
    817Per Share Data:Basic income per common share
    
    $
    0.78
    
    
    $
    1.42Diluted income per common share
    
    
    0.77
    
    
    
    1.36Book value per share at year-end
    
    
    25.22
    
    
    
    24.05Cash dividends per share
    
    
    n/a
    
    
    
    n/aAverage shares used in basic income per share calculations
    
    
    582,230
    
    
    
    575,261Average shares used in diluted income per share calculations
    
    
    592,181
    
    
    
    600,832Operating Ratios:Total loans to total deposits
    
    
    91.65
    %
    
    
    86.00
    %Total shareholders equity to total assets
    
    
    8.21
    %
    
    
    8.74
    %Average shareholders equity to average assets
    
    
    8.65
    %
    
    
    8.70
    %Return on average equity
    
    
    3.17
    %
    
    
    6.12
    %Return on average assets
    
    
    0.27
    %
    
    
    0.53
    %Dividend payout ratio
    
    
    n/a
    
    
    
    n/aAllowance for loan losses to total loans
    
    
    1.21
    %
    
    
    1.32
    %Average assets
    
    $
    165,171
    
    
    $
    153,374Average shareholders equity
    
    
    14,294
    
    
    
    13,345
  32.




---



##### 



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS
 OVERVIEW
       FINANCIAL CONDITION
   33.




---



##### 



SECURITIES
  LOANS
      DEPOSITS AND OTHER FUNDING SOURCES
  Percent ofAmount
    
    
    PortfolioTotal Deposits at December 31, 2008:Noninterest bearing demand deposits
    
    $
    16,942,194
    
    
    
    10.8
    %Interest-bearing NOW accounts
    
    
    6,958,911
    
    
    
    4.4
    %Savings accounts and money market accounts
    
    
    66,882,089
    
    
    
    42.7
    %Certificates of deposit (CDs)
    
    
    57,976,747
    
    
    
    37.0
    %Individual Retirement Arrangements (IRAs)
    
    
    7,957,915
    
    
    
    5.1
    %Total
    
    $
    156,717,856
    
    
    
    100.00
    %
  34.




---



##### 



RESULTS OF OPERATIONS
     NET INTEREST INCOME
   35.




---



##### 



Year ended
    
    
    Year endedDecember 31, 2008
    
    
    December 31, 2007Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average($ thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateInterest-earning assets:Federal funds sold and
other short-term funds
    
    $
    11,962
    
    
    $
    274
    
    
    
    2.29
    %
    
    $
    21,032
    
    
    $
    1,050
    
    
    
    4.99
    %Securities  taxable
    
    
    6,524
    
    
    
    330
    
    
    
    5.09
    
    
    
    6,001
    
    
    
    312
    
    
    
    5.17Securities  tax exempt
    
    
    4,499
    
    
    
    241
    
    
    
    5.39
    
    
    
    4,430
    
    
    
    229
    
    
    
    5.15Restricted stock
    
    
    648
    
    
    
    34
    
    
    
    5.29
    
    
    
    587
    
    
    
    36
    
    
    
    6.20Loans
    
    
    135,848
    
    
    
    8,799
    
    
    
    6.48
    
    
    
    116,806
    
    
    
    9,294
    
    
    
    7.96Total interest-earning assets
    
    
    159,481
    
    
    
    9,678
    
    
    
    6.07
    
    
    
    148,856
    
    
    
    10,921
    
    
    
    7.33Noninterest earning assets
    
    
    5,690
    
    
    
    
    
    
    
    
    
    
    
    4,518Total Assets
    
    $
    165,171
    
    
    
    
    
    
    
    
    
    
    $
    153,374Interest-bearing liabilitiesTransaction accounts (NOW)
    
    $
    7,010
    
    
    
    69
    
    
    
    0.99
    
    
    $
    6,435
    
    
    
    64
    
    
    
    1.00Market rate savings accounts
    
    
    76,520
    
    
    
    1,892
    
    
    
    2.47
    
    
    
    73,090
    
    
    
    3,386
    
    
    
    4.63Time deposits
    
    
    43,999
    
    
    
    1,606
    
    
    
    3.65
    
    
    
    40,857
    
    
    
    1,831
    
    
    
    4.48Federal Home Loan Bank advances and other borrowings
    
    
    6,006
    
    
    
    203
    
    
    
    3.38
    
    
    
    3,500
    
    
    
    127
    
    
    
    3.63Total interest-bearing liabilities
    
    
    133,535
    
    
    
    3,770
    
    
    
    2.82
    
    
    
    123,882
    
    
    
    5,408
    
    
    
    4.36Noninterest bearing liabilities
    
    
    17,342
    
    
    
    
    
    
    
    
    
    
    
    16,147Shareholders equity
    
    
    14,294
    
    
    
    
    
    
    
    
    
    
    
    13,345Total Liabilities and
Shareholders Equity
    
    $
    165,171
    
    
    
    
    
    
    
    
    
    
    $
    153,374Net interest income
    
    
    
    
    
    
    5,908
    
    
    
    
    
    
    
    
    
    
    
    5,513Tax equivalent adjustment
    
    
    
    
    
    
    (69
    )
    
    
    
    
    
    
    
    
    
    
    (57
    )Net interest income per financial
statements
    
    
    
    
    
    $
    5,839
    
    
    
    
    
    
    
    
    
    
    $
    5,456Net interest margin
(Net yield on average earning assets)
    
    
    
    
    
    
    
    
    
    
    3.71
    %
    
    
    
    
    
    
    
    
    
    
    3.70
    %
  36.




---



##### 



Summary of Changes in Net Interest Income
 2008 vs. 2007
    
    
    2007 vs. 2006Increase (Decrease) Due to
    
    
    Increase (Decrease) Due to($ thousands)
    
    Volume
    
    
    Rate
    
    
    Net
    
    
    Volume
    
    
    Rate
    
    
    NetInterest income:Federal funds sold and other
short-term funds
    
    $
    (329
    )
    
    $
    (447
    )
    
    $
    (776
    )
    
    $
    474
    
    
    $
    (14
    )
    
    $
    460Securities available-for-sale-
Taxable
    
    
    23
    
    
    
    (5
    )
    
    
    18
    
    
    
    69
    
    
    
    35
    
    
    
    104Securities available-for-sale-tax-exempt
    
    
    1
    
    
    
    11
    
    
    
    12
    
    
    
    151
    
    
    
    2
    
    
    
    153Restricted stock
    
    
    4
    
    
    
    (6
    )
    
    
    (2
    )
    
    
    2
    
    
    
    2
    
    
    
    4Loans receivable
    
    
    1,287
    
    
    
    (1,782
    )
    
    
    (495
    )
    
    
    360
    
    
    
    (11
    )
    
    
    349Total interest-earning assets
    
    
    986
    
    
    
    (2,229
    )
    
    
    (1,243
    )
    
    
    1,056
    
    
    
    14
    
    
    
    1,070Interest expense:Transaction accounts (NOW)
    
    
    (6
    )
    
    
    1
    
    
    
    (5
    )
    
    
    6
    
    
    
    
    
    
    
    6Market rate savings accounts
    
    
    (151
    )
    
    
    1,645
    
    
    
    1,494
    
    
    
    (925
    )
    
    
    (184
    )
    
    
    (1,109
    )Time deposits
    
    
    (129
    )
    
    
    354
    
    
    
    225
    
    
    
    157
    
    
    
    (185
    )
    
    
    (28
    )FHLB borrowings
    
    
    (85
    )
    
    
    9
    
    
    
    (76
    )
    
    
    
    
    
    
    
    
    
    
    Total interest-bearing
liabilities
    
    
    (371
    )
    
    
    2,009
    
    
    
    1,638
    
    
    
    (762
    )
    
    
    (369
    )
    
    
    (1,131
    )Change in net interest income
    
    $
    615
    
    
    $
    (220
    )
    
    $
    395
    
    
    $
    294
    
    
    $
    (355
    )
    
    $
    (61
    )
    37.




---



##### 



NONINTEREST INCOME
     NONINTEREST EXPENSE
   38.




---



##### 



2008
    
    
    2007Reversal of prior year interest income on non-accrual loans
    
    $
    77,950
    
    
    $
    Collection expenses
    
    
    72,559
    
    
    
    95,111Loss on disposal of fixed assets
    
    
    59,295
    
    
    
    Loan expenses
    
    
    49,636
    
    
    
    42,281Travel and entertainment
    
    
    47,199
    
    
    
    46,522OREO expense
    
    
    43,695
    
    
    
    38,645Insurance
    
    
    37,026
    
    
    
    33,941Telephone
    
    
    25,480
    
    
    
    25,834Other
    
    
    66,178
    
    
    
    46,702Total
    
    $
    479,018
    
    
    $
    329,036
  PROVISION AND THE ALLOWANCE FOR LOAN LOSSES
    39.




---



##### 



LIQUIDITY
  .
 INTEREST RATE SENSITIVITY/GAP
      40.




---



##### 



CAPITAL RESOURCES
         41.




---



##### 



CRITICAL ACCOUNTING POLICIES
  CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET ARRANGEMENTS
   Note(Dollars in thousands)
    
    Reference
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    ThereafterDeposits without maturity
    
    
    6
    
    
    $
    90,783Time deposits
    
    
    6
    
    
    
    39,019
    
    
    $
    14,385
    
    
    $
    6,501
    
    
    $
    1,593
    
    
    $
    4,328
    
    
    $
    109FHLB advances and
other
borrowings
    
    
    7
    
    
    
    3,600
    
    
    
    1,500
    
    
    
    1,400
    
    
    
    300
    
    
    
    200
    
    
    
    Operating leases
    
    
    5
    
    
    
    411
    
    
    
    419
    
    
    
    427
    
    
    
    436
    
    
    
    399
    
    
    
    135
    42.




---



##### 



IMPACT OF INFLATION AND CHANGING PRICES
  FORWARD LOOKING STATEMENTS
   43.




---



##### 



EXECUTIVE OFFICERSWESTERN RESERVE BANCORP, INC.
 
 EXECUTIVE OFFICERSWESTERN RESERVE BANK
 
 TRANSFER AGENT, REGISTRAR & DIVIDEND AGENT
 
 STOCK INFORMATION
  ANNUAL REPORT ON FORM 10-K
 www.sec.gov www.westernreservebank.com
 ANNUAL MEETING




---



##### 



BOARD OF DIRECTORS (1)
 P.M. Jones
    
    Edward J. McKeonChairman
    
    President and Chief Executive OfficerWestern Reserve Bancorp, Inc. and
    
    Western Reserve Bancorp, Inc. andWestern Reserve Bank
    
    Western Reserve BankMedina, Ohio
    
    Medina, OhioRoland H. Bauer
    
    Rory H. ONeilPresident and Chief Executive Officer
    
    PresidentThe Cypress Companies
    
    Quetzal Corp.Akron, Ohio
    
    Westfield Center, OhioBijay K. Jayaswal, M.D.
    
    Michael R. RosePhysician, Cardiology
    
    PresidentMedina, Ohio
    
    Washington Properties, Inc.Medina, OhioRay E. Laribee
    
    Glenn M. SmithAttorney
    
    Retired PresidentLaribee & Hertrick
    
    Smith Bros., Inc.Medina, Ohio
    
    Medina, OhioC. Richard Lynham
    
    Thomas A. TubbsPresident and Owner
    
    Bank Management ConsultantHarbor Castings, Inc.
    
    EBSNorth Canton, Ohio
    
    Birmingham, AlabamaR. Hal NicholsChairman and ManagerAustin Associates, LLCToledo, Ohio
 (1)
    
    All are Directors of Western Reserve Bancorp, Inc. and Western Reserve Bank. BRECKSVILLE ADVISORY BOARD
 Victoria J. Burns
    
    Brendan RoseReal Estate Broker, RE/MAX Classic
    
    C.F.O., Industrial First Inc.Joe Carollo
    
    Greg SkaljacPresident, Jani-King of Cleveland
    
    Vice President, Luce, Smith & Scott Inc.Member, Brecksville City CouncilLouis N. Carouse, Jr.
    
    Michael R. TorchiaMember, Brecksville City Council
    
    President & Owner, The Realty Store, LLCSteve Karas, Retired