##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
 þ
    
    Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarter ended June 30, 2006
 o
    
    Transition Report Under Section 13 or 15(d) of the Exchange Act
 Commission file number 000-51264
 WESTERN RESERVE BANCORP, INC.
  Ohio
    
    31-1566623(State or other jurisdiction of
incorporation or organization)
    
    (IRS Employer
Identification No.)
 4015 Medina Road, Suite 100, P.O. Box 585, Medina, Ohio 44256
 Issuers telephone number, including area code
 þ o
 o þ
  Common Stock, no par value, $1.00 stated value
 (number of shares outstanding as of August 3, 2006)
 o þ




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
FORM 10-QSB
Quarter ended June 30, 2006
 PART IFinancial InformationPageITEM 1 FINANCIAL STATEMENTSConsolidated Balance Sheets as of June 30, 2006
and December 31, 2005
    
    
    3Consolidated Statements of Income for the three months and
six months ended June 30, 2006 and 2005
    
    
    4Consolidated Statements of Comprehensive Income for the three
months
and six months ended June 30, 2006 and 2005
    
    
    5Consolidated Statements of Cash Flows for the three months and
six months ended June 30, 2006 and 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    7ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    19ITEM 3 CONTROLS AND PROCEDURES
    
    
    35PART IIOther Information
    
    
    36SIGNATURES
    
    
    39EX-4EX-31.1EX-31.2EX-32.1EX-32.2
 Page 2




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##### Table of Contents



(Unaudited)June 30,
    
    
    December 31,2006
    
    
    2005AssetsCash and due from financial institutions
    
    $
    2,562,877
    
    
    $
    2,228,258Federal funds sold and other short-term funds
    
    
    13,784,799
    
    
    
    5,114,748Cash and cash equivalents
    
    
    16,347,676
    
    
    
    7,343,006Securities available for sale
    
    
    4,031,855
    
    
    
    7,301,377Loans held for sale
    
    
    306,012
    
    
    
    Loans
    
    
    112,956,595
    
    
    
    111,189,355Allowance for loan losses
    
    
    (1,603,649
    )
    
    
    (1,541,654
    )Loans, net
    
    
    111,352,946
    
    
    
    109,647,701Restricted stock
    
    
    559,500
    
    
    
    537,200Premises and equipment, net
    
    
    1,227,720
    
    
    
    1,303,921Accrued interest receivable and other assets
    
    
    1,963,180
    
    
    
    1,650,798Total Assets
    
    $
    135,788,889
    
    
    $
    127,784,003Liabilities and Shareholders EquityDepositsNoninterest-bearing
    
    $
    14,633,966
    
    
    $
    12,899,265Interest-bearing
    
    
    105,104,153
    
    
    
    99,388,145Total deposits
    
    
    119,738,119
    
    
    
    112,287,410Federal Home Loan Bank advances
    
    
    3,500,000
    
    
    
    3,500,000Accrued interest payable and other liabilities
    
    
    373,885
    
    
    
    398,254Total Liabilities
    
    
    123,612,004
    
    
    
    116,185,664Shareholders EquityCommon
stock, without par value, $1 stated value: 750,000 shares authorized; 457,644 and
457,331 shares issued and outstanding as of
June 30, 2006 and December 31, 2005
    
    
    457,644
    
    
    
    457,331Additional paid-in capital
    
    
    9,539,567
    
    
    
    9,528,376Retained earnings
    
    
    2,226,281
    
    
    
    1,639,369Accumulated other comprehensive income (loss)
    
    
    (46,607
    )
    
    
    (26,737
    )Total Shareholders Equity
    
    
    12,176,885
    
    
    
    11,598,339Total Liabilities and Shareholders Equity
    
    $
    135,788,889
    
    
    $
    127,784,003
  Page 3




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Three months ended June 30,
    
    
    Six months ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Interest and dividend incomeLoans, including fees
    
    $
    2,249,593
    
    
    $
    1,864,817
    
    
    $
    4,372,866
    
    
    $
    3,518,177Securities
    
    
    73,463
    
    
    
    12,525
    
    
    
    148,914
    
    
    
    24,489Dividends on restricted stock
    
    
    7,714
    
    
    
    6,401
    
    
    
    15,425
    
    
    
    12,470Federal funds sold and other
short-term funds
    
    
    91,012
    
    
    
    36,695
    
    
    
    150,361
    
    
    
    63,8652,421,782
    
    
    
    1,920,438
    
    
    
    4,687,566
    
    
    
    3,619,001Interest expenseDeposits
    
    
    985,841
    
    
    
    671,272
    
    
    
    1,870,644
    
    
    
    1,233,416Borrowings
    
    
    31,650
    
    
    
    27,644
    
    
    
    62,953
    
    
    
    47,6781,017,491
    
    
    
    698,916
    
    
    
    1,933,597
    
    
    
    1,281,094Net interest income
    
    
    1,404,291
    
    
    
    1,221,522
    
    
    
    2,753,969
    
    
    
    2,337,907Provision (credit) for loan losses
    
    
    69,820
    
    
    
    (85,300
    )
    
    
    (60,780
    )
    
    
    (56,400
    )Net interest income after provision
(credit) for loan losses
    
    
    1,334,471
    
    
    
    1,306,822
    
    
    
    2,814,749
    
    
    
    2,394,307Noninterest incomeService charges on deposit accounts
    
    
    45,956
    
    
    
    33,270
    
    
    
    88,186
    
    
    
    61,821Net gains on sales of loans
    
    
    
    
    
    
    50,782
    
    
    
    
    
    
    
    128,621Other
    
    
    57,074
    
    
    
    31,772
    
    
    
    96,293
    
    
    
    73,078103,030
    
    
    
    115,824
    
    
    
    184,479
    
    
    
    263,520Noninterest expenseSalaries and employee benefits
    
    
    522,233
    
    
    
    437,735
    
    
    
    1,058,447
    
    
    
    922,539Premises and equipment, net
    
    
    206,660
    
    
    
    200,222
    
    
    
    406,817
    
    
    
    394,401Data processing
    
    
    82,102
    
    
    
    73,555
    
    
    
    165,030
    
    
    
    147,822Professional fees
    
    
    66,612
    
    
    
    90,350
    
    
    
    139,667
    
    
    
    170,181Taxes other than income and payroll
    
    
    29,924
    
    
    
    23,949
    
    
    
    62,370
    
    
    
    50,258Community and shareholder relations
and contributions
    
    
    26,793
    
    
    
    24,629
    
    
    
    53,595
    
    
    
    40,390Supplies, printing and postage
    
    
    18,697
    
    
    
    19,592
    
    
    
    37,209
    
    
    
    41,274Other
    
    
    114,015
    
    
    
    98,143
    
    
    
    193,489
    
    
    
    172,5571,067,036
    
    
    
    968,175
    
    
    
    2,116,624
    
    
    
    1,939,422Income before income taxes
    
    
    370,465
    
    
    
    454,471
    
    
    
    882,604
    
    
    
    718,405Income tax expense
    
    
    123,091
    
    
    
    152,466
    
    
    
    295,692
    
    
    
    241,239Net income
    
    $
    247,374
    
    
    $
    302,005
    
    
    $
    586,912
    
    
    $
    477,166Average shares outstanding (basic)
    
    
    457,519
    
    
    
    456,621
    
    
    
    457,427
    
    
    
    456,151Average shares outstanding (diluted)
    
    
    475,455
    
    
    
    471,808
    
    
    
    474,738
    
    
    
    471,380Basic income per share
    
    $
    0.54
    
    
    $
    0.66
    
    
    $
    1.28
    
    
    $
    1.05Diluted income per share
    
    $
    0.52
    
    
    $
    0.64
    
    
    $
    1.24
    
    
    $
    1.01
  Page 4




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Three months ended June 30,
    
    
    Six months ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    247,374
    
    
    $
    302,005
    
    
    $
    586,912
    
    
    $
    477,166Other comprehensive income (loss), net of tax:Unrealized gains/(losses) on securities
arising during the period
    
    
    (11,297
    )
    
    
    10,394
    
    
    
    (19,870
    )
    
    
    (748
    )Comprehensive income
    
    $
    236,077
    
    
    $
    312,399
    
    
    $
    567,042
    
    
    $
    476,418
  Page 5




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##### Table of Contents



Six months ended June 30,2006
    
    
    2005Cash flows from operating activitiesNet income
    
    $
    586,912
    
    
    $
    477,166Adjustments to reconcile net income
to net cash from operating activities:Provision (credit) for loan losses
    
    
    (60,780
    )
    
    
    (56,400
    )Depreciation
    
    
    85,050
    
    
    
    88,106Net amortization (accretion) of securities
    
    
    (101,091
    )
    
    
    3,109Stock-based compensation
    
    
    1,466
    
    
    
    Loans originated for sale
    
    
    
    
    
    
    (1,498,376
    )Proceeds from sales of loan originations
    
    
    
    
    
    
    1,626,997Gains on sales of loans
    
    
    
    
    
    
    (128,621
    )Federal Home Loan Bank stock dividends
    
    
    (8,500
    )
    
    
    (6,400
    )Net change in:Interest receivable
    
    
    (13,760
    )
    
    
    (32,397
    )Interest payable
    
    
    (44,196
    )
    
    
    29,920Other assets
    
    
    (23,386
    )
    
    
    336,119Other liabilities
    
    
    (115,173
    )
    
    
    891,108Net cash from operating activities
    
    
    306,542
    
    
    
    1,730,331Cash flows from investing activitiesAvailable for sale securities:Purchases
    
    
    (2,001,256
    )
    
    
    (958,171
    )Maturities, repayments and calls
    
    
    5,341,763
    
    
    
    564,999Purchase of Federal Home Loan Bank stock
    
    
    (13,800
    )
    
    
    Net increase in loans
    
    
    (2,080,477
    )
    
    
    (7,480,487
    )Purchases of premises and equipment
    
    
    (8,849
    )
    
    
    (90,482
    )Net cash from investing activities
    
    
    1,237,381
    
    
    
    (7,964,141
    )Cash flows from financing activitiesNet increase in deposits
    
    
    7,450,709
    
    
    
    6,708,681Proceeds from Federal Home Loan Bank advances
    
    
    
    
    
    
    1,000,000Proceeds from issuance of common stock
under Employee Stock Purchase Plan
    
    
    10,038
    
    
    
    9,383Proceeds from exercise of stock options
    
    
    
    
    
    
    24,000Net cash from financing activities
    
    
    7,460,747
    
    
    
    7,742,064Change in cash and cash equivalents
    
    
    9,004,670
    
    
    
    1,508,254Cash and cash equivalents at beginning of period
    
    
    7,343,006
    
    
    
    6,936,119Cash and cash equivalents at end of period
    
    $
    16,347,676
    
    
    $
    8,444,373Supplemental cash flow information:Interest paid
    
    $
    1,977,793
    
    
    $
    1,231,294Income taxes paid
    
    
    425,000
    
    
    
    203,000Supplemental disclosure of noncash activities:Investing Activities:Non cash transfer from loans to loans originated for sale
    
    $
    306,012
    
    
    $
    Non cash transfer from loans to other real estate owned
    
    
    130,000
    
    
    
    Acquisition of real estate via account payable
    
    
    135,000
    
    
    
    Non cash transfer from loans originated for sale to loans
    
    
    
    
    
    
    250,835
  Page 6




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WESTERN RESERVE BANCORP, INC.
 
 NOTES TO FINANCIAL STATEMENTS
 June 30, 2006
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
       Page 7




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WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     Page 8




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WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    Three months ended June 30, 2006Using
    
    
    SFASPrevious
    
    
    123(R)
    
    
    AsAccounting
    
    
    Adjustments
    
    
    ReportedIncome before income taxes
    
    $
    371,198
    
    
    $
    (733
    )
    
    $
    370,465Income taxes
    
    
    123,340
    
    
    
    249
    
    
    
    123,091Net income
    
    $
    247,858
    
    
    $
    (484
    )
    
    $
    247,374Basic earnings per share
    
    $
    0.54
    
    
    $
    
    
    
    $
    0.54Diluted earnings per share
    
    $
    0.52
    
    
    $
    
    
    
    $
    0.52
 Page 9




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WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Six months ended June 30, 2006Using
    
    
    SFASPrevious
    
    
    123(R)
    
    
    AsAccounting
    
    
    Adjustments
    
    
    ReportedIncome before income taxes
    
    $
    884,070
    
    
    $
    (1,466
    )
    
    $
    882,604Income taxes
    
    
    296,190
    
    
    
    498
    
    
    
    295,692Net income
    
    $
    587,880
    
    
    $
    (968
    )
    
    $
    586,912Basic earnings per share
    
    $
    1.29
    
    
    $
    (.01
    )
    
    $
    1.28Diluted earnings per share
    
    $
    1.24
    
    
    $
    
    
    
    $
    1.24
  Three months ended June 30, 2005Pro Forma asAs
    
    
    Pro Forma
    
    
    if underReported
    
    
    Adjustments
    
    

SFAS
123(R)Income before income taxes
    
    $
    454,471
    
    
    $
    (857
    )
    
    $
    453,614Income taxes
    
    
    152,466
    
    
    
    291
    
    
    
    152,175Net income
    
    $
    302,005
    
    
    $
    (566
    )
    
    $
    301,439Basic earnings per share
    
    $
    0.66
    
    
    $
    
    
    
    $
    0.66Diluted earnings per share
    
    $
    0.64
    
    
    $
    
    
    
    $
    0.64
 Page 10




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WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Six months ended June 30, 2005Pro Forma asAs
    
    
    Pro Forma
    
    
    if underReported
    
    
    Adjustments
    
    
    SFAS 123(R)Income before income taxes
    
    $
    718,405
    
    
    $
    (1,577
    )
    
    $
    716,828Income taxes
    
    
    241,239
    
    
    
    536
    
    
    
    240,703Net income
    
    $
    477,166
    
    
    $
    (1,041
    )
    
    $
    476,125Basic earnings per share
    
    $
    1.05
    
    
    $
    
    
    
    $
    1.05Diluted earnings per share
    
    $
    1.01
    
    
    $
    
    
    
    $
    1.01
   Six months endedJune 30, 2006Total options outstandingWeighted
    
    
    WeightedAverage
    
    
    AverageExercise
    
    
    FairShares
    
    
    Price
    
    
    ValueOptions outstanding, beginning of
period
    
    
    91,312
    
    
    $
    23.15
    
    
    $
    5.74Forfeited
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    
    
    
    
    Options outstanding, end of period
    
    
    91,312
    
    
    $
    23.15
    
    
    $
    5.74Options exercisable, end of period
    
    
    90,374
    
    
    $
    23.09
    
    
    $
    5.73
 Page 11




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WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Six months endedJune 30, 2006WeightedAverageShares
    
    Fair ValueUnvested options, beginning of period
    
    
    1,250
    
    
    $
    7.17Vested
    
    
    (312
    )
    
    
    5.98Granted
    
    
    
    
    
    
    Unvested options, end of period
    
    
    938
    
    
    $
    7.57
  Outstanding
    
    
    ExercisableWeighted
    
    
    
    
    
    
    WeightedAverage Remaining
    
    
    
    
    
    
    AverageContractual Life
    
    
    
    
    
    
    ExerciseRange of Exercise Prices
    
    Number
    
    
    (in years)
    
    
    Number
    
    
    Price$20.00-$24.99
    
    
    70,694
    
    
    
    3.1
    
    
    
    70,694
    
    
    $
    21.04$25.00-$29.99
    
    
    10,250
    
    
    
    5.0
    
    
    
    10,000
    
    
    
    25.08$30.00-$39.99
    
    
    7,162
    
    
    
    3.1
    
    
    
    6,474
    
    
    
    33.96$40.00
    
    
    3,206
    
    
    
    2.3
    
    
    
    3,206
    
    
    
    40.00Outstanding at period
end
    
    
    91,312
    
    
    
    3.3
    
    
    
    90,374
    
    
    $
    23.09
  Page 12




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WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  2005Risk-free interest rate
    
    
    4.27
    %Expected option life (years)
    
    
    7Expected stock price volatility
    
    
    7.09
    %Dividend yield
    
    
    0.00
    %
   Six months endedJune 30,2006
    
    2005Proceeds of options exercised
    
    $
    
    
    
    $
    24,000Related tax benefit recognized
    
    
    
    
    
    
    3,060Intrinsic value of options exercised
    
    
    
    
    
    
    9,000
  CompensationCostsRemainder of 2006
    
    $
    1,4662007
    
    
    1,4582008
    
    
    1,1862009
    
    
    8362010
    
    
    697Total
    
    $
    5,643
 Page 13




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WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Three months ended June 30,
    
    
    Six months ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Net income
    
    $
    247,374
    
    
    $
    302,005
    
    
    $
    586,912
    
    
    $
    477,166Denominator:Denominator for basic
earnings per share
weighted average shares
    
    
    457,519
    
    
    
    456,621
    
    
    
    457,427
    
    
    
    456,151Effect of dilutive securities:Nonqualified stock options
    
    
    17,936
    
    
    
    15,187
    
    
    
    17,311
    
    
    
    15,229Denominator for diluted
earnings per share
    
    
    475,455
    
    
    
    471,808
    
    
    
    474,738
    
    
    
    471,380Basic earnings per share
    
    $
    0.54
    
    
    $
    0.66
    
    
    $
    1.28
    
    
    $
    1.05Diluted earnings per share
    
    $
    0.52
    
    
    $
    0.64
    
    
    $
    1.24
    
    
    $
    1.01
   Accounting Changes and Error Correctionsa replacement of
APB Opinion No. 20 and FASB Statement No. 3.
 Page 14




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Accounting for Certain Hybrid Financial Instrumentsan amendment of
FASB Statements No. 133 and 140.
 Accounting for Servicing of Financial Assets  an
amendment of FASB Statement No. 140,
   Page 15




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WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
 NOTE 2  LOANS
  June 30,
    
    
    December 31,2006
    
    
    2005Commercial real estate
    
    $
    66,957,152
    
    
    $
    65,367,133Commercial business
    
    
    11,228,669
    
    
    
    11,401,834Commercial lines of credit
    
    
    18,506,399
    
    
    
    16,991,017Commercial construction
    
    
    3,473,464
    
    
    
    4,465,089Home equity lines of credit
    
    
    9,482,801
    
    
    
    9,589,660Residential mortgage
and construction
    
    
    960,863
    
    
    
    917,565Consumer installment
    
    
    2,320,770
    
    
    
    2,108,230Credit card and other
    
    
    26,477
    
    
    
    348,827$
    112,956,595
    
    
    $
    111,189,355
  Three months ended June 30,
    
    
    Six months ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Beginning balance
    
    $
    1,606,054
    
    
    $
    1,630,833
    
    
    $
    1,541,654
    
    
    $
    1,605,933Loans charged off
    
    
    (82,225
    )
    
    
    
    
    
    
    (82,225
    )
    
    
    (4,000
    )Recoveries
    
    
    10,000
    
    
    
    1,881
    
    
    
    205,000
    
    
    
    1,881Provision
(credit) for loan
losses
    
    
    69,820
    
    
    
    (85,300
    )
    
    
    (60,780
    )
    
    
    (56,400
    )Ending balance
    
    $
    1,603,649
    
    
    $
    1,547,414
    
    
    $
    1,603,649
    
    
    $
    1,547,414
  Page 16




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
 NOTE 3  DEPOSITS
  June 30,
    
    
    December 31,2006
    
    
    2005Noninterest-bearing demand
    
    $
    14,633,967
    
    
    $
    12,899,265Interest-bearing demand
    
    
    7,497,445
    
    
    
    6,300,341Market Rate Savings
    
    
    53,663,862
    
    
    
    45,930,275Time under $100,000
    
    
    27,083,883
    
    
    
    28,241,158Time $100,000 and over
    
    
    16,858,962
    
    
    
    18,916,371$
    119,738,119
    
    
    $
    112,287,410
  NOTE 4FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
  June 30,
    
    
    December 31,2006
    
    
    2005Maturing March 2009, fixed rate advance at 3.25%
    
    $
    2,500,000
    
    
    $
    2,500,000Maturing April 2010, fixed rate advance at 4.57%
    
    
    1,000,000
    
    
    
    1,000,000$
    3,500,000
    
    
    $
    3,500,000
  Page 17




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
 NOTE 4FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
    Page 18




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
 
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND RESULTS OF OPERATIONS
 June 30, 2006
 OVERVIEW
   FINANCIAL CONDITION
 Assets
    Page 19




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##### Table of Contents



WESTERN RESERVE BANCORP, INC  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2006
 FINANCIAL CONDITION
       Page 20




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2006
 FINANCIAL CONDITION
   Liabilities
    Page 21




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2006
 FINANCIAL CONDITION
  Shareholders Equity
  RESULTS OF OPERATIONS  FOR THE SIX MONTHS ENDED JUNE 30, 2006
 Overview
  Net Interest Income
   Page 22




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2006
 RESULTS OF OPERATIONS  FOR THE SIX MONTHS ENDED JUNE 30, 2006
  Six months ended June 30,2006
    
    
    2005Average
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/($ in thousands)
    
    Balance
    
    
    Expense
    
    
    Cost
    
    
    Balance
    
    
    Expense
    
    
    CostLoans
    
    $
    112,627
    
    
    $
    4,373
    
    
    
    7.83
    %
    
    $
    108,279
    
    
    $
    3,518
    
    
    
    6.55
    %Investment securities-taxable
    
    
    6,484
    
    
    
    137
    
    
    
    4.27
    %
    
    
    984
    
    
    
    19
    
    
    
    3.92
    %Investment securities-tax exempt
    
    
    691
    
    
    
    16
    
    
    
    4.54
    %
    
    
    328
    
    
    
    7
    
    
    
    4.54
    %Restricted stock
    
    
    545
    
    
    
    16
    
    
    
    5.70
    %
    
    
    479
    
    
    
    13
    
    
    
    5.25
    %Federal funds sold and other
short-term funds
    
    
    6,443
    
    
    
    150
    
    
    
    4.71
    %
    
    
    4,779
    
    
    
    64
    
    
    
    2.69
    %Total interest earning assets
    
    
    126,790
    
    
    
    4,692
    
    
    
    7.46
    %
    
    
    114,849
    
    
    
    3,621
    
    
    
    6.36
    %Noninterest earning assets
    
    
    3,716
    
    
    
    
    
    
    
    
    
    
    
    3,940Total Assets
    
    $
    130,506
    
    
    
    
    
    
    
    
    
    
    $
    118,789Interest-bearing transaction
accounts
    
    $
    7,237
    
    
    
    36
    
    
    
    1.00
    %
    
    $
    6,478
    
    
    
    24
    
    
    
    0.73
    %Market rate savings
    
    
    49,099
    
    
    
    970
    
    
    
    3.98
    %
    
    
    36,867
    
    
    
    417
    
    
    
    2.28
    %Certificate of deposit and IRAs
    
    
    45,061
    
    
    
    865
    
    
    
    3.87
    %
    
    
    48,926
    
    
    
    792
    
    
    
    3.27
    %Borrowings
    
    
    3,500
    
    
    
    63
    
    
    
    3.63
    %
    
    
    2,831
    
    
    
    48
    
    
    
    3.40
    %Total interest bearing liabilities
    
    
    104,897
    
    
    
    1,934
    
    
    
    3.72
    %
    
    
    95,102
    
    
    
    1,281
    
    
    
    2.72
    %Noninterest bearing liabilities
    
    
    13,704
    
    
    
    
    
    
    
    
    
    
    
    12,887Shareholders equity
    
    
    11,905
    
    
    
    
    
    
    
    
    
    
    
    10,800Total Liabilities and
Shareholders Equity
    
    $
    130,506
    
    
    
    
    
    
    
    
    
    
    $
    118,789Net interest income
    
    
    
    
    
    
    2,758
    
    
    
    
    
    
    
    
    
    
    
    2,340Tax equivalent adjustment
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )Net interest income per financial
statements
    
    
    
    
    
    $
    2,754
    
    
    
    
    
    
    
    
    
    
    $
    2,338Net yield on average earning assets
    
    
    
    
    
    
    
    
    
    
    4.39
    %
    
    
    
    
    
    
    
    
    
    
    4.11
    %
 Page 23




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2006
 RESULTS OF OPERATIONS  FOR THE SIX MONTHS ENDED JUNE 30, 2006
  Six months endedJune 30, 2006 vs. 2005Increase (Decrease) inNet Interest Income Due to($ in thousands)
    
    Volume
    
    
    Rate
    
    
    NetInterest income:Loans
    
    $
    153
    
    
    $
    702
    
    
    $
    855Investment securities-taxable
    
    
    116
    
    
    
    2
    
    
    
    118Investment securities-tax exempt
    
    
    9
    
    
    
    
    
    
    
    9Restricted stock
    
    
    2
    
    
    
    1
    
    
    
    3Federal funds sold and
other short-term funds
    
    
    32
    
    
    
    54
    
    
    
    86Total interest-earning assets
    
    
    312
    
    
    
    759
    
    
    
    1,071Interest expense:Interest-bearing transaction
accounts
    
    
    (3
    )
    
    
    (9
    )
    
    
    (12
    )Market rate savings accounts
    
    
    (170
    )
    
    
    (383
    )
    
    
    (553
    )Certificates of deposit and IRAs
    
    
    63
    
    
    
    (136
    )
    
    
    (73
    )Borrowings
    
    
    (12
    )
    
    
    (3
    )
    
    
    (15
    )Total interest-bearing liabilities
    
    
    (122
    )
    
    
    (531
    )
    
    
    (653
    )Change in net interest income
    
    $
    190
    
    
    $
    228
    
    
    $
    418
 Interest Income
   Page 24




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2006
 RESULTS OF OPERATIONS  FOR THE SIX MONTHS ENDED JUNE 30, 2006
 Interest Expense
   Net Interest Margin
    Provision for Loan Losses
  Page 25




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2006
 RESULTS OF OPERATIONS  FOR THE SIX MONTHS ENDED JUNE 30, 2006
    Noninterest Income
    Page 26




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2006
 RESULTS OF OPERATIONS  FOR THE SIX MONTHS ENDED JUNE 30, 2006
   Noninterest Expenses
   Six months endedJune 30,2006
    
    
    2005Marketing and advertising
    
    $
    54,000
    
    
    $
    45,000Loan expenses
    
    
    33,000
    
    
    
    36,000Insurance
    
    
    25,000
    
    
    
    27,000Travel and entertainment
    
    
    20,000
    
    
    
    19,000Telephone
    
    
    12,000
    
    
    
    13,000Other
    
    
    49,000
    
    
    
    33,000$
    193,000
    
    
    $
    173,000
 Page 27




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2006
 RESULTS OF OPERATIONS  FOR THE SIX MONTHS ENDED JUNE 30, 2006
   RESULTS OF OPERATIONS  FOR THE THREE MONTHS ENDED JUNE 30, 2006
  Net Interest Income
   Page 28




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2006
 RESULTS OF OPERATIONS  FOR THE THREE MONTHS ENDED JUNE 30, 2006
 Provision for Loan Losses
  Noninterest Income
  Noninterest Expense
   Page 29




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2006
 RESULTS OF OPERATIONS  FOR THE THREE MONTHS ENDED JUNE 30, 2006
  Three months endedJune 30,2006
    
    
    2005Marketing and advertising
    
    $
    33,000
    
    
    $
    26,000Loan expenses
    
    
    20,000
    
    
    
    24,000Insurance
    
    
    13,000
    
    
    
    15,000Travel and entertainment
    
    
    10,000
    
    
    
    10,000Telephone
    
    
    8,000
    
    
    
    7,000Other
    
    
    30,000
    
    
    
    17,000$
    114,000
    
    
    $
    99,000
 LIQUIDITY AND CAPITAL RESOURCES
    Page 30




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2006
 LIQUIDITY AND CAPITAL RESOURCES
    Minimum
    
    Minimumto be
    
    required forWestern Reserve Bank
    
    considered
    
    capitalJune 30,
    
    December 31,
    
    well-
    
    adequacy2006
    
    2005
    
    capitalized
    
    purposesTier 1 core capital to
risk-weighted assets
    
    
    8.3
    %
    
    
    8.4
    %
    
    
    6.0
    %
    
    
    4.0
    %Total capital to
risk-weighted assets
    
    
    10.5
    %
    
    
    11.0
    %
    
    
    10.0
    %
    
    
    8.0
    %Tier 1 leverage ratio
    
    
    7.5
    %
    
    
    7.4
    %
    
    
    5.0
    %
    
    
    4.0
    %
   Page 31




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2006
 LIQUIDITY AND CAPITAL RESOURCES
  INTEREST RATE SENSITIVITY
     Page 32




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2006
 INTEREST RATE SENSITIVITY
   Page 33




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
June 30, 2006
 CRITICAL ACCOUNTING POLICIES
  Page 34




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
 
 CONTROLS AND PROCEDURES
June 30, 2006
   Page 35




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
FORM 10-QSB
June 30, 2006
 
 PART IIOTHER INFORMATION
       For
    
    Withheld
    
    AbstainMichael R. Rose
    
    
    296,118
    
    
    
    500
    
    
    
    1,000Glenn M. Smith
    
    
    296,118
    
    
    
    500
    
    
    
    1,000Thomas A. Tubbs
    
    
    296,118
    
    
    
    500
    
    
    
    1,000
     ExhibitNo.
    
    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).
    
    *
 
  Page 36




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
FORM 10-QSB
June 30, 2006
 ExhibitNo.
    
    Description of Exhibits4
    
    Legend Placed on Certificates Representing Shares Issued
pursuant to an exemption from registration under Section
3(a)(11) of the Securities Act and Rule 147 thereunder10.1
    
    Employment Agreement of Edward J. McKeon, Dated December
15, 2005. (incorporated by reference to the Companys
Report on Form 8-K filed with the Commission on December
19, 2005)
    
    *10.2
    
    Lease Agreement by and between Michael Rose DBA
Washington Properties and Western Reserve Bancorp, Inc.
(incorporated by reference to the Companys Report on
Form 10-KSB filed with the Commission on 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 Bank (incorporated
by reference to the Companys Report on Form 10-KSB filed
with the Commission on March 30, 2005)
    
    *10.10
    
    First amendment to the Loan Agreement by and between
Western Reserve Bancorp, Inc. and TCF National Bank,
dated March 31, 2005 (incorporated by reference to the
Companys Report on Form 10-QSB filed with the Commission
on May 16, 2005)
    
    *10.11
    
    Second amendment to the Loan Agreement by and between
Western Reserve Bancorp, Inc. and TCF National Bank,
dated June 30, 2005 (incorporated by reference to the
Companys Report on Form 10-QSB filed with the Commission
on August 15, 2005)
    
    *10.12
    
    Western Reserve Bancorp, Inc. and Western Reserve Bank
Incentive Compensation Plan (incorporated by reference to
the Companys Report on Form 8-K filed with the
Commission on January 23, 2006)
    
    *
 
 *
    
    Previously filed and incorporated herein by reference. Page 37




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
FORM 10-QSB
June 30, 2006
 ExhibitNo.
    
    Description of Exhibits11
    
    Statement re: Computation of Per Share Earnings
(incorporated by reference to Note 1 of this Form 10-QSB)
    
    *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)
    
    *31.1
    
    Certification under Section 302 of the Sarbanes-Oxley Act
by Edward J. McKeon, President and Chief Executive
Officer31.2
    
    Certification under Section 302 of the Sarbanes-Oxley Act
by Cynthia A. Mahl, 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 Officer
 
 *
    
    Previously filed and incorporated herein by reference. Page 38




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
FORM 10-QSB
Quarter ended June 30, 2006
 
 SIGNATURES
  Western Reserve Bancorp, Inc.Date: August 14, 2006
    
    By: /s/ Edward J. McKeonEdward J. McKeonPresident and Chief Executive Officer(Principal Executive Officer)/s/ Cynthia A. MahlCynthia A. MahlSenior Vice President/Chief Financial Officer(Principal Financial Officer)
 Page 39