##### 



Exhibit 13
 WESTERN RESERVE BANCORP, INC.
 ANNUAL REPORT




---



##### 



WESTERN RESERVE BANCORP, INC.
Medina, Ohio
 ANNUAL REPORT
December 31, 2005
 CONTENTS
 LETTER TO SHAREHOLDERS
    
    
    1REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    3CONSOLIDATED FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETS
    
    
    4CONSOLIDATED STATEMENTS OF INCOME
    
    
    5CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY
    
    
    6CONSOLIDATED STATEMENTS OF CASH FLOWS
    
    
    7NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    8COMPARATIVE SUMMARY OF SELECTED FINANCIAL DATA
    
    
    29MANAGEMENTS DISCUSSION AND ANALYSIS
    
    
    30
 Cover design by Renée W. Gareau, Zinnias Design Studio, Berea, Ohio 440-239-2437.




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##### 



What is the status of the collection efforts regarding the loan loss from 2004?
      How is the new bank in Brecksville doing?
  1.




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##### 



Why has our growth slowed?
  If Brecksville is growing so rapidly, why isnt the bank growing at least that much?
  You paid performance bonuses for poor performance in 2004. Have you really corrected that
situation?
 th
   Edward J. McKeon
    
    P.M. JonesPresident & CEO
    
    Chairman of the Board
 2.




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##### 



3.




---



##### 



2005
    
    
    2004ASSETSCash and due from financial institutions
    
    $
    2,228,258
    
    
    $
    2,059,119Federal funds sold and other short-term funds
    
    
    5,114,748
    
    
    
    4,877,000Cash and cash equivalents
    
    
    7,343,006
    
    
    
    6,936,119Securities available for sale
    
    
    7,301,377
    
    
    
    1,204,686Restricted stock
    
    
    537,200
    
    
    
    477,200Loans held for sale
    
    
    
    
    
    
    250,835Loans
    
    
    111,189,355
    
    
    
    104,735,255Allowance for loan losses
    
    
    (1,541,654
    )
    
    
    (1,605,933
    )Loans, net
    
    
    109,647,701
    
    
    
    103,129,322Premises and equipment, net
    
    
    1,303,921
    
    
    
    1,371,248Accrued interest receivable and other assets
    
    
    1,650,798
    
    
    
    1,880,740$
    127,784,003
    
    
    $
    115,250,150LIABILITIES AND SHAREHOLDERS EQUITYDepositsNoninterest-bearing
    
    $
    12,899,265
    
    
    $
    12,668,555Interest-bearing
    
    
    99,388,145
    
    
    
    89,158,414Total deposits
    
    
    112,287,410
    
    
    
    101,826,969Federal Home Loan Bank advances
    
    
    3,500,000
    
    
    
    2,500,000Accrued interest payable and other liabilities
    
    
    398,254
    
    
    
    307,252Total liabilities
    
    
    116,185,664
    
    
    
    104,634,221Shareholders equityCommon stock, no par value, $1 stated value
750,000 shares authorized, 457,331 and
455,624 shares issued and outstanding as of
December 31, 2005 and December 31, 2004
    
    
    457,331
    
    
    
    455,624Additional paid-in capital
    
    
    9,528,376
    
    
    
    9,484,470Retained earnings
    
    
    1,639,369
    
    
    
    678,651Accumulated other comprehensive income (loss)
    
    
    (26,737
    )
    
    
    (2,816
    )Total shareholders equity
    
    
    11,598,339
    
    
    
    10,615,929$
    127,784,003
    
    
    $
    115,250,150
  4.




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##### 



2005
    
    
    2004Interest and dividend incomeLoans, including fees
    
    $
    7,633,389
    
    
    $
    5,959,491Securities
    
    
    66,138
    
    
    
    59,275Dividends on restricted stock
    
    
    27,007
    
    
    
    22,303Federal funds sold and other short-term funds
    
    
    201,977
    
    
    
    62,8367,928,511
    
    
    
    6,103,905Interest expenseDeposits
    
    
    2,821,865
    
    
    
    1,852,117Federal Home Loan Bank advances and other debt
    
    
    111,675
    
    
    
    172,4402,933,540
    
    
    
    2,024,557Net interest income
    
    
    4,994,971
    
    
    
    4,079,348Provision for loan losses
    
    
    17,811
    
    
    
    1,324,764Net interest income after provision for loan losses
    
    
    4,977,160
    
    
    
    2,754,584Noninterest incomeService charges on deposit accounts
    
    
    141,814
    
    
    
    116,095Net gains on sales of loans
    
    
    160,927
    
    
    
    191,073Other
    
    
    154,321
    
    
    
    128,682457,062
    
    
    
    435,850Noninterest expenseSalaries and employee benefits
    
    
    1,908,367
    
    
    
    1,672,294Premises and equipment
    
    
    793,822
    
    
    
    517,001Data processing
    
    
    304,966
    
    
    
    247,994Professional fees
    
    
    359,562
    
    
    
    192,966Taxes other than income and payroll
    
    
    100,384
    
    
    
    91,812Supplies, printing and postage
    
    
    78,303
    
    
    
    74,387Community relations and contributions
    
    
    67,452
    
    
    
    68,191Other
    
    
    375,557
    
    
    
    291,5273,988,413
    
    
    
    3,156,172Income before income taxes
    
    
    1,445,809
    
    
    
    34,262Income tax expense
    
    
    485,091
    
    
    
    9,782Net income
    
    $
    960,718
    
    
    $
    24,480Earnings per share:Basic
    
    $
    2.10
    
    
    $
    0.06Diluted
    
    $
    2.04
    
    
    $
    0.06
  5.




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##### 



AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalCommon
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    ShareholdersStock
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    EquityBalance, January 1, 2004
    
    $
    388,052
    
    
    $
    7,557,845
    
    
    $
    654,171
    
    
    $
    12,587
    
    
    $
    8,612,655Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    24,480
    
    
    
    
    
    
    
    24,480Change in unrealized net gain
(loss) on securities available
for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,403
    )
    
    
    (15,403
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,077Exercise of stock options (250 shares)
    
    
    250
    

    
    
    4,750
    
    
    
    
    
    
    
    
    
    
    
    5,000Common stock issued (700 shares)
under Employee Stock Purchase
Plan
    
    
    700
    
    
    
    20,292
    
    
    
    
    
    
    
    
    
    
    
    20,992Common stock issued
(66,622 shares) under stock
offering, net of offering costs
    
    
    66,622
    
    
    
    1,901,583
    
    
    
    
    
    
    
    
    
    
    
    1,968,205Balance, December 31, 2004
    
    
    455,624
    
    
    
    9,484,470
    
    
    
    678,651
    
    
    
    (2,816
    )
    
    
    10,615,929Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    960,718
    
    
    
    
    
    
    
    960,718Change in unrealized net gain
(loss) on securities available
for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,921
    )
    
    
    (23,921
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    936,797Exercise of stock options (1,100 shares)
    
    
    1,100
    

    
    
    25,960
    
    
    
    
    
    
    
    
    
    
    
    27,060Common stock issued (607 shares)
under Employee Stock Purchase
Plan
    
    
    607
    
    
    
    17,946
    
    
    
    
    
    
    
    
    
    
    
    18,553Balance, December 31, 2005
    
    $
    457,331
    
    
    $
    9,528,376
    
    
    $
    1,639,369
    
    
    $
    (26,737
    )
    
    $
    11,598,339
  6.




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##### 



2005
    
    
    2004Cash flows from operating activitiesNet income
    
    $
    960,718
    
    
    $
    24,480Adjustments to reconcile net income
to net cash from operating activitiesProvision for loan losses
    
    
    17,811
    
    
    
    1,324,764Depreciation
    
    
    176,162
    
    
    
    111,560Net amortization of securities
    
    
    1,010
    
    
    
    12,821Loans originated for sale
    
    
    (2,895,284
    )
    
    
    (4,342,668
    )Proceeds from sales of loan originations
    
    
    2,438,053
    
    
    
    4,282,906Gains on sales of loans
    
    
    (160,927
    )
    
    
    (191,073
    )Federal Home Loan Bank stock dividends
    
    
    (14,000
    )
    
    
    (10,400
    )Net change in:Interest receivable
    
    
    (114,987
    )
    
    
    (73,109
    )Interest payable
    
    
    36,250
    
    
    
    8,304Other assets
    
    
    357,252
    
    
    
    (619,811
    )Other liabilities
    
    
    57,812
    
    
    
    75,312Net cash from operating activities
    
    
    859,870
    
    
    
    603,086Cash flows from investing activitiesAvailable for sale securities:Purchases
    
    
    (6,796,807
    )
    
    
    Maturities, prepayments and calls
    
    
    662,862
    
    
    
    500,852Purchase of restricted stock
    
    
    (46,000
    )
    
    
    (82,200
    )Net increase in loans
    
    
    (5,667,197
    )
    
    
    (10,408,488
    )Purchases of premises and equipment
    
    
    (108,835
    )
    
    
    (807,403
    )Net cash from investing activities
    
    
    (11,955,977
    )
    
    
    (10,797,239
    )Cash flows from financing activitiesNet increase in deposits
    
    
    10,460,441
    
    
    
    10,046,712Proceeds from Federal Home Loan Bank advances
    
    
    1,000,000
    
    
    
    2,500,000Repayment of Federal Home Loan Bank advances
    
    
    
    
    
    
    (3,200,000
    )Proceeds from other borrowings
    
    
    
    
    
    
    300,000Repayment of other borrowings
    
    
    
    
    
    
    (800,000
    )Proceeds from issuance of common stock
under Employee Stock Purchase Plan
    
    
    18,553
    
    
    
    20,992Proceeds from exercise of stock options
    
    
    24,000
    
    
    
    5,000Net proceeds from stock offering
    
    
    
    
    
    
    1,968,205Net cash from financing activities
    
    
    11,502,994
    
    
    
    10,840,909Change in cash and cash equivalents
    
    
    406,887
    
    
    
    646,756Cash and cash equivalents at beginning of period
    
    
    6,936,119
    
    
    
    6,289,363Cash and cash equivalents at end of period
    
    $
    7,343,006
    
    
    $
    6,936,119Supplemental cash flow information:Interest paid
    
    $
    2,897,289
    
    
    $
    2,015,923Income taxes paid (refunded)
    
    
    (26,090
    )
    
    
    543,000Supplemental disclosure of noncash activities:Investing: Non cash transfer from loans originated for sale to loans
    
    $
    868,993
    
    
    $
    
  7.




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##### 



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Principles of Consolidation
 Nature of Operations
 Use of Estimates
 Cash and Cash Equivalents
 Securities
    8.




---



##### 



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Concentrations of Credit Risk
 Loans
  Loans Held for Sale
 Allowance for Loan Losses
   9.




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##### 






NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Foreclosed Assets
 Premises and Equipment
 Restricted Stock
 Company-Owned Life Insurance
 Long-Term Assets
 Loan Commitments and Related Financial Instruments
 Income Taxes
  10.




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##### 



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Earnings per Common Share
 Stock Compensation Accounting for Stock Based Compensation
 2005
    
    
    2004Net income as reported
    
    $
    960,718
    
    
    $
    24,480Deduct: stock based
compensation expense
determined under fair value
based method
    
    
    (3,293
    )
    
    
    (8,461
    )Pro forma net income
    
    $
    957,425
    
    
    $
    16,019Basic earnings per share
as reported
    
    $
    2.10
    
    
    $
    0.06Pro forma basic earnings
per share
    
    $
    2.10
    
    
    $
    0.04Diluted earnings per share
as reported
    
    $
    2.04
    
    
    $
    0.06Pro forma diluted earnings
per share
    
    $
    2.03
    
    
    $
    0.04
  2005Risk-free interest rate
    
    
    4.27
    %Expected option life (years)
    
    
    7Expected stock price volatility
    
    
    7.09
    %Dividend yield
    
    
    0.00
    %
   11.




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##### 



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Comprehensive Income
 Effect of Newly Issued But Not Yet Effective Accounting Standards:
 Loss Contingencies
 Restrictions on Cash
 Dividend Restriction
 Fair Values of Financial Instruments
  12.




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##### 



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Operating Segments
 Reclassifications
 NOTE 2
 ORGANIZATION
    13.




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##### 



NOTE 3  SECURITIES
  Gross
    
    
    GrossFair
    
    
    Unrealized
    
    
    UnrealizedValue
    
    
    Gains
    
    
    Losses2005U.S. Government-sponsored enterprises
    
    $
    1,012,221
    
    
    $
    
    
    
    $
    (10,954
    )U.S. Treasury
    
    
    4,901,067
    
    
    
    
    
    
    
    Mortgage-backed
    
    
    772,822
    
    
    
    620
    
    
    
    (12,564
    )Municipal
    
    
    615,267
    
    
    
    
    
    
    
    (17,613
    )$
    7,301,377
    
    
    $
    620
    
    
    $
    (41,131
    )2004U.S. Government-sponsored enterprises
    
    $
    502,165
    
    
    $
    1,658
    
    
    $
    Mortgage-backed
    
    
    702,521
    
    
    
    430
    
    
    
    (6,355
    )$
    1,204,686
    
    
    $
    2,088
    
    
    $
    (6,355
    )
   Due in one year or less
    
    $
    5,147,800Due from one to five years
    
    
    765,488Due from five to ten years
    
    
    405,485Due from ten to fifteen years
    
    
    209,782Mortgage-backed
    
    
    772,822$
    7,301,377
   14.




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##### 



NOTE 4  LOANS
  2005
    
    
    2004Commercial business
    
    $
    28,392,851
    
    
    $
    33,584,605Commercial real estate
    
    
    65,367,133
    
    
    
    51,972,391Commercial construction
    
    
    4,465,089
    
    
    
    6,898,890Home equity
    
    
    9,589,660
    
    
    
    9,857,867Residential mortgage
and construction
    
    
    917,565
    
    
    
    821,658Consumer installment
    
    
    2,108,230
    
    
    
    1,308,084Credit card and other
    
    
    348,827
    
    
    
    291,760$
    111,189,355
    
    
    $
    104,735,255
  2005
    
    
    2004Beginning balance
    
    $
    1,605,933
    
    
    $
    1,502,688Provision for loan losses
    
    
    17,811
    
    
    
    1,324,764Loans charged off
    
    
    (83,971
    )
    
    
    (1,321,207
    )Recoveries
    
    
    1,881
    
    
    
    99,688Ending balance
    
    $
    1,541,654
    
    
    $
    1,605,933
   2005
    
    
    2004Year-end loans with no allocated
allowance for loan losses
    
    $
    945,029
    
    
    $
    416,101Year-end loans with allocated
allowance for loan losses
    
    
    66,850
    
    
    
    873,452$
    1,011,879
    
    
    $
    1,289,553
 2005
    
    
    2004Amount of the allowance for
loan losses allocated
    
    $
    40,961
    
    
    $
    206,000Average of impaired loans
during the year
    
    
    1,088,110
    
    
    
    1,709,057Interest income recognized
during impairment
    
    
    
    
    
    
    20,991Cash-basis interest income
recognized
    
    
    
    
    
    
    20,991
  15.




---



##### 



NOTE 4  LOANS
  Beginning balance
    
    $
    1,916,710New loans
    
    
    165,212Repayments
    
    
    (1,174,235
    )Ending balance
    
    $
    907,687
 NOTE 5  PREMISES AND EQUIPMENT, NET
  2005
    
    
    2004Leasehold improvements
    
    $
    1,198,353
    
    
    $
    1,158,301Furniture and equipment
    
    
    947,318
    
    
    
    878,5362,145,671
    
    
    
    2,036,837Less accumulated depreciation
    
    
    (841,750
    )
    
    
    (665,589
    )$
    1,303,921
    
    
    $
    1,371,248
   2006
    
    $
    404,9582007
    
    
    413,0532008
    
    
    377,2132009
    
    
    164,1812010
    
    
    167,465Thereafter
    
    
    658,036$
    2,184,906
  16.




---



##### 



NOTE 6  DEPOSITS
  2005
    
    
    2004Interest-bearing demand
    
    $
    6,300,341
    
    
    $
    6,770,262Savings
    
    
    28,009,939
    
    
    
    21,934,769Money market
    
    
    17,920,336
    
    
    
    12,827,391Time under $100,000
    
    
    28,241,158
    
    
    
    29,027,314Time $100,000 and over
    
    
    18,916,371
    
    
    
    18,598,678$
    99,388,145
    
    
    $
    89,158,414
   2006
    
    $
    18,497,2022007
    
    
    12,348,5102008
    
    
    8,692,0042009
    
    
    2,060,0532010
    
    
    5,445,202$
    47,042,971
   NOTE 7  FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
  December 31,
    
    
    December 31,2005
    
    
    2004Maturing 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
    
    
    
    $
    3,500,000
    
    
    $
    2,500,000
   17.




---



##### 



NOTE 7  FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
     NOTE 8
 EMPLOYEE BENEFITS
   18.




---



##### 



NOTE 8
 EMPLOYEE BENEFITS
   NOTE 9  INCOME TAXES
  2005
    
    
    2004Current
    
    $
    442,368
    
    
    $
    852Deferred
    
    
    42,723
    
    
    
    8,930Total income tax expense
    
    $
    485,091
    
    
    $
    9,782
  2005
    
    
    2004Income tax expense
at statutory rate
    
    $
    491,575
    
    
    $
    11,649Income from life insurance contract
    
    
    (7,662
    )
    
    
    (7,474
    )Other, net
    
    
    1,178
    
    
    
    5,607Total income tax expense
    
    $
    485,091
    
    
    $
    9,782
  19.




---



##### 



NOTE 9  INCOME TAXES
  2005
    
    
    2004Deferred tax assets:Bad debt deduction
    
    $
    415,332
    
    
    $
    425,515Deferred loan fees
    
    
    51,136
    
    
    
    51,344Net operating loss carryforward
    
    
    
    
    
    
    64,369Unrealized loss on securities
available for sale
    
    
    13,774
    
    
    
    1,451Deferred compensation
    
    
    28,378
    
    
    
    17,535508,620
    
    
    
    560,214Deferred tax liabilities:Discount accretion
    
    
    (1,791
    )
    
    
    Accrual to cash adjustment
    
    
    (10,451
    )
    
    
    (15,676
    )Prepaid expenses
    
    
    (35,669
    )
    
    
    (34,165
    )Depreciation
    
    
    (63,832
    )
    
    
    (87,856
    )FHLB stock dividends
    
    
    (16,728
    )
    
    
    (11,968
    )(128,471
    )
    
    
    (149,665
    )Net deferred tax asset
    
    $
    380,149
    
    
    $
    410,549
 NOTE 10  STOCK OPTIONS
   20.




---



##### 



NOTE 10  STOCK OPTIONS
  2005
    
    
    2004Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    PriceOptions outstanding
at beginning of year
    
    
    92,162
    
    
    $
    23.09
    
    
    
    92,412
    
    
    $
    23.08Granted
    
    
    750
    
    
    
    30.75
    
    
    
    
    
    
    
    Exercised
    
    
    (1,100
    )
    
    
    21.82
    
    
    
    (250
    )
    
    
    20.00Forfeited
    
    
    (500
    )
    
    
    26.00
    
    
    
    
    
    
    
    Options outstanding
at end of year
    
    
    91,312
    
    
    $
    23.15
    
    
    
    92,162
    
    
    $
    23.09Options available for
grant at year-end
    
    
    7,338
    
    
    
    
    
    
    
    7,588Options exercisable
at year-end
    
    
    90,062
    
    
    
    
    
    
    
    91,037
  Outstanding
    
    
    ExercisableWeightedAverage
    
    
    
    
    
    
    WeightedRemaining
    
    
    
    
    
    
    AverageContractual
    
    
    
    
    
    
    ExerciseRange of Exercise Prices
    
    Number
    
    
    Life (years)
    
    
    Number
    
    
    Price$20.00-$24.99
    
    
    70,694
    
    
    
    3.6
    
    
    
    70,694
    
    
    $
    21.04$25.00-$29.99
    
    
    10,250
    
    
    
    5.5
    
    
    
    9,750
    
    
    
    25.05$30.00-$39.99
    
    
    7,162
    
    
    
    3.6
    
    
    
    6,412
    
    
    
    34.00$40.00
    
    
    3,206
    
    
    
    2.8
    
    
    
    3,206
    
    
    
    40.00Outstanding at year-end
    
    
    91,312
    
    
    
    3.8
    
    
    
    90,062
    
    
    $
    23.07
   21.




---



##### 



NOTE 11  LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
   2005
    
    
    2004Fixed
    
    
    Variable
    
    
    Fixed
    
    
    VariableRate
    
    
    Rate
    
    
    Rate
    
    
    RateCommitments to extend credit
(net of participations)
    
    $
    336,000
    
    
    $
    3,526,000
    
    
    $
    868,000
    
    
    $
    6,048,000Unused credit card, home
equity and overdraft
lines of credit
    
    
    
    
    
    
    10,790,000
    
    
    
    
    
    
    
    9,599,000Unused commercial lines
of credit
    
    
    248,000
    
    
    
    17,380,000
    
    
    
    327,000
    
    
    
    13,728,000
     22.




---



##### 



NOTE 12  FAIR VALUES OF FINANCIAL INSTRUMENTS
  2005
    
    2004Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair ValueCash and cash equivalents
    
    $
    7,343,006
    
    
    $
    7,343,000
    
    
    $
    6,936,119
    
    
    $
    6,936,000Securities available for sale
    
    
    7,301,377
    
    
    
    7,301,000
    
    
    
    1,204,686
    
    
    
    1,205,000Loans held for sale
    
    
    
    
    
    
    
    
    
    
    250,835
    
    
    
    251,000Loans, net of allowance
    
    
    109,647,701
    
    
    
    109,249,000
    
    
    
    103,129,322
    
    
    
    102,395,000Restricted stock
    
    
    537,200
    
    
    
    537,000
    
    
    
    477,200
    
    
    
    477,000Accrued interest receivable
    
    
    458,614
    
    
    
    459,000
    
    
    
    343,627
    
    
    
    344,000Demand and savings deposits
    
    
    (65,139,137
    )
    
    
    (65,139,000
    )
    
    
    (54,200,977
    )
    
    
    (54,201,000
    )Time deposits
    
    
    (47,148,273
    )
    
    
    (47,011,000
    )
    
    
    (47,625,992
    )
    
    
    (47,388,000
    )Federal Home Loan Bank
advances
    
    
    (3,500,000
    )
    
    
    (3,463,000
    )
    
    
    (2,500,000
    )
    
    
    (2,457,000
    )Accrued interest payable
    
    
    (147,973
    )
    
    
    (148,000
    )
    
    
    (111,723
    )
    
    
    (112,000
    )
     23.




---



##### 



NOTE 13  CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
      24.




---



##### 



NOTE 13  CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
 Minimum To BeMinimum
    
    
    Well-CapitalizedRequired For
    
    
    Under PromptWestern Reserve
    
    
    Capital Adequacy
    
    
    Corrective Action($ thousands)
    
    Bank
    
    
    Purposes
    
    
    ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio2005Total Capital to
risk-weighted assets
    
    $
    12,325
    
    
    
    11.0
    %
    
    $
    8,959
    
    
    
    8.0
    %
    
    $
    11,199
    
    
    
    10.0
    %Tier 1 (Core) Capital to
risk-weighted assets
    
    
    9,423
    
    
    
    8.4
    %
    
    
    4,479
    
    
    
    4.0
    %
    
    
    6,719
    
    
    
    6.0
    %Tier 1 (Core) Capital to
average assets
    
    
    9,423
    
    
    
    7.4
    %
    
    
    5,115
    
    
    
    4.0
    %
    
    
    6,394
    
    
    
    5.0
    %2004Total Capital to
risk-weighted assets
    
    $
    10,888
    
    
    
    10.2
    %
    
    $
    8,511
    
    
    
    8.0
    %
    
    $
    10,639
    
    
    
    10.0
    %Tier 1 (Core) Capital to
risk-weighted assets
    
    
    8,055
    
    
    
    7.6
    %
    
    
    4,255
    
    
    
    4.0
    %
    
    
    6,383
    
    
    
    6.0
    %Tier 1 (Core) Capital to
average assets
    
    
    8,055
    
    
    
    6.9
    %
    
    
    4,687
    
    
    
    4.0
    %
    
    
    5,858
    
    
    
    5.0
    %
 NOTE 14  OTHER NON-INTEREST EXPENSE
  2005
    
    
    2004Insurance
    
    $
    56,397
    
    
    $
    54,182Loan expenses
    
    
    25,435
    
    
    
    28,520Marketing and advertising
    
    
    106,009
    
    
    
    64,538Collection/repo/OREO expenses
    
    
    50,285
    
    
    
    22,165Telephone
    
    
    26,395
    
    
    
    25,736Travel and entertainment
    
    
    41,493
    
    
    
    37,004Losses on other assets
    
    
    
    
    
    
    1,043Other
    
    
    69,543
    
    
    
    58,339Total
    
    $
    375,557
    
    
    $
    291,527
  25.




---



##### 



NOTE 15  PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
  
 2005
    
    
    2004ASSETSCash and cash equivalents
    
    $
    675,712
    
    
    $
    1,349,339Investment in bank subsidiary
    
    
    9,396,376
    
    
    
    8,052,085Restricted stock
    
    
    25,000
    
    
    
    Subordinated debt due from bank
    
    
    1,500,000
    
    
    
    1,500,000Other assets
    
    
    15,831
    
    
    
    14,505Total assets
    
    $
    11,612,919
    
    
    $
    10,915,929LIABILITIES AND SHAREHOLDERS EQUITYDue to bank
    
    $
    
    
    
    $
    300,000Other liabilities
    
    
    14,580
    
    
    
    Shareholders equity
    
    
    11,598,339
    
    
    
    10,615,929Total liabilities and shareholders equity
    
    $
    11,612,919
    
    
    $
    10,915,929
 
 2005
    
    
    2004Interest and dividend income
    
    $
    48,359
    
    
    $
    21,997Interest expense
    
    
    
    
    
    
    19,235Operating expenses
    
    
    59,714
    
    
    
    45,426Loss before income tax and undistributed
income of subsidiary
    
    
    (11,355
    )
    
    
    (42,664
    )Income tax benefit
    
    
    3,861
    
    
    
    14,506Equity in undistributed income of subsidiary
    
    
    968,212
    
    
    
    52,638Net Income
    
    $
    960,718
    
    
    $
    24,480
  26.




---



##### 



NOTE 15  PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
 
 2005
    
    
    2004Cash flow from operating activitiesNet income
    
    $
    960,718
    
    
    $
    24,480Equity in undistributed
income of subsidiary
    
    
    (968,212
    )
    
    
    (52,638
    )Change in other assets and liabilities
    
    
    (283,686
    )
    
    
    332,158Net cash from operating activities
    
    
    (291,180
    )
    
    
    304,000Cash flows from investing activitiesInvestment in subsidiary
    
    
    (400,000
    )
    
    
    (600,000
    )Purchase of restricted stock
    
    
    (25,000
    )
    
    
    Net cash from investing activities
    
    
    (425,000
    )
    
    
    (600,000
    )Cash flows from financing activitiesProceeds from exercise of stock options
    
    
    24,000
    
    
    
    5,000Proceeds from issuance of common stock
under Employee Stock Purchase Plan
    
    
    18,553
    
    
    
    20,992Net proceeds from stock offering
    
    
    
    
    
    
    1,968,205Proceeds from borrowing
    
    
    
    
    
    
    300,000Repayment of borrowing
    
    
    
    
    
    
    (800,000
    )Net cash from financing activities
    
    
    42,553
    
    
    
    1,494,197Change in cash and cash equivalents
    
    
    (673,627
    )
    
    
    1,198,197Cash and cash equivalents at beginning of year
    
    
    1,349,339
    
    
    
    151,142Cash and cash equivalents at end of year
    
    $
    675,712
    
    
    $
    1,349,339
 NOTE 16  EARNINGS PER SHARE
   27.




---



##### 



NOTE
16  EARNINGS PER SHARE
  2005
    
    
    2004BasicNet income
    
    $
    960,718
    
    
    $
    24,480Weighted average common
shares outstanding
    
    
    456,636
    
    
    
    402,956Basic earnings per
common share
    
    $
    2.10
    
    
    $
    0.06DilutedNet income
    
    $
    960,718
    
    
    $
    24,480Weighted average common
shares outstanding for basic
earnings per common share
    
    
    456,636
    
    
    
    402,956Add: Dilutive effects of assumed
exercises of stock options
    
    
    15,405
    
    
    
    13,009Average shares and dilutive
potential common shares
    
    
    472,041
    
    
    
    415,965Diluted earnings per
common share
    
    $
    2.04
    
    
    $
    0.06
 
  28.




---



##### 



($000s except per share data)
    
    2005
    
    
    2004Balance Sheet Data:Total assets
    
    $
    127,784
    
    
    $
    115,250Securities available for sale
    
    
    7,301
    
    
    
    1,205Total loans
    
    
    111,189
    
    
    
    104,735Allowance for loan losses
    
    
    1,542
    
    
    
    1,606Total deposits
    
    
    112,287
    
    
    
    101,827Shareholders equity
    
    
    11,598
    
    
    
    10,616Income Statement Data:Total interest income
    
    $
    7,928
    
    
    $
    6,104Total interest expense
    
    
    2,933
    
    
    
    2,025Net interest income
    
    
    4,995
    
    
    
    4,079Provision for loan losses
    
    
    18
    
    
    
    1,325Net interest income after provision for loan losses
    
    
    4,977
    
    
    
    2,754Noninterest income
    
    
    457
    
    
    
    436Noninterest expense
    
    
    3,988
    
    
    
    3,156Income before income tax
    
    
    1,446
    
    
    
    34Income tax expense
    
    
    485
    
    
    
    10Net income
    
    $
    961
    
    
    $
    24Per Share Data:Basic income per common share
    
    $
    2.10
    
    
    $
    0.06Diluted income per common share
    
    
    2.04
    
    
    
    0.06Book value per share at year-end
    
    
    25.36
    
    
    
    23.30Cash dividends per share
    
    
    n/a
    
    
    
    n/aAverage shares used in basic income per share calculations
    
    
    456,636
    
    
    
    402,956Average shares used in diluted income per share calculations
    
    
    472,041
    
    
    
    415,965Operating Ratios:Total loans to total deposits
    
    
    99.02
    %
    
    
    102.86
    %Total shareholders equity to total assets
    
    
    9.07
    %
    
    
    9.21
    %Average shareholders equity to average assets
    
    
    9.04
    %
    
    
    8.45
    %Return on average equity
    
    
    8.68
    %
    
    
    0.25
    %Return on average assets
    
    
    0.78
    %
    
    
    0.02
    %Dividend payout ratio
    
    
    n/a
    
    
    
    n/aAllowance for loan losses to total loans
    
    
    1.39
    %
    
    
    1.53
    %Average assets
    
    $
    122,439
    
    
    $
    112,943Average shareholders equity
    
    
    11,072
    
    
    
    9,546
 29.




---



##### 



WESTERN RESERVE BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS
 OVERVIEW
      30.




---



##### 



FINANCIAL CONDITION
   SECURITIES
  31.




---



##### 



LOANS
       32.




---



##### 



DEPOSITS AND OTHER FUNDING SOURCES
        RESULTS OF OPERATIONS
   33.




---



##### 



NET INTEREST INCOME
  34.




---



##### 



Year ended
    
    
    Year endedDecember 31, 2005
    
    
    December 31, 2004Average
    
    

    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    Average($ thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateInterest-earning assets:Federal funds sold and
other short-term funds
    
    $
    6,055
    
    
    $
    202
    
    
    
    3.34
    %
    
    $
    4,909
    
    
    $
    63
    
    
    
    1.28
    %Securities  taxable
    
    
    1,318
    
    
    
    52
    
    
    
    3.98
    
    
    
    1,570
    
    
    
    59
    
    
    
    3.78Securities
 tax exempt
    
    
    422
    
    
    
    19
    
    
    
    4.94
    
    
    
    
    
    
    
    
    
    
    
    Loans
    
    
    110,273
    
    
    
    7,633
    
    
    
    6.92
    
    
    
    103,196
    
    
    
    5,959
    
    
    
    5.77Restricted stock
    
    
    505
    
    
    
    27
    
    
    
    5.34
    
    
    
    452
    
    
    
    23
    
    
    
    4.94Total interest-earning assets
    
    
    118,573
    
    
    
    7,933
    
    
    
    6.69
    
    
    
    110,127
    
    
    
    6,104
    
    
    
    5.54Interest-bearing liabilitiesTransaction accounts (NOW)
    
    
    6,559
    
    
    
    51
    
    
    
    0.78
    
    
    
    6,432
    
    
    
    39
    
    
    
    0.60Market rate savings accounts
    
    
    39,882
    
    
    
    1,106
    
    
    
    2.77
    
    
    
    29,185
    
    
    
    335
    
    
    
    1.15Time deposits
    
    
    48,675
    
    
    
    1,665
    
    
    
    3.42
    
    
    
    51,535
    
    
    
    1,479
    
    
    
    2.87Federal Home Loan Bank advances
    
    
    3,168
    
    
    
    112
    
    
    
    3.52
    
    
    
    4,100
    
    
    
    153
    
    
    
    3.74Other borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    548
    
    
    
    19
    
    
    
    3.51Total interest-bearing liabilities
    
    $
    98,284
    
    
    
    2,934
    
    
    
    2.98
    
    
    $
    91,800
    
    
    
    2,025
    
    
    
    2.21Net interest income
    
    
    
    
    
    
    4,999
    
    
    
    
    
    
    
    
    
    
    
    4,079Tax equivalent adjustment
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    Net interest income per financial
statements
    
    
    
    
    
    $
    4,995
    
    
    
    
    
    
    
    
    
    
    $
    4,079Net interest margin
(Net yield on average earning assets)
    
    
    
    
    
    
    
    
    
    
    4.22
    %
    
    
    
    
    
    
    
    
    
    
    3.70
    %
     35.




---



##### 



Summary of Changes in Net Interest Income
 2005 vs. 2004
    
    
    2004 vs. 2003Increase (Decrease) Due to
    
    
    Increase (Decrease) Due to($ thousands)
    
    Volume
    
    
    Rate
    
    
    Net
    
    
    Volume
    
    
    Rate
    
    
    NetInterest income:Loans receivable
    
    $
    434
    
    
    $
    1,240
    
    
    $
    1,674
    
    
    $
    1,017
    
    
    $
    (171
    )
    
    $
    846Federal funds sold and other
short-term funds
    
    
    17
    
    
    
    122
    
    
    
    139
    
    
    
    7
    
    
    
    11
    
    
    
    18Securities available-for-sale-
taxable
    
    
    (10
    )
    
    
    3
    
    
    
    (7
    )
    
    
    (7
    )
    
    
    (3
    )
    
    
    (10
    )Securities available-for-sale-
tax-exempt
    
    
    19
    
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    Restricted stock
    
    
    2
    
    
    
    2
    
    
    
    4
    
    
    
    4
    
    
    
    
    
    
    
    4Total interest-earning assets
    
    
    462
    
    
    
    1,367
    
    
    
    1,829
    
    
    
    1,021
    
    
    
    (163
    )
    
    
    858Interest expense:Transaction accounts (NOW)
    
    
    
    
    
    
    (12
    )
    
    
    (12
    )
    
    
    (8
    )
    
    
    6
    
    
    
    (2
    )Market rate savings accounts
    
    
    (158
    )
    
    
    (613
    )
    
    
    (771
    )
    
    
    (24
    )
    
    
    (103
    )
    
    
    (127
    )Time deposits
    
    
    76
    
    
    
    (262
    )
    
    
    (186
    )
    
    
    (328
    )
    
    
    131
    
    
    
    (197
    )Other borrowings
    
    
    19
    
    
    
    
    
    
    
    19
    
    
    
    (14
    )
    
    
    
    
    
    
    (14
    )FHLB borrowings
    
    
    33
    
    
    
    8
    
    
    
    41
    
    
    
    (35
    )
    
    
    17
    
    
    
    (18
    )Total interest-bearing
liabilities
    
    
    (30
    )
    
    
    (879
    )
    
    
    (909
    )
    
    
    (409
    )
    
    
    51
    
    
    
    (358
    )Change in net interest income
    
    $
    432
    
    
    $
    488
    
    
    $
    920
    
    
    $
    612
    
    
    $
    (112
    )
    
    $
    500
    36.




---



##### 



NONINTEREST INCOME
     37.




---



##### 



NONINTEREST EXPENSE
      PROVISION AND ALLOWANCE FOR LOAN LOSSES
  38.




---



##### 



LIQUIDITY
  .
 INTEREST RATE SENSITIVITY/GAP
  39.




---



##### 



CAPITAL RESOURCES
    40.




---



##### 



CRITICAL ACCOUNTING POLICIES
  CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET ARRANGEMENTS
  41.




---



##### 



Note(Dollars in thousands)
    
    Reference
    
    2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    ThereafterDeposits without maturity
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    52,231Time deposits
    
    
    6
    
    
    $
    18,497
    
    
    $
    12,349
    
    
    $
    8,692
    
    
    $
    2,060
    
    
    $
    5,445
    
    
    
    FHLB advances and other
borrowings
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,500
    
    
    
    1,000
    
    
    
    Operating leases
    
    
    5
    
    
    
    405
    
    
    
    413
    
    
    
    377
    
    
    
    164
    
    
    
    168
    
    
    
    658
   IMPACT OF INFLATION AND CHANGING PRICES
  SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002
  42.




---



##### 



FORWARD LOOKING STATEMENTS
  43.




---



##### 



BOARD OF DIRECTORS (1)
 P.M. Jones
    
    Edward J. McKeonChairman
    
    President and Chief Executive OfficerWestern Reserve Bancorp, Inc. and
    
    Western Reserve Bancorp, Inc. andWestern Reserve Bank
    
    Western Reserve BankMedina, Ohio
    
    Medina, OhioRoland H. Bauer
    
    Rory H. ONeilPresident and Chief Executive Officer
    
    PresidentThe Cypress Companies
    
    Quetzal Corp.Akron, Ohio
    
    Westfield Center, OhioBijay K. Jayaswal, M.D.
    
    Michael R. RosePhysician, Cardiology
    
    PresidentMedina, Ohio
    
    Washington Properties, Inc.Medina, OhioRay E. Laribee
    
    Glenn M. SmithAttorney
    
    Retired PresidentLaribee & Hertrick
    
    Smith Bros., Inc.Medina, Ohio
    
    Medina, OhioC. Richard Lynham
    
    Thomas A. TubbsPresident and Owner
    
    C.E.O.Harbor Castings, Inc.
    
    Tubbs FinancialNorth Canton, Ohio
    
    Akron, OhioR. Hal NicholsChairman and ManagerAustin Associates, LLCToledo, Ohio
 
 (1)
 BRECKSVILLE ADVISORY BOARD
 Victoria J. Burns
    
    Rex MackRealtor, Realty One Real Living
    
    Senior Financial AdvisorMerrill LynchLouis N. Carouse, Jr.
    
    ReJean Schulte, Ph.D.Member, Brecksville City Council
    
    Associate Professor, Cuyahoga
Community CollegeSteve Karas
    
    Michael R. TorchiaArea President, Republic Waste Services
    
    President & Owner, The Realty Store, LLC
 44.




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