##### 



WESTERN RESERVE BANCORP, INC.
 ANNUAL REPORT




---



##### 



WESTERN RESERVE BANCORP, INC.
Medina, Ohio
 ANNUAL REPORT
December 31, 2007
 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
    
    
    33MANAGEMENTS DISCUSSION AND ANALYSIS
    
    
    34
 Cover design by Renée W. Gareau, Zinnias Design Studio, Berea, Ohio 440-239-2437.




---



##### 




    
    $156,000: the net extra cost for the provision for loan losses in 2007 above 2006 due to
two major factors: the benefit of a large recovery in 2006 and the cost, in 2007, of
reserving for loan losses when you grow your loan portfolio, which happened this past year.
    
    $99,000: the decrease of net interest income in 2007 despite the growth in the loan
portfolio. The dramatic increase in loan and investment income was more than offset by the
increase in deposit interest expense. This resulted in our margin being compressed.
    
    $81,000: the increased expense for FDIC insurance that our bank incurred above 2006.
All banks were subject to this increase.
    
    $61,850: the increase in Directors Fees. The bulk of this expense reflected
significantly higher Board committee activity combined with an increase in director meeting
fees. In addition, there was a one time stock grant to P.M. Jones, the Chairman of the
Board. This was to reflect his unique and significant role in the creation and success of
our bank.
 
 1.




---



##### 




    
    Federal Reserve  a two-week joint examination for safety and soundness.
    
    Federal Reserve  a one-week compliance examination for the purpose of evaluating our
level of compliance with over 20 complex regulations.
    
    Federal Home Loan Bank  a two-week review of our commercial real estate and home
equity portfolios.
    
    Internal auditors  four two-day visits in order to audit our operation, and the audits
are now expanding to accommodate many aspects of the Sarbanes Oxley Act.
    
    Loan review team  two week-long visits in order to evaluate the strength of our
commercial loan portfolio.
    
    Outside auditors  two visits in order to evaluate and opine upon the accuracy of our
financial reporting.
    
    Securities and Exchange Commission and the Federal Reserve Bank  two examinations of
two days each of our operation as transfer agent for our stock.
   
 2.




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##### 



3.




---



##### 



Internal ControlIntegrated Framework Guidance for Smaller Public
Companies
  Edward J. McKeon
    
    Cynthia A. MahlPresident and
    
    Senior Vice President andChief Executive Officer
    
    Chief Financial OfficerMarch 12, 2008


4.



---



##### 



5.




---



##### 



2007
    
    
    2006ASSETSCash and due from financial institutions
    
    $
    2,486,243
    
    
    $
    2,923,863Federal funds sold and other short-term funds
    
    
    21,332,285
    
    
    
    15,172,614Cash and cash equivalents
    
    
    23,818,528
    
    
    
    18,096,477Interest-bearing deposits in other banks
    
    
    
    
    
    
    2,200,000Securities available for sale
    
    
    10,982,965
    
    
    
    10,964,783Restricted stock
    
    
    593,400
    
    
    
    568,800Loans
    
    
    121,628,057
    
    
    
    110,149,244Allowance for loan losses
    
    
    (1,605,766
    )
    
    
    (1,588,217
    )Loans, net
    
    
    120,022,291
    
    
    
    108,561,027Premises and equipment, net
    
    
    1,187,302
    
    
    
    1,237,761Bank owned life insurance
    
    
    1,142,580
    
    
    
    1,092,473Foreclosed assets
    
    
    371,000
    
    
    
    265,000Accrued interest receivable and other assets
    
    
    1,241,651
    
    
    
    1,129,092$
    159,359,717
    
    
    $
    144,115,413LIABILITIES AND SHAREHOLDERS EQUITYDepositsNoninterest-bearing
    
    $
    17,080,851
    
    
    $
    16,115,340Interest-bearing
    
    
    124,348,417
    
    
    
    111,143,783Total deposits
    
    
    141,429,268
    
    
    
    127,259,123Federal Home Loan Bank advances
    
    
    3,500,000
    
    
    
    3,500,000Accrued interest payable and other liabilities
    
    
    501,476
    
    
    
    424,897Total liabilities
    
    
    145,430,744
    
    
    
    131,184,020Shareholders equityCommon stock, no par value, $1 stated value
1,500,000 shares authorized, 579,059 and
573,277 shares issued and outstanding as of
December 31, 2007 and December 31, 2006
    
    
    579,059
    
    
    
    573,277Additional paid-in capital
    
    
    9,702,632
    
    
    
    9,572,861Retained earnings
    
    
    3,587,907
    
    
    
    2,770,693Accumulated other comprehensive income
    
    
    59,375
    
    
    
    14,562Total shareholders equity
    
    
    13,928,973
    
    
    
    12,931,393$
    159,359,717
    
    
    $
    144,115,413
 
 6.




---



##### 



2007
    
    
    2006Interest and dividend incomeLoans, including fees
    
    $
    9,293,550
    
    
    $
    8,944,929Securities:Taxable
    
    
    312,446
    
    
    
    209,046Tax exempt
    
    
    171,884
    
    
    
    56,411Dividends on restricted stock
    
    
    36,369
    
    
    
    32,007Federal funds sold and other short-term funds
    
    
    1,050,112
    
    
    
    589,87310,864,361
    
    
    
    9,832,266Interest expenseDeposits
    
    
    5,280,842
    
    
    
    4,150,145Federal Home Loan Bank advances
    
    
    126,950
    
    
    
    126,9505,407,792
    
    
    
    4,277,095Net interest income
    
    
    5,456,569
    
    
    
    5,555,171Provision (credit) for loan losses
    
    
    116,202
    
    
    
    (40,230
    )Net interest income after provision (credit) for loan losses
    
    
    5,340,367
    
    
    
    5,595,401Noninterest incomeService charges on deposit accounts
    
    
    155,468
    
    
    
    173,339Net gains on sales of loans
    
    
    33,166
    
    
    
    20,085Gain on sale of credit card portfolio
    
    
    
    
    
    
    28,500Other
    
    
    195,391
    
    
    
    174,283384,025
    
    
    
    396,207Noninterest expenseSalaries and employee benefits
    
    
    2,137,368
    
    
    
    2,108,212Premises and equipment
    
    
    876,856
    
    
    
    833,504Data processing
    
    
    342,525
    
    
    
    324,282Directors fees
    
    
    184,750
    
    
    
    122,900Professional fees
    
    
    183,277
    
    
    
    176,695Taxes other than income and payroll
    
    
    134,584
    
    
    
    117,951Marketing and advertising
    
    
    123,118
    
    
    
    132,448Federal Deposit Insurance Corporation premiums
    
    
    94,959
    
    
    
    14,241Community relations and contributions
    
    
    90,346
    
    
    
    88,674Supplies, printing and postage
    
    
    77,376
    
    
    
    77,575Other
    
    
    329,036
    
    
    
    281,7154,574,195
    
    
    
    4,278,197Income before income taxes
    
    
    1,150,197
    
    
    
    1,713,411Income tax expense
    
    
    332,983
    
    
    
    562,245Net income
    
    $
    817,214
    
    
    $
    1,151,166Earnings per share:Basic
    
    $
    1.42
    
    
    $
    2.01Diluted
    
    $
    1.36
    
    
    $
    1.93
 
 7.




---



##### 



AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalCommon
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    ShareholdersStock
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    EquityBalance, January 1, 2006
    
    $
    457,331
    
    
    $
    9,528,376
    
    
    $
    1,639,369
    
    
    $
    (26,737
    )
    
    $
    11,598,339Cumulative adjustment related to
SAB 108 adoption
    
    
    
    
    
    
    
    
    
    
    99,231
    
    
    
    
    
    
    
    99,231Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    1,151,166
    
    
    
    
    
    
    
    1,151,166Change in unrealized net gain
(loss) on securities available
for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,299
    
    
    
    41,299Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,192,465Five-for-four stock split
    
    
    114,270
    
    
    
    
    
    
    
    (114,270
    )
    
    
    
    
    
    
    Cash paid in lieu of fractional shares
    
    
    
    
    
    
    
    
    
    
    (4,803
    )
    
    
    
    
    
    
    (4,803
    )Stock-based compensation expense
    
    
    
    
    
    
    2,933
    
    
    
    
    
    
    
    
    
    
    
    2,933Exercise of stock options (1,000 shares)
    
    
    1,000
    
    
    
    16,600
    
    
    
    
    
    
    
    
    
    
    
    17,600Tax benefit related to exercise of stock
options
    
    
    
    
    
    
    4,556
    
    
    
    
    
    
    
    
    
    
    
    4,556Common stock issued (676 shares)
under Employee Stock Purchase
Plan (ESPP)
    
    
    676
    
    
    
    20,396
    
    
    
    
    
    
    
    
    
    
    
    21,072Balance, December 31, 2006
    
    
    573,277
    
    
    
    9,572,861
    
    
    
    2,770,693
    
    
    
    14,562
    
    
    
    12,931,393Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    817,214
    
    
    
    
    
    
    
    817,214Change in unrealized net gain
(loss) on securities available
for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,813
    
    
    
    44,813Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    862,027Stock-based compensation expense:Stock options
    
    
    
    
    
    
    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
    
    
    $
    13,928,973
 
 8.




---



##### 



2007
    
    
    2006Cash flows from operating activitiesNet income
    
    $
    817,214
    
    
    $
    1,151,166Adjustments to reconcile net income to net cash
from operating activities:Provision (credit) for loan losses
    
    
    116,202
    
    
    
    (40,230
    )Depreciation
    
    
    188,654
    
    
    
    172,384Net amortization (accretion) of securities
    
    
    (16,863
    )
    
    
    (103,956
    )Stock-based compensation
    
    
    17,446
    
    
    
    2,933Loans originated for sale
    
    
    (1,528,000
    )
    
    
    (1,131,200
    )Proceeds from sales of loan originations
    
    
    1,561,166
    
    
    
    1,151,285Gains on sales of loans and credit card sale
    
    
    (33,166
    )
    
    
    (48,585
    )Loss on disposal of fixed assets
    
    
    
    
    
    
    1,594Gain on sale of other real estate owned
    
    
    (2,285
    )
    
    
    Federal Home Loan Bank stock dividends
    
    
    
    
    
    
    (17,800
    )Increase in cash surrender value of bank owned life insurance
    
    
    (50,107
    )
    
    
    (32,918
    )Net change in other assets and other liabilities
    
    
    (102,782
    )
    
    
    (83,601
    )Net cash from operating activities
    
    
    967,479
    
    
    
    1,021,072Cash flows from investing activitiesAvailable for sale securities:Purchases
    
    
    (1,253,378
    )
    
    
    (9,010,094
    )Maturities, prepayments and calls
    
    
    1,319,957
    
    
    
    5,513,219Purchase of restricted stock
    
    
    (24,600
    )
    
    
    (13,800
    )Net (increase) decrease in interest-bearing deposits in other banks
    
    
    2,200,000
    
    
    
    (2,200,000
    )Net (increase) decrease in loans
    
    
    (11,904,749
    )
    
    
    862,257Purchases of premises and equipment
    
    
    (138,195
    )
    
    
    (107,818
    )Acquisition of other real estate owned
    
    
    
    
    
    
    (135,000
    )Proceeds from sale of other real estate owned
    
    
    267,285
    
    
    
    Proceeds from sale of credit card portfolio
    
    
    
    
    
    
    313,497Purchases of bank owned life insurance
    
    
    
    
    
    
    (500,000
    )Net cash from investing activities
    
    
    (9,533,680
    )
    
    
    (5,277,739
    )Cash flows from financing activitiesNet increase in deposits
    
    
    14,170,145
    
    
    
    14,971,713Proceeds from issuance of common stock under ESPP
    
    
    19,253
    
    
    
    21,072Proceeds and income tax benefit from exercise of stock options
    
    
    98,854
    
    
    
    22,156Cash paid for fractional shares
    
    
    
    
    
    
    (4,803
    )Net cash from financing activities
    
    
    14,288,252
    
    
    
    15,010,138Change in cash and cash equivalents
    
    
    5,722,051
    
    
    
    10,753,471Cash and cash equivalents at beginning of period
    
    
    18,096,477
    
    
    
    7,343,006Cash and cash equivalents at end of period
    
    $
    23,818,528
    
    
    $
    18,096,477Supplemental cash flow information:Interest paid
    
    $
    5,438,997
    
    
    $
    4,278,651Income taxes paid
    
    
    395,000
    
    
    
    617,000Supplemental disclosure of noncash investing activities:Non cash transfer from loans to other real estate owned
    
    $
    327,283
    
    
    $
    130,000Non cash transfer from other real estate owned to other liabilities
    
    
    43,717
    
    
    
    
 
 9.




---



##### 



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




---



##### 



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Concentrations of Credit Risk
 Loans Held for Sale
 Loans
  Allowance for Loan Losses
 
 
  11.




---



##### 



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Transfers of Financial Assets
 Foreclosed Assets
 Premises and Equipment
 Restricted Stock
 Bank-Owned Life Insurance
 
  12.




---



##### 



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Long-Term Assets
 Loan Commitments and Related Financial Instruments
 Income Taxes
 Accounting for Uncertainty in Income Taxes
 Retirement Plans
 Earnings per Common Share
 Stock Split
 Stock Compensation Share-based Payment
 
  13.




---



##### 



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Comprehensive Income
 Loss Contingencies
 Restrictions on Cash
  Dividend Restriction
 Fair Values of Financial Instruments
 Operating Segments
 Reclassifications
 
  14.




---



##### 



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Effect of Newly Issued But Not Yet Effective Accounting Standards: Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Written Loan Commitments
Recorded at Fair Value through Earnings Application of Accounting
Principles to Loan Commitments
 
  15.




---



##### 



NOTE 2  SECURITIES
  Gross Unrealized
    
    
    Gross UnrealizedFair Value
    
    
    Gains
    
    
    Losses2007U.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
    )2006U.S. Government-sponsored enterprises
    
    $
    2,018,404
    
    
    $
    
    
    
    $
    (6,596
    )Mortgage-backed
    
    
    4,470,140
    
    
    
    22,847
    
    
    
    (10,163
    )Municipal
    
    
    4,476,239
    
    
    
    25,787
    
    
    
    (9,811
    )$
    10,964,783
    
    
    $
    48,634
    
    
    $
    (26,570
    )
  Due in one year or less
    
    $
    500,021Due from one to five years
    
    
    1,839,771Due from five to ten years
    
    
    2,372,432Due from ten to fifteen years
    
    
    2,339,647Mortgage-backed
    
    
    3,931,094$
    10,982,965
   Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    LossU.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
    )
 
  16.




---



##### 



NOTE 2  SECURITIES
  Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    LossU.S. Government-sponsored enterprises
    
    $
    
    
    
    $
    
    
    
    $
    768,404
    
    
    $
    (6,596
    )
    
    $
    768,404
    
    
    $
    (6,596
    )Mortgage-backed
    
    
    225,859
    
    
    
    (1,086
    )
    
    
    349,085
    
    
    
    (9,077
    )
    
    
    574,944
    
    
    
    (10,163
    )Municipal
    
    
    
    
    
    
    
    
    
    
    625,301
    
    
    
    (9,811
    )
    
    
    625,301
    
    
    
    (9,811
    )Total
    
    $
    225,859
    
    
    $
    (1,086
    )
    
    $
    1,742,790
    
    
    $
    (25,484
    )
    
    $
    1,968,649
    
    
    $
    (26,570
    )
   NOTE 3  LOANS
  2007
    
    
    2006Commercial business
    
    $
    35,391,508
    
    
    $
    28,987,234Commercial real estate
    
    
    73,122,859
    
    
    
    66,570,136Commercial construction
    
    
    1,919,310
    
    
    
    2,214,763Home equity
    
    
    6,663,412
    
    
    
    7,860,647Residential mortgage
and construction
    
    
    1,513,902
    
    
    
    1,226,016Consumer installment
    
    
    2,985,560
    
    
    
    3,261,615Other
    
    
    31,506
    
    
    
    28,833$
    121,628,057
    
    
    $
    110,149,244
 
  17.




---



##### 



NOTE 3  LOANS
  2007
    
    
    2006Beginning balance
    
    $
    1,588,217
    
    
    $
    1,541,654Provision (credit) for loan losses
    
    
    116,202
    
    
    
    (40,230
    )Loans charged off
    
    
    (203,668
    )
    
    
    (148,881
    )Recoveries
    
    
    105,015
    
    
    
    235,674Ending balance
    
    $
    1,605,766
    
    
    $
    1,588,217
   2007
    
    
    2006Year-end loans with no allocated
allowance for loan losses
    
    $
    720,356
    
    
    $
    1,336,886Year-end loans with allocated
allowance for loan losses
    
    
    
    
    
    
    361,491$
    720,356
    
    
    $
    1,698,377
 2007
    
    2006Amount of the allowance for
loan losses allocated
    
    $
    
    
    
    $
    136,490Average of impaired loans
during the year
    
    
    877,810
    
    
    
    1,324,280
   Beginning balance
    
    $
    870,089New loans
    
    
    1,572,733Repayments
    
    
    (415,280
    )Ending balance
    
    $
    2,027,542
 
  18.




---



##### 



NOTE 4  PREMISES AND EQUIPMENT, NET
  2007
    
    
    2006Leasehold improvements
    
    $
    1,281,280
    
    
    $
    1,198,353Furniture and equipment
    
    
    1,020,404
    
    
    
    969,757Construction in process
    
    
    
    
    
    
    5,6252,301,684
    
    
    
    2,173,735Less accumulated depreciation
    
    
    (1,114,382
    )
    
    
    (935,974
    )$
    1,187,302
    
    
    $
    1,237,761
    2008
    
    $
    377,2132009
    
    
    164,1812010
    
    
    167,4652011
    
    
    170,8142012
    
    
    174,231Thereafter
    
    
    312,991$
    1,366,895
 
  19.




---



##### 



NOTE 5  DEPOSITS
  2007
    
    
    2006Interest-bearing demand
    
    $
    6,662,678
    
    
    $
    7,859,550Savings
    
    
    50,365,334
    
    
    
    35,655,449Money market
    
    
    29,622,534
    
    
    
    22,872,733Time under $100,000
    
    
    22,604,561
    
    
    
    26,049,710Time $100,000 and over
    
    
    15,093,310
    
    
    
    18,706,341$
    124,348,417
    
    
    $
    111,143,783
  2008
    
    $
    26,489,6232009
    
    
    3,819,2422010
    
    
    5,125,1952011
    
    
    1,581,0622012
    
    
    575,002Thereafter
    
    
    107,747$
    37,697,871
    NOTE 6  FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
  2007
    
    
    2006Maturing 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
  
  20.




---



##### 



NOTE 6  FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
    NOTE 7  EMPLOYEE BENEFITS
    
 21.




---



##### 



NOTE 7  EMPLOYEE BENEFITS
    NOTE 8  INCOME TAXES
  2007
    
    
    2006Current
    
    $
    390,838
    
    
    $
    574,743Deferred
    
    
    (57,855
    )
    
    
    (12,498
    )Total income tax expense
    
    $
    332,983
    
    
    $
    562,245
  2007
    
    
    2006Income tax expense
at statutory rate
    
    $
    391,067
    
    
    $
    582,560Tax-exempt income
    
    
    (47,607
    )
    
    
    (15,862
    )Income from life insurance contracts
    
    
    (16,875
    )
    
    
    (11,192
    )Other, net
    
    
    6,398
    
    
    
    6,739Total income tax expense
    
    $
    332,983
    
    
    $
    562,245
 
 22.




---



##### 



NOTE 8  INCOME TAXES
  2007
    
    
    2006Deferred tax assets:Bad debt deduction
    
    $
    441,163
    
    
    $
    401,654Deferred loan fees and costs
    
    
    
    
    
    
    6,441Deferred compensation
    
    
    57,761
    
    
    
    43,138Accrued expenses
    
    
    25,500
    
    
    
    NQ stock option expense
    
    
    1,573
    
    
    
    997525,997
    
    
    
    452,230Deferred tax liabilities:Accrual to cash adjustment
    
    
    
    
    
    
    (5,225
    )Unrealized gain on securities
available for sale
    
    
    (30,587
    )
    
    
    (7,502
    )Deferred loan fees and costs
    
    
    (2,291
    )
    
    
    Prepaid expenses
    
    
    (38,285
    )
    
    
    (36,409
    )Depreciation
    
    
    (35,426
    )
    
    
    (60,062
    )FHLB stock dividends
    
    
    (22,780
    )
    
    
    (22,780
    )(129,369
    )
    
    
    (131,978
    )Net deferred tax asset
    
    $
    396,628
    
    
    $
    320,252
  NOTE 9  STOCK OPTIONS
  
 23.




---



##### 



NOTE 9  STOCK OPTIONS
   2007WeightedAverageExerciseShares
    
    PriceOptions outstanding at beginning of year
    
    
    113,136
    
    
    $
    18.53Granted
    
    
    1,500
    
    
    
    28.33Exercised
    
    
    (4,625
    )
    
    
    17.56Forfeited
    
    
    (125
    )
    
    
    16.00Options outstanding at end of year
    
    
    109,886
    
    
    $
    18.71Options exercisable at year-end
    
    
    107,605
    Outstanding
    
    ExercisableWeighted Average
    
    
    
    
    
    WeightedRemaining
    
    
    
    
    
    AverageContractual
    
    
    
    
    
    ExerciseRange of Exercise Prices
    
    Number
    
    Life (years)
    
    Number
    
    Price$16.00-$19.99
    
    
    82,616
    
    
    
    1.6
    
    
    
    82,616
    
    
    $
    16.78$20.00-$23.99
    
    
    12,812
    
    
    
    3.5
    
    
    
    12,812
    
    
    
    20.01$24.00-$31.99
    
    
    10,451
    
    
    
    2.8
    
    
    
    8,170
    
    
    
    27.14$32.00
    
    
    4,007
    
    
    
    0.8
    
    
    
    4,007
    
    
    
    32.00Outstanding at year-end
    
    
    109,886
    
    
    
    1.9
    
    
    
    107,605
    
    
    $
    18.53
 
 24.




---



##### 



NOTE 9  STOCK OPTIONS
   2007Risk-free interest rate
    
    
    3.96
    %Expected option life (years)
    
    
    7Expected stock price volatility
    
    
    11.70
    %Dividend yield
    
    
    0.00
    %
   2007
    
    2006Proceeds of options exercised
    
    $
    81,200
    
    
    $
    17,600Related tax benefit recognized
    
    
    17,654
    
    
    
    4,556Intrinsic value of options exercised
    
    
    51,925
    
    
    
    13,400
  CompensationCosts2008
    
    $
    3,4812009
    
    
    3,1312010
    
    
    2,9922011
    
    
    2,2952012
    
    
    2,046Total
    
    $
    13,945
 
 25.




---



##### 



NOTE 10  LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
   2007
    
    2006Fixed
    
    
    
    
    
    FixedRate
    
    Variable Rate
    
    Rate
    
    Variable RateCommitments to extend credit
(net of participations)
    
    $
    4,504,000
    
    
    $
    6,285,000
    
    
    $
    626,000
    
    
    $
    6,917,000Unused credit card, home
equity and overdraft
lines of credit
    
    
    
    
    
    
    9,376,000
    
    
    
    
    
    
    
    10,348,000Unused commercial lines
of credit
    
    
    400,000
    
    
    
    17,121,000
    
    
    
    80,000
    
    
    
    16,141,000
    
 26.




---



##### 



NOTE 11  FAIR VALUES OF FINANCIAL INSTRUMENTS
  2007
    
    2006Carrying Amount
    
    Estimated Fair Value
    
    Carrying Amount
    
    Estimated Fair ValueCash and cash equivalents
    
    $
    23,818,528
    
    
    $
    23,819,000
    
    
    $
    18,096,477
    
    
    $
    18,096,000Interest bearing deposits
in other banks
    
    
    
    
    
    
    
    
    
    
    2,200,000
    
    
    
    2,200,000Securities available for sale
    
    
    10,982,965
    
    
    
    10,983,000
    
    
    
    10,964,783
    
    
    
    10,965,000Loans, net of allowance
    
    
    120,022,291
    
    
    
    120,715,000
    
    
    
    108,561,027
    
    
    
    108,660,000Accrued interest receivable
    
    
    631,436
    
    
    
    631,000
    
    
    
    615,801
    
    
    
    616,000Demand and savings deposits
    
    
    (103,731,397
    )
    
    
    (103,731,000
    )
    
    
    (82,503,072
    )
    
    
    (82,503,000
    )Time deposits
    
    
    (37,697,871
    )
    
    
    (37,848,000
    )
    
    
    (44,756,051
    )
    
    
    (44,806,000
    )Federal Home Loan Bank
advances
    
    
    (3,500,000
    )
    
    
    (3,524,000
    )
    
    
    (3,500,000
    )
    
    
    (3,505,000
    )Accrued interest payable
    
    
    (115,212
    )
    
    
    (115,000
    )
    
    
    (146,417
    )
    
    
    (146,000
    )
    
 27.




---



##### 



NOTE 12  REGULATORY CAPITAL MATTERS
     
  28.




---



##### 



NOTE 12  REGULATORY CAPITAL MATTERS
 Minimum To BeWell-CapitalizedUnder PromptMinimum Required For
    
    Corrective ActionWestern Reserve Bank
    
    Capital Adequacy Purposes
    
    Provisions($ thousands)
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio2007Total 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
    %2006Total Capital to
risk-weighted assets
    
    $
    13,341
    
    
    
    11.3
    %
    
    $
    9,448
    
    
    
    8.0
    %
    
    $
    11,810
    
    
    
    10.0
    %Tier 1 (Core) Capital to
risk-weighted assets
    
    
    10,663
    
    
    
    9.0
    %
    
    
    4,724
    
    
    
    4.0
    %
    
    
    7,086
    
    
    
    6.0
    %Tier 1 (Core) Capital to
average assets
    
    
    10,663
    
    
    
    7.5
    %
    
    
    5,658
    
    
    
    4.0
    %
    
    
    7,073
    
    
    
    5.0
    %
 NOTE 13  OTHER NON-INTEREST EXPENSE
  2007
    
    
    2006Insurance
    
    $
    33,941
    
    
    $
    37,609Loan expenses
    
    
    42,281
    
    
    
    28,410Collection expenses
    
    
    95,111
    
    
    
    59,017OREO expenses
    
    
    38,645
    
    
    
    7,897Telephone
    
    
    25,834
    
    
    
    24,927Travel and entertainment
    
    
    46,522
    
    
    
    45,953Other
    
    
    46,702
    
    
    
    77,902Total
    
    $
    329,036
    
    
    $
    281,715
 
  29.




---



##### 



NOTE 14  PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
  
 2007
    
    
    2006ASSETSCash and cash equivalents
    
    $
    544,053
    
    
    $
    726,353Investment in bank subsidiary
    
    
    11,842,086
    
    
    
    10,677,627Restricted stock
    
    
    25,000
    
    
    
    25,000Subordinated debt due from bank subsidiary
    
    
    1,500,000
    
    
    
    1,500,000Other assets
    
    
    19,034
    
    
    
    2,413Total assets
    
    $
    13,930,173
    
    
    $
    12,931,393LIABILITIES AND SHAREHOLDERS EQUITYOther liabilities
    
    $
    1,200
    
    
    $
    Shareholders equity
    
    
    13,928,973
    
    
    
    12,931,393Total liabilities and shareholders equity
    
    $
    13,930,173
    
    
    $
    12,931,393
 
 2007
    
    
    2006Interest and dividend income
    
    $
    76,381
    
    
    $
    75,221Operating expenses
    
    
    80,077
    
    
    
    59,395Income (loss) before income tax and undistributed
income of bank subsidiary
    
    
    (3,696
    )
    
    
    15,826Income tax (expense) benefit
    
    
    1,264
    
    
    
    (5,381
    )Equity in undistributed income of bank subsidiary
    
    
    819,646
    
    
    
    1,140,721Net Income
    
    $
    817,214
    
    
    $
    1,151,166
 
  30.




---



##### 



NOTE 14  PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
 
 2007
    
    
    2006Cash flow from operating activitiesNet income
    
    $
    817,214
    
    
    $
    1,151,166Stock based compensation
    
    
    17,446
    
    
    
    2,933Equity in undistributed
income of bank subsidiary
    
    
    (819,646
    )
    
    
    (1,140,721
    )Change in other assets and liabilities
    
    
    (15,421
    )
    
    
    (1,172
    )Net cash from operating activities
    
    
    (407
    )
    
    
    12,206Cash flows from investing activitiesInvestment in bank subsidiary
    
    
    (300,000
    )
    
    
    Net cash from investing activities
    
    
    (300,000
    )
    
    
    Cash flows from financing activitiesProceeds and income tax benefit from
exercise of stock options
    
    
    98,854
    
    
    
    22,166Proceeds from issuance of common stock
under Employee Stock Purchase Plan
    
    
    19,253
    
    
    
    21,072Cash paid for fractional shares
    
    
    
    
    
    
    (4,803
    )Net cash from financing activities
    
    
    118,107
    
    
    
    38,435Change in cash and cash equivalents
    
    
    (182,300
    )
    
    
    50,641Cash and cash equivalents at beginning of year
    
    
    726,353
    
    
    
    675,712Cash and cash equivalents at end of year
    
    $
    544,053
    
    
    $
    726,353
 NOTE 15  OTHER COMPREHENSIVE INCOME
  2007
    
    
    2006Unrealized holding gains
on available for sale securities
    
    $
    67,898
    
    
    $
    62,575Tax effect
    
    
    (23,085
    )
    
    
    (21,276
    )Net-of-tax amount
    
    $
    44,813
    
    
    $
    41,299
 
  31.




---



##### 



NOTE 16 EARNINGS PER SHARE
   2007
    
    
    2006BasicNet income
    
    $
    817,214
    
    
    $
    1,151,166Weighted average common shares outstanding
    
    
    575,261
    
    
    
    571,853Basic earnings per common share
    
    $
    1.42
    
    
    $
    2.01DilutedNet income
    
    $
    817,214
    
    
    $
    1,151,166Weighted average common shares outstanding
for basic earnings per common share
    
    
    575,261
    
    
    
    571,853Add: Dilutive effects of assumed exercises of stock options
    
    
    25,571
    
    
    
    25,089Average shares and dilutive potential common shares
    
    
    600,832
    
    
    
    596,942Diluted earnings per common share
    
    $
    1.36
    
    
    $
    1.93
 
 
 32.




---



##### 



($000s except per share data)
    
    2007
    
    
    2006Balance Sheet Data:Total assets
    
    $
    159,360
    
    
    $
    144,115Securities available for sale
    
    
    10,983
    
    
    
    10,965Total loans
    
    
    121,628
    
    
    
    110,149Allowance for loan losses
    
    
    1,606
    
    
    
    1,588Total deposits
    
    
    141,429
    
    
    
    127,259Shareholders equity
    
    
    13,929
    
    
    
    12,931Income Statement Data:Total interest income
    
    $
    10,864
    
    
    $
    9,832Total interest expense
    
    
    5,408
    
    
    
    4,277Net interest income
    
    
    5,456
    
    
    
    5,555Provision (credit) for loan losses
    
    
    116
    
    
    
    (40
    )Net interest income after provision (credit) for loan losses
    
    
    5,340
    
    
    
    5,595Noninterest income
    
    
    384
    
    
    
    396Noninterest expense
    
    
    4,574
    
    
    
    4,278Income before income tax
    
    
    1,150
    
    
    
    1,713Income tax expense
    
    
    333
    
    
    
    562Net income
    
    $
    817
    
    
    $
    1,151Per Share Data:Basic income per common share
    
    $
    1.42
    
    
    $
    2.01Diluted income per common share
    
    
    1.36
    
    
    
    1.93Book value per share at year-end
    
    
    24.05
    
    
    
    22.56Cash dividends per share
    
    
    n/a
    
    
    
    n/aAverage shares used in basic income per share calculations
    
    
    575,261
    
    
    
    571,853Average shares used in diluted income per share calculations
    
    
    600,832
    
    
    
    596,942Operating Ratios:Total loans to total deposits
    
    
    86.00
    %
    
    
    86.56
    %Total shareholders equity to total assets
    
    
    8.74
    %
    
    
    8.97
    %Average shareholders equity to average assets
    
    
    8.70
    %
    
    
    9.07
    %Return on average equity
    
    
    6.12
    %
    
    
    9.42
    %Return on average assets
    
    
    0.53
    %
    
    
    0.85
    %Dividend payout ratio
    
    
    n/a
    
    
    
    n/aAllowance for loan losses to total loans
    
    
    1.32
    %
    
    
    1.44
    %Average assets
    
    $
    153,374
    
    
    $
    134,805Average shareholders equity
    
    
    13,345
    
    
    
    12,223
 
 33.




---



##### 



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS
 OVERVIEW
       
 34.




---



##### 



FINANCIAL CONDITION
  SECURITIES
  LOANS
      
 35.




---



##### 



DEPOSITS AND OTHER FUNDING SOURCES
      
 36.




---



##### 



RESULTS OF OPERATIONS
      NET INTEREST INCOME
  
 37.




---



##### 



Year ended
    
    
    Year endedDecember 31, 2007
    
    
    December 31, 2006Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average($ thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateInterest-earning assets:Federal funds sold and
other short-term funds
    
    $
    21,032
    
    
    $
    1,050
    
    
    
    4.99
    %
    
    $
    11,549
    
    
    $
    590
    
    
    
    5.11
    %Securities  taxable
    
    
    6,040
    
    
    
    312
    
    
    
    5.17
    
    
    
    4,654
    
    
    
    208
    
    
    
    4.47Securities  tax exempt
    
    
    4,448
    
    
    
    229
    
    
    
    5.15
    
    
    
    1,511
    
    
    
    76
    
    
    
    5.03Restricted stock
    
    
    587
    
    
    
    36
    
    
    
    6.20
    
    
    
    554
    
    
    
    32
    
    
    
    5.78Loans
    
    
    116,806
    
    
    
    9,294
    
    
    
    7.96
    
    
    
    112,385
    
    
    
    8,945
    
    
    
    7.97Total interest-earning assets
    
    
    148,913
    
    
    
    10,921
    
    
    
    7.33
    
    
    
    130,653
    
    
    
    9,851
    
    
    
    7.54Noninterest earning assets
    
    
    4,461
    
    
    
    
    
    
    
    
    
    
    
    4,152Total Assets
    
    $
    153,374
    
    
    
    
    
    
    
    
    
    
    $
    134,805Interest-bearing liabilitiesTransaction accounts (NOW)
    
    $
    6,435
    
    
    
    64
    
    
    
    1.00
    
    
    $
    7,012
    
    
    
    70
    
    
    
    1.00Market rate savings accounts
    
    
    73,090
    
    
    
    3,386
    
    
    
    4.63
    
    
    
    52,890
    
    
    
    2,277
    
    
    
    4.31Time deposits
    
    
    40,857
    
    
    
    1,831
    
    
    
    4.48
    
    
    
    44,604
    
    
    
    1,803
    
    
    
    4.04Federal Home Loan Bank advances
    
    
    3,500
    
    
    
    127
    
    
    
    3.63
    
    
    
    3,500
    
    
    
    127
    
    
    
    3.63Total interest-bearing liabilities
    
    
    123,882
    
    
    
    5,408
    
    
    
    4.36
    
    
    
    108,006
    
    
    
    4,277
    
    
    
    3.96Noninterest bearing liabilities
    
    
    16,147
    
    
    
    
    
    
    
    
    
    
    
    14,576Shareholders equity
    
    
    13,345
    
    
    
    
    
    
    
    
    
    
    
    12,223Total Liabilities and
Shareholders Equity
    
    $
    153,374
    
    
    
    
    
    
    
    
    
    
    $
    134,805Net interest income
    
    
    
    
    
    
    5,513
    
    
    
    
    
    
    
    
    
    
    
    5,574Tax equivalent adjustment
    
    
    
    
    
    
    (57
    )
    
    
    
    
    
    
    
    
    
    
    (19
    )Net interest income per financial
statements
    
    
    
    
    
    $
    5,456
    
    
    
    
    
    
    
    
    
    
    $
    5,555Net interest margin(Net yield on average earning assets)
    
    
    
    
    
    
    
    
    
    
    3.70
    %
    
    
    
    
    
    
    
    
    
    
    4.27
    %
 
 38.




---



##### 



Summary of Changes in Net Interest Income
 2007 vs. 2006
    
    
    2006 vs. 2005Increase (Decrease) Due to
    
    
    Increase (Decrease) Due to($ thousands)
    
    Volume
    
    
    Rate
    
    
    Net
    
    
    Volume
    
    
    Rate
    
    
    NetInterest income:Federal funds sold and other
short-term funds
    
    $
    474
    
    
    $
    (14
    )
    
    $
    460
    
    
    $
    245
    
    
    $
    143
    
    
    $
    388Securities available-for-sale-
taxable
    
    
    69
    
    
    
    35
    
    
    
    104
    
    
    
    148
    
    
    
    8
    
    
    
    156Securities available-for-sale-
tax-exempt
    
    
    151
    
    
    
    2
    
    
    
    153
    
    
    
    54
    
    
    
    3
    
    
    
    57Restricted stock
    
    
    2
    
    
    
    2
    
    
    
    4
    
    
    
    3
    
    
    
    2
    
    
    
    5Loans receivable
    
    
    360
    
    
    
    (11
    )
    
    
    349
    
    
    
    111
    
    
    
    1,201
    
    
    
    1,312Total interest-earning assets
    
    
    1,056
    
    
    
    14
    
    
    
    1,070
    
    
    
    561
    
    
    
    1,357
    
    
    
    1,918Interest expense:Transaction accounts (NOW)
    
    
    6
    
    
    
    
    
    
    
    6
    
    
    
    (4
    )
    
    
    (15
    )
    
    
    (19
    )Market rate savings accounts
    
    
    (925
    )
    
    
    (184
    )
    
    
    (1,109
    )
    
    
    (435
    )
    
    
    (736
    )
    
    
    (1,171
    )Time deposits
    
    
    157
    
    
    
    (185
    )
    
    
    (28
    )
    
    
    145
    
    
    
    (283
    )
    
    
    (138
    )FHLB borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    (3
    )
    
    
    (15
    )Total interest-bearing
liabilities
    
    
    (762
    )
    
    
    (369
    )
    
    
    (1,131
    )
    
    
    (306
    )
    
    
    (1,037
    )
    
    
    (1,343
    )Change in net interest income
    
    $
    294
    
    
    $
    (355
    )
    
    $
    61
    
    
    $
    255
    
    
    $
    320
    
    
    $
    575
   
 39.




---



##### 



NONINTEREST INCOME
    
 40.




---



##### 



NONINTEREST EXPENSE
    PROVISION AND ALLOWANCE FOR LOAN LOSSES
  
 41.




---



##### 



LIQUIDITY
  .
 INTEREST RATE SENSITIVITY/GAP
   
 42.




---



##### 



CAPITAL RESOURCES
   
 43.




---



##### 



CRITICAL ACCOUNTING POLICIES
  
 44.




---



##### 



CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET ARRANGEMENTS
   Note(Dollars in thousands)
    
    Reference
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012
    
    ThereafterDeposits without
maturity
    
    
    5
    
    
    $
    103,731Time deposits
    
    
    5
    
    
    
    26,490
    
    
    $
    3,819
    
    
    $
    5,125
    
    
    $
    1,581
    
    
    $
    575
    
    
    $
    108FHLB advances and
other borrowings
    
    
    6
    
    
    
    
    
    
    
    2,500
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    4
    
    
    
    377
    
    
    
    164
    
    
    
    168
    
    
    
    171
    
    
    
    174
    
    
    
    313
   IMPACT OF INFLATION AND CHANGING PRICES
  
 45.




---



##### 



FORWARD LOOKING STATEMENTS
  
 46.




---



##### 



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
    
    C.E.O.Medina, 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




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##### 



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