##### 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 September 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.)
  
   
  þ o
 o þ
   
   
  o þ




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##### 



WESTERN RESERVE BANCORP, INC.
FORM 10-QSB
Quarter ended September 30, 2006
 PagePART IFinancial InformationITEM 1 FINANCIAL STATEMENTSConsolidated Balance Sheets as of September 30, 2006
and December 31, 2005
    
    
    3Consolidated Statements of Income for the three months and
nine months ended September 30, 2006 and 2005
    
    
    4Consolidated Statements of Comprehensive Income for the three
months
and nine months ended September 30, 2006 and 2005
    
    
    5Consolidated Statements of Cash Flows for the nine months ended
September 30, 2006 and 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    7ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    20ITEM 3 CONTROLS AND PROCEDURES
    
    
    36PART IIOther Information
    
    
    37SIGNATURES
    
    
    40EX-4EX-10.13EX-31.1EX-31.2EX-32.1EX-32.2
  Page 2




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##### Table of Contents



(Unaudited)Sept. 30,
    
    
    December 31,2006
    
    
    2005AssetsCash and due from financial institutions
    
    $
    2,624,990
    
    
    $
    2,228,258Federal funds sold and other short-term funds
    
    
    15,800,380
    
    
    
    5,114,748Cash and cash equivalents
    
    
    18,425,370
    
    
    
    7,343,006Securities available for sale
    
    
    5,021,177
    
    
    
    7,301,377Loans
    
    
    113,340,320
    
    
    
    111,189,355Allowance for loan losses
    
    
    (1,505,288
    )
    
    
    (1,541,654
    )Loans, net
    
    
    111,835,032
    
    
    
    109,647,701Restricted stock
    
    
    564,000
    
    
    
    537,200Premises and equipment, net
    
    
    1,190,631
    
    
    
    1,303,921Accrued interest receivable and other assets
    
    
    2,515,280
    
    
    
    1,650,798Total Assets
    
    $
    139,551,490
    
    
    $
    127,784,003Liabilities and Shareholders EquityDepositsNoninterest-bearing
    
    $
    13,502,617
    
    
    $
    12,899,265Interest-bearing
    
    
    109,582,380
    
    
    
    99,388,145Total deposits
    
    
    123,084,997
    
    
    
    112,287,410Federal Home Loan Bank advances
    
    
    3,500,000
    
    
    
    3,500,000Accrued interest payable and other liabilities
    
    
    376,110
    
    
    
    398,254Total Liabilities
    
    
    126,961,107
    
    
    
    116,185,664Shareholders EquityCommon stock, without par value, $1 stated value:750,000 shares authorized; 572,147 and
571,523 shares issued and outstanding as of
September 30, 2006 and December 31, 2005
    
    
    572,147
    
    
    
    457,331Additional paid-in capital
    
    
    9,542,389
    
    
    
    9,528,376Retained earnings
    
    
    2,465,326
    
    
    
    1,639,369Accumulated other comprehensive income (loss)
    
    
    10,521
    
    
    
    (26,737
    )Total Shareholders Equity
    
    
    12,590,383
    
    
    
    11,598,339Total Liabilities and Shareholders Equity
    
    $
    139,551,490
    
    
    $
    127,784,003
  Page 3




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##### Table of Contents



Three months ended September 30,
    
    
    Nine months ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Interest and dividend incomeLoans, including fees
    
    $
    2,330,445
    
    
    $
    2,012,958
    
    
    $
    6,703,311
    
    
    $
    5,531,135Securities
    
    
    50,786
    
    
    
    17,148
    
    
    
    199,700
    
    
    
    41,637Dividends on restricted stock
    
    
    8,158
    
    
    
    6,762
    
    
    
    23,583
    
    
    
    19,232Federal funds sold and other
short-term funds
    
    
    184,675
    
    
    
    51,052
    
    
    
    335,036
    
    
    
    114,9172,574,064
    
    
    
    2,087,920
    
    
    
    7,261,630
    
    
    
    5,706,921Interest expenseDeposits
    
    
    1,101,785
    
    
    
    757,066
    
    
    
    2,972,429
    
    
    
    1,990,482Borrowings
    
    
    31,999
    
    
    
    31,999
    
    
    
    94,952
    
    
    
    79,6771,133,784
    
    
    
    789,065
    
    
    
    3,067,381
    
    
    
    2,070,159Net interest income
    
    
    1,440,280
    
    
    
    1,298,855
    
    
    
    4,194,249
    
    
    
    3,636,762Provision (credit) for loan losses
    
    
    (51,300
    )
    
    
    67,400
    
    
    
    (112,080
    )
    
    
    11,000Net interest income after provision
(credit) for loan losses
    
    
    1,491,580
    
    
    
    1,231,455
    
    
    
    4,306,329
    
    
    
    3,625,762Noninterest incomeService charges on deposit accounts
    
    
    45,354
    
    
    
    38,348
    
    
    
    133,540
    
    
    
    100,169Net gains on sales of loans
    
    
    7,451
    
    
    
    22,725
    
    
    
    7,451
    
    
    
    151,346Gain on sale of credit card portfolio
    
    
    28,500
    
    
    
    
    
    
    
    28,500
    
    
    
    Other
    
    
    37,523
    
    
    
    42,514
    
    
    
    133,816
    
    
    
    115,592118,828
    
    
    
    103,587
    
    
    
    303,307
    
    
    
    367,107Noninterest expenseSalaries and employee benefits
    
    
    558,334
    
    
    
    473,137
    
    
    
    1,616,781
    
    
    
    1,395,676Premises and equipment, net
    
    
    206,948
    
    
    
    198,813
    
    
    
    613,765
    
    
    
    593,214Data processing
    
    
    81,323
    
    
    
    75,418
    
    
    
    246,353
    
    
    
    223,240Professional fees
    
    
    72,480
    
    
    
    104,845
    
    
    
    212,147
    
    
    
    275,026Taxes other than income and payroll
    
    
    28,159
    
    
    
    25,084
    
    
    
    90,529
    
    
    
    75,342Community and shareholder relations
and contributions
    
    
    17,436
    
    
    
    13,589
    
    
    
    71,031
    
    
    
    53,979Supplies, printing and postage
    
    
    19,916
    
    
    
    17,442
    
    
    
    57,125
    
    
    
    58,716Other
    
    
    99,978
    
    
    
    83,654
    
    
    
    293,467
    
    
    
    256,2111,084,574
    
    
    
    991,982
    
    
    
    3,201,198
    
    
    
    2,931,404Income before income taxes
    
    
    525,834
    
    
    
    343,060
    
    
    
    1,408,438
    
    
    
    1,061,465Income tax expense
    
    
    172,387
    
    
    
    115,037
    
    
    
    468,079
    
    
    
    356,276Net income
    
    $
    353,447
    
    
    $
    228,023
    
    
    $
    940,359
    
    
    $
    705,189Average shares outstanding (basic)
    
    
    571,916
    
    
    
    571,296
    
    
    
    571,734
    
    
    
    570,561Average shares outstanding (diluted)
    
    
    598,948
    
    
    
    590,194
    
    
    
    595,336
    
    
    
    589,551Basic income per share
    
    $
    0.62
    
    
    $
    0.40
    
    
    $
    1.64
    
    
    $
    1.24Diluted income per share
    
    $
    0.59
    
    
    $
    0.39
    
    
    $
    1.58
    
    
    $
    1.20
  Page 4




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##### Table of Contents



Three months ended September 30,
    
    
    Nine months ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    353,447
    
    
    $
    228,023
    
    
    $
    940,359
    
    
    $
    705,189Other comprehensive income (loss), net of tax:Unrealized
gains/(losses) on
securities
arising during the period
    
    
    57,128
    
    
    
    (6,237
    )
    
    
    37,258
    
    
    
    (6,985
    )Comprehensive income
    
    $
    410,575
    
    
    $
    221,786
    
    
    $
    977,617
    
    
    $
    698,204
  Page 5




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##### Table of Contents



Nine months ended September 30,2006
    
    
    2005Cash flows from operating activitiesNet income
    
    $
    940,359
    
    
    $
    705,189Adjustments to reconcile net income
to net cash from operating activities:Provision (credit) for loan losses
    
    
    (112,080
    )
    
    
    11,000Depreciation
    
    
    127,662
    
    
    
    132,363Net amortization (accretion) of securities
    
    
    (102,377
    )
    
    
    4,231Stock-based compensation
    
    
    2,199
    
    
    
    Loans originated for sale
    
    
    (474,500
    )
    
    
    (2,003,376
    )Proceeds from sales of loan originations
    
    
    481,951
    
    
    
    2,154,722Gains on sales of loans and credit card portfolio sale
    
    
    (35,951
    )
    
    
    (151,346
    )Loss on disposal of fixed assets
    
    
    1,594
    
    
    
    Federal Home Loan Bank stock dividends
    
    
    (13,000
    )
    
    
    (9,900
    )Net change in:Interest receivable and other assets
    
    
    (111,310
    )
    
    
    221,250Interest payable and other liabilities
    
    
    (27,563
    )
    
    
    (27,384
    )Net cash from operating activities
    
    
    676,984
    
    
    
    1,036,749Cash flows from investing activities
Available for sale securities:Purchases
    
    
    (2,987,110
    )
    
    
    (1,458,171
    )Maturities, repayments and calls
    
    
    5,426,138
    
    
    
    618,367Purchase of restricted stock
    
    
    (13,800
    )
    
    
    (21,000
    )Net increase in loans
    
    
    (2,490,248
    )
    
    
    (6,343,824
    )Purchases of premises and equipment
    
    
    (15,966
    )
    
    
    (90,482
    )Acquisition of other real estate owned
    
    
    (136,946
    )
    
    
    Proceeds from sale of credit card portfolio
    
    
    313,497
    
    
    
    Purchase of bank owned life insurance
    
    
    (500,000
    )
    
    
    Net cash from investing activities
    
    
    (404,435
    )
    
    
    (7,295,110
    )Cash flows from financing activitiesNet increase in deposits
    
    
    10,797,587
    
    
    
    9,748,924Proceeds from Federal Home Loan Bank advances
    
    
    
    
    
    
    1,000,000Proceeds from issuance of common stock
under Employee Stock Purchase Plan
    
    
    17,030
    
    
    
    13,880Proceeds from exercise of stock options
    
    
    
    
    
    
    24,000Cash paid for fractional shares
    
    
    (4,802
    )
    
    
    Net cash from financing activities
    
    
    10,809,815
    
    
    
    10,786,804Change in cash and cash equivalents
    
    
    11,082,364
    
    
    
    4,528,443Cash and cash equivalents at beginning of period
    
    
    7,343,006
    
    
    
    6,936,119Cash and cash equivalents at end of period
    
    $
    18,425,370
    
    
    $
    11,464,562Supplemental cash flow information:Interest paid
    
    $
    3,110,208
    
    
    $
    2,091,586Income taxes paid
    
    
    540,000
    
    
    
    322,000Supplemental disclosure of noncash investing activities:Non cash transfer from loans to other real estate owned
    
    $
    130,000
    
    
    $
    Non cash transfer from loans originated for sale to loans
    
    
    
    
    
    
    250,835
  Page 6




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
 
 NOTES TO FINANCIAL STATEMENTS
September 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
September 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
September 30, 2006
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    Three months ended September 30, 2006Using
    
    
    SFASPrevious
    
    
    123(R)
    
    
    AsAccounting
    
    
    Adjustments
    
    
    ReportedIncome before income taxes
    
    $
    526,567
    
    
    $
    (733
    )
    
    $
    525,834Income taxes
    
    
    172,636
    
    
    
    249
    
    
    
    172,387Net income
    
    $
    353,931
    
    
    $
    (484
    )
    
    $
    353,447Basic earnings per share
    
    $
    0.62
    
    
    $
    
    
    
    $
    0.62Diluted earnings per share
    
    $
    0.59
    
    
    $
    
    
    
    $
    0.59
 Page 9




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2006
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Nine months ended September 30, 2006Using
    
    
    SFASPrevious
    
    
    123(R)
    
    
    AsAccounting
    
    
    Adjustments
    
    
    ReportedIncome before income taxes
    
    $
    1,410,637
    
    
    $
    (2,199
    )
    
    $
    1,408,438Income taxes
    
    
    468,827
    
    
    
    748
    
    
    
    468,079Net income
    
    $
    941,810
    
    
    $
    (1,451
    )
    
    $
    940,359Basic earnings per share
    
    $
    1.65
    
    
    $
    (.01
    )
    
    $
    1.64Diluted earnings per share
    
    $
    1.58
    
    
    $
    
    
    
    $
    1.58
  Three months ended September 30, 2005Pro Forma asAs
    
    
    Pro Forma
    
    
    if under SFASReported
    
    
    Adjustments
    
    
    123(R)Income before income taxes
    
    $
    343,060
    
    
    $
    (788
    )
    
    $
    342,272Income taxes
    
    
    115,037
    
    
    
    268
    
    
    
    114,769Net income
    
    $
    228,023
    
    
    $
    (520
    )
    
    $
    227,503Basic earnings per share
    
    $
    0.40
    
    
    $
    
    
    
    $
    0.40Diluted earnings per share
    
    $
    0.39
    
    
    $
    
    
    
    $
    0.39
 Page 10




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2006
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Nine months ended September 30, 2005Pro Forma asAs
    
    
    Pro Forma
    
    
    if under SFASReported
    
    
    Adjustments
    
    
    123(R)Income before income taxes
    
    $
    1,061,465
    
    
    $
    (2,365
    )
    
    $
    1,059,100Income taxes
    
    
    356,276
    
    
    
    804
    
    
    
    355,472Net income
    
    $
    705,189
    
    
    $
    (1,561
    )
    
    $
    703,628Basic earnings per share
    
    $
    1.24
    
    
    $
    (.01
    )
    
    $
    1.23Diluted earnings per share
    
    $
    1.20
    
    
    $
    (.01
    )
    
    $
    1.19
   Nine months endedSeptember 30, 2006Total options outstandingWeighted
    
    WeightedAverage
    
    AverageExercise
    
    FairShares
    
    Price
    
    ValueOptions outstanding, beginning of
period
    
    
    114,136
    
    
    $
    18.52
    
    
    $
    4.60Forfeited
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    
    
    
    
    Options outstanding, end of period
    
    
    114,136
    
    
    $
    18.52
    
    
    $
    4.60Options exercisable, end of period
    
    
    112,964
    
    
    $
    18.47
    
    
    $
    4.58
 Page 11




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##### Table of Contents



WESTERN RESERVE BANCORP, INC  NOTES TO FINANCIAL STATEMENT  September 30, 200
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
   Outstanding
    
    ExercisableWeighted
    
    
    
    
    
    WeightedAverage Remaining
    
    
    
    
    
    AverageContractual Life
    
    
    
    
    
    ExerciseRange of Exercise Prices
    
    Number
    
    (in years)
    
    Number
    
    Price$16.00$19.99
    
    
    88,366
    
    
    
    2.9
    
    
    
    88,366
    
    
    $
    16.83$20.00$23.99
    
    
    12,812
    
    
    
    4.7
    
    
    
    12,499
    
    
    
    20.06$24.00$31.99
    
    
    8,951
    
    
    
    2.8
    
    
    
    8,092
    
    
    
    27.17$32.00
    
    
    4,007
    
    
    
    2.1
    
    
    
    4,007
    
    
    
    32.00Outstanding at period
end
    
    
    114,136
    
    
    
    3.0
    
    
    
    112,964
    
    
    $
    18.47
   2005Risk-free interest rate
    
    
    4.27
    %Expected option life (years)
    
    
    7Expected stock price volatility
    
    
    7.09
    %Dividend yield
    
    
    0.00
    %
  Page 12




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2006
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Nine months endedSeptember 30,2006
    
    2005Proceeds of options exercised
    
    $
    
    
    
    $
    24,000Related tax benefit recognized
    
    
    
    
    
    
    3,060Intrinsic value of options exercised
    
    
    
    
    
    
    9,000
  CompensationCostsRemainder of 2006
    
    $
    7332007
    
    
    1,4582008
    
    
    1,1862009
    
    
    8362010
    
    
    697Total
    
    $
    4,910
 Page 13




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2006
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Three months ended Sept. 30,
    
    
    Nine months ended Sept. 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Net income
    
    $
    353,447
    
    
    $
    228,023
    
    
    $
    940,359
    
    
    $
    705,189Denominator:Denominator for basic
earnings per share
weighted average shares
    
    
    571,917
    
    
    
    571,296
    
    
    
    571,735
    
    
    
    570,561Effect of dilutive securities:Nonqualified stock options
    
    
    27,033
    
    
    
    18,898
    
    
    
    23,603
    
    
    
    18,990Denominator for diluted
earnings per share
    
    
    598,950
    
    
    
    590,194
    
    
    
    595,338
    
    
    
    589,551Basic earnings per share
    
    $
    0.62
    
    
    $
    0.40
    
    
    $
    1.64
    
    
    $
    1.24Diluted earnings per share
    
    $
    0.59
    
    
    $
    0.39
    
    
    $
    1.58
    
    
    $
    1.20
    Page 14




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2006
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Accounting Changes and Error Correctionsa replacement of
APB Opinion No. 20 and FASB Statement No. 3.
 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,
 Accounting for Uncertainty in Income Taxes. Accounting for Income Taxes.
 Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangement.
 Page 15




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2006
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Employers Accounting for Postretirement Benefits Other Than Pensions.
 Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans  an amendment of FASB Statements No. 07, 08, 106 and 132(R).
 Fair Value Measurements.
  Page 16




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2006
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  NOTE 2  LOANS
  September 30,
    
    
    December 31,2006
    
    
    2005Commercial real estate
    
    $
    67,113,368
    
    
    $
    65,367,133Commercial business
    
    
    11,123,256
    
    
    
    11,401,834Commercial lines of credit
    
    
    19,196,153
    
    
    
    16,991,017Commercial construction
    
    
    3,602,131
    
    
    
    4,465,089Home equity lines of credit
    
    
    8,534,726
    
    
    
    9,589,660Residential mortgage
and construction
    
    
    1,164,574
    
    
    
    917,565Consumer installment
    
    
    2,578,396
    
    
    
    2,108,230Credit card and other
    
    
    27,716
    
    
    
    348,827$
    113,340,320
    
    
    $
    111,189,355
  Three months ended Sept. 30,
    
    
    Nine months ended Sept. 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Beginning balance
    
    $
    1,603,649
    
    
    $
    1,547,414
    
    
    $
    1,541,654
    
    
    $
    1,605,933Loans charged off
    
    
    (66,656
    )
    
    
    (62,000
    )
    
    
    (148,881
    )
    
    
    (66,000
    )Recoveries
    
    
    19,595
    
    
    
    
    
    
    
    224,595
    
    
    
    1,881Provision
(credit) for loan
losses
    
    
    (51,300
    )
    
    
    67,400
    
    
    
    (112,080
    )
    
    
    11,000Ending balance
    
    $
    1,505,288
    
    
    $
    1,552,814
    
    
    $
    1,505,288
    
    
    $
    1,552,814
  Page 17




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2006
 NOTE 3  DEPOSITS
  September 30,
    
    
    December 31,2006
    
    
    2005Noninterest-bearing demand
    
    $
    13,502,617
    
    
    $
    12,899,265Interest-bearing demand
    
    
    7,202,990
    
    
    
    6,300,341Market Rate Savings
    
    
    57,281,898
    
    
    
    45,930,275Time under $100,000
    
    
    27,463,047
    
    
    
    28,241,158Time $100,000 and over
    
    
    17,634,445
    
    
    
    18,916,371$
    123,084,997
    
    
    $
    112,287,410
  NOTE 4FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
  September 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 18




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2006
 NOTE 4FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
    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
September 30, 2006
 OVERVIEW
   FINANCIAL CONDITION
 Assets
    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
September 30, 2006
 FINANCIAL CONDITION
      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
September 30, 2006
 FINANCIAL CONDITION
   Liabilities
    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
September 30, 2006
 FINANCIAL CONDITION
   Shareholders Equity
  RESULTS OF OPERATIONS  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
 Overview
  Net Interest Income
   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
September 30, 2006
 RESULTS OF OPERATIONS  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
  Nine months ended September 30,($ in thousands)
    
    2006
    
    
    2005Average
    
    Income/
    
    Yield/
    
    Average
    
    Income/
    
    Yield/Balance
    
    Expense
    
    Cost
    
    Balance
    
    Expense
    
    CostLoans
    
    $
    112,861
    
    
    $
    6,703
    
    
    
    7.94
    %
    
    $
    109,610
    
    
    $
    5,531
    
    
    
    6.75
    %Investment securities-taxable
    
    
    5,123
    
    
    
    168
    
    
    
    4.39
    %
    
    
    1,119
    
    
    
    33
    
    
    
    3.92
    %Investment securities-tax exempt
    
    
    1,156
    
    
    
    42
    
    
    
    4.92
    %
    
    
    364
    
    
    
    12
    
    
    
    4.47
    %Restricted stock
    
    
    550
    
    
    
    24
    
    
    
    5.73
    %
    
    
    492
    
    
    
    19
    
    
    
    5.22
    %Federal funds sold and other
short-term funds
    
    
    8,972
    
    
    
    335
    
    
    
    4.99
    %
    
    
    5,147
    
    
    
    115
    
    
    
    2.98
    %Total interest earning assets
    
    
    128,662
    
    
    
    7,272
    
    
    
    7.56
    %
    
    
    116,732
    
    
    
    5,710
    
    
    
    6.54
    %Noninterest earning assets
    
    
    3,904
    
    
    
    
    
    
    
    
    
    
    
    3,858Total Assets
    
    $
    132,566
    
    
    
    
    
    
    
    
    
    
    $
    120,590Interest-bearing transaction
accounts
    
    $
    7,053
    
    
    
    53
    
    
    
    1.00
    %
    
    $
    6,485
    
    
    
    36
    
    
    
    0.74
    %Market rate savings
    
    
    51,078
    
    
    
    1,598
    
    
    
    4.18
    %
    
    
    38,212
    
    
    
    722
    
    
    
    2.53
    %Certificate of deposit and IRAs
    
    
    44,730
    
    
    
    1,321
    
    
    
    3.95
    %
    
    
    49,067
    
    
    
    1,232
    
    
    
    3.36
    %Borrowings
    
    
    3,500
    
    
    
    95
    
    
    
    3.63
    %
    
    
    3,057
    
    
    
    80
    
    
    
    3.48
    %Total interest bearing liabilities
    
    
    106,361
    
    
    
    3,067
    
    
    
    3.86
    %
    
    
    96,821
    
    
    
    2,070
    
    
    
    2.86
    %Noninterest bearing liabilities
    
    
    14,136
    
    
    
    
    
    
    
    
    
    
    
    12,828Shareholders equity
    
    
    12,069
    
    
    
    
    
    
    
    
    
    
    
    10,941Total Liabilities and
Shareholders Equity
    
    $
    132,566
    
    
    
    
    
    
    
    
    
    
    $
    120,590Net interest income
    
    
    
    
    
    
    4,205
    
    
    
    
    
    
    
    
    
    
    
    3,640Tax equivalent adjustment
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    (3
    )Net interest income per financial
Statements
    
    
    
    
    
    $
    4,194
    
    
    
    
    
    
    
    
    
    
    $
    3,637Net yield on average earning assets
    
    
    
    
    
    
    
    
    
    
    4.37
    %
    
    
    
    
    
    
    
    
    
    
    4.17
    %
 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
September 30, 2006
 RESULTS OF OPERATIONS  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
   Nine months endedSeptember 30, 2006 vs. 2005Increase (Decrease) inNet Interest Income Due to($ in thousands)
    
    Volume
    
    
    Rate
    
    
    NetInterest income:Loans
    
    $
    158
    
    
    $
    1,014
    
    
    $
    1,172Investment securities-taxable
    
    
    131
    
    
    
    4
    
    
    
    135Investment securities-tax exempt
    
    
    29
    
    
    
    1
    
    
    
    30Restricted stock
    
    
    3
    
    
    
    2
    
    
    
    5Federal funds sold and other short-term funds
    
    
    117
    
    
    
    103
    
    
    
    220Total interest-earning assets
    
    
    438
    
    
    
    1,124
    
    
    
    1,562Interest expense:Interest-bearing transaction
Accounts
    
    
    (3
    )
    
    
    (14
    )
    
    
    (17
    )Market rate savings accounts
    
    
    (298
    )
    
    
    (578
    )
    
    
    (876
    )Certificates of deposit and IRAs
    
    
    113
    
    
    
    (202
    )
    
    
    (89
    )Borrowings
    
    
    (12
    )
    
    
    (3
    )
    
    
    (15
    )Total interest-bearing liabilities
    
    
    (200
    )
    
    
    (797
    )
    
    
    (997
    )Change in net interest income
    
    $
    238
    
    
    $
    327
    
    
    $
    565
 Interest Income
   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
September 30, 2006
 RESULTS OF OPERATIONS  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
 Interest Expense
   Net Interest Margin
    Provision for Loan Losses
  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
September 30, 2006
 RESULTS OF OPERATIONS  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
    Noninterest Income
   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
September 30, 2006
 RESULTS OF OPERATIONS  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
    Noninterest Expenses
  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
September 30, 2006
 RESULTS OF OPERATIONS  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
  Nine months endedSeptember 30,2006
    
    
    2005Marketing and advertising
    
    $
    79,000
    
    
    $
    63,000Loan expenses
    
    
    56,000
    
    
    
    50,000Insurance
    
    
    38,000
    
    
    
    42,000Travel and entertainment
    
    
    35,000
    
    
    
    27,000Telephone
    
    
    19,000
    
    
    
    20,000Other
    
    
    66,000
    
    
    
    54,000$
    293,000
    
    
    $
    256,000
   RESULTS OF OPERATIONS  FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
  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
September 30, 2006
 RESULTS OF OPERATIONS  FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
 Net Interest Income
   Provision for Loan Losses
  Noninterest Income
  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
September 30, 2006
 RESULTS OF OPERATIONS  FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
 Noninterest Income
  Noninterest Expense
   Three months endedSeptember 30,2006
    
    
    2005Marketing and advertising
    
    $
    25,000
    
    
    $
    18,000Loan expenses
    
    
    23,000
    
    
    
    14,000Insurance
    
    
    13,000
    
    
    
    15,000Travel and entertainment
    
    
    15,000
    
    
    
    8,000Telephone
    
    
    6,000
    
    
    
    7,000Other
    
    
    18,000
    
    
    
    22,000$
    100,000
    
    
    $
    84,000
 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
September 30, 2006
 LIQUIDITY AND CAPITAL RESOURCES
       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
September 30, 2006
 LIQUIDITY AND CAPITAL RESOURCES
 Minimum
    
    Minimumto be
    
    required forWestern Reserve Bank
    
    considered
    
    capitalSept 30,
    
    December 31,
    
    well-
    
    adequacy2006
    
    2005
    
    capitalized
    
    purposesTier 1 core capital to
risk-weighted assets
    
    
    8.6
    %
    
    
    8.4
    %
    
    
    6.0
    %
    
    
    4.0
    %Total capital to
risk-weighted assets
    
    
    10.9
    %
    
    
    11.0
    %
    
    
    10.0
    %
    
    
    8.0
    %Tier 1 leverage ratio
    
    
    7.6
    %
    
    
    7.4
    %
    
    
    5.0
    %
    
    
    4.0
    %
    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
September 30, 2006
 INTEREST RATE SENSITIVITY
      Page 34




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
September 30, 2006
 CRITICAL ACCOUNTING POLICIES
  Page 35




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
CONTROLS AND PROCEDURES
September 30, 2006
   Page 36




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
FORM 10-QSB
September 30, 2006
 
 PART IIOTHER INFORMATION
        WESTERN RESERVE BANCORP, INC.
FORM 10-QSB
September 30, 2006
 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)
    
    *4
    
    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)
    
    *
 
 *
    
    Previously filed and incorporated herein by reference. Page 37




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
FORM 10-QSB
September 30, 2006
 ExhibitNo.
    
    Description of Exhibits10.4
    
    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)
    
    *10.13
    
    Third amendment to the Loan Agreement by and between
Western Reserve Bancorp, Inc. and TCF National Bank,
dated July 20, 200611
    
    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 Officer
 
 *
    
    Previously filed and incorporated herein by reference. Page 38




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
FORM 10-QSB
September 30, 2006
 ExhibitNo.
    
    Description of Exhibits32.1
    
    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 39




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##### Table of Contents



WESTERN RESERVE BANCORP, INC.
FORM 10-QSB
Quarter ended September 30, 2006
 
 SIGNATURES
  Western Reserve Bancorp, Inc.Date: November 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 40