United
States


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





Annual Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 for the fiscal year
ended:  December 31,
2008





Commission File Number: 000-31673





OHIO LEGACY
CORP


(Exact
name of registrant as specified in its charter)




Ohio
              34-1903890(State or other
      jurisdiction
              (IRS
    Employerof incorporation or
      organization)
              Identification
      No.)


2375
Benden Drive Suite C, Wooster, Ohio 44691


(330)
263-1955


(Address, including zip code, and
telephone number,


including area code, of registrant’s
principal executive offices)





Securities registered pursuant to
section 12(b) of the Act:  none





Securities registered pursuant to
section 12(g) of the Act:  common stock, without par
value





Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities act.  Yes  o  No  x





Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Exchange Act.  Yes  oNo  x





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by sections 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes  xNo  o





Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of
this chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  x




Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a smaller
reporting company. See definition of “large accelerated filer, accelerated filed
and smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer o                                                      Accelerated
filer o


Non-accelerated filer  o                                                       Smaller
reporting company x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes  o  No  x




Based on the closing sales price of
$5.50 on June 30, 2008, the aggregate market value of Ohio Legacy Corp stock
held by non-affiliates was $8,244,929.




Ohio
Legacy Corp’s only class is common stock, without par value, of which 2,214,564
shares were outstanding on March 30, 2009.




Documents
Incorporated by Reference





Portions
of the registrant’s definitive proxy statement for the 2009 Annual Meeting of
Shareholders are incorporated by reference in Part III of this
report.











TABLE OF
CONTENTS




PART
      I
                  
                  
                  3Item
      1. Description of Business
                  
                  
                  3Item
      2. Description of Property
                  
                  
                  15Item
      3. Legal Proceedings
                  
                  
                  15Item
      4. Submission of Matters to a Vote of Security Holders
                  
                  
                  15PART
      II
                  
                  
                  15Item
      5. Market for Common Equity and Related Stockholder
Matters
                  
                  
                  15Item
      6. Selected Financial Data
                  
                  
                  15Item
      7. Management’s Discussion and Analysis
                  
                  
                  16Item
      8. Financial Statements
                  
                  
                  24Item
      9. Changes in and Disagreements With Accountants on Accounting and
      Financial Disclosure
                  
                  
                  52Item
      9A(T). Controls and Procedures
                  
                  
                  52Item
      9B. Other Information
                  
                  
                  52PART
      III
                  
                  
                  52Item
      10. Directors, Executive Officers, Promoters and Control Persons;
      Compliance With Section 16(a) of the Exchange Act
                  
                  
                  52Item
      11. Executive Compensation
                  
                  
                  52Item
      12. Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
                  
                  
                  52Item
      13. Certain Relationships and Related Transactions and Director
      Independence
                  
                  
                  53Item
      14. Principal Accountant Fees and Services
                  
                  
                  54Item
      15. Exhibits
                  
                  
                  5455SIGNATURESEX-14
      Code of EthicsEX-20
      Proxy StatementEX-21
      Subsidiary of Ohio Legacy CorpEX-23
      Consent of Crowe Horwath LLPEX-31.1
      302 Certification for CEO, CFO, and PresidentEX-31.2
      Rule 13a-14(a)/15d-14(a) CertificationsEX-32.1 906 Certification for CEO, CFO and
      President




2





PART
I





Item
1. Description of Business.





Background





Ohio
Legacy Corp (Ohio Legacy) is a bank holding company incorporated in July 1999
under the laws of the State of Ohio.  Ohio Legacy has one wholly-owned
subsidiary, Ohio Legacy Bank, N.A (Bank). Hereafter, unless otherwise noted, the
“Company,” “us,” “we,” and “our” refer to Ohio Legacy, together with the
Bank.  Ohio Legacy was incorporated on October 2, 2000 and the bank
opened for business on October 3, 2000.





On
December 18, 2002, Ohio Legacy issued 1,000,000 common shares (2002 Offering) at
a price of $8.50 per share in a public offering.  Proceeds from the
2002 Offering were $7,555,755, net of offering costs of $944,245.  In
conjunction with the 2002 Offering, Ohio Legacy listed its common shares on the
NASDAQ SmallCap Market under the ticker “OLCB.” In December 2002, Ohio Legacy
contributed $4,080,000 of the proceeds of the 2002 Offering to the Bank as a
capital contribution to provide additional lending capacity for the
Bank.  On January 17, 2003, an additional 150,000 common shares were
issued at $8.50 per share to cover over-allotments in accordance with the terms
of the 2002 Offering. Ohio Legacy contributed another $3,000,000 to the Bank as
capital.





Products and
Services





The
Company, through the Bank’s four offices, provides retail and commercial banking
services to its customers, who are located primarily in Stark and Wayne Counties
in north east-central Ohio.  These products include checking and
savings accounts, cash management services, time deposits, safe deposit box
facilities and courier services, commercial loans, real estate mortgage loans,
installment and personal loans and night depository facilities to
customers.





Commercial
and Construction Lending Products





Commercial
loans are primarily variable rate and include operating lines of credit and term
loans made to small businesses based primarily on their ability to repay the
loan from the cash flow of the related businesses.  These loans
typically are secured by business assets such as equipment or
inventory.  When the borrower is not an individual, the Bank generally
obtains the personal guarantee of the business owner.  As compared to
retail lending, which includes residential real estate, personal installment
loans and automobile loans, commercial lending entails significant additional
risks.  These loans typically involve larger loan balances and are
generally dependent on the businesses’ cash flow and, thus, may be subject to
adverse conditions in the general economy or in a specific
industry.  Management reviews the borrower’s cash flows when deciding
whether or not to grant the credit.  Management also evaluates if
estimated future cash flows will be adequate to service principal and interest
of the new obligation in addition to existing
obligations.  Additionally, the historical performance of the company
the business principles and the industry are reviewed prior to the extension of
credit.  Commercial loans comprised 9.3% of the loan portfolio at
December 31, 2008.





Commercial
real estate loans are secured primarily by borrower-occupied business real
estate or multifamily residential real estate, such as apartment buildings; and
are dependent on the ability of the related business to generate adequate cash
flow to service the debt.  These loans primarily carry variable
interest rates.  Commercial real estate loans generally are originated
with a loan-to-value ratio of 80% or less.  Management performs much
the same analysis when deciding whether to grant a commercial real estate loan
as a commercial loan.  Commercial real estate and multifamily real
estate loans comprised 47.9% of the loan portfolio at December 31,
2008.





Construction
loans are secured by residential and business real estate.  The Bank’s
construction lending program is established in a manner to minimize risk of this
type of lending by not making a significant number of loans on speculative
projects.  While not required to do so contractually, the Bank may
finance the permanent loan at the end of the construction
phase.  Construction loans also are generally made in amounts of 80%
or less of the value of collateral.  Construction loans comprised 8.3%
of the loan portfolio at December 31, 2008.





Certain
risks are involved in granting loans that primarily relate to the borrowers’
ability and willingness to repay the debt.  Before the Bank extends a
new loan to a customer, these risks are assessed through a review of the
borrower’s past and current credit history, the collateral being used to secure
the transaction in case the customer does not repay the debt, the borrower’s
character and other factors.  Once the decision has been made to
extend credit, the Bank’s responsible credit officer monitors these factors
throughout the life of the loan.





3




Retail
Lending Products





Residential
real estate loans, primarily fixed rate, and home equity lines of credit,
primarily variable rate, are secured by the borrower’s
residence.  These loans are made based on the borrower’s ability to
make repayment from employment and other income.  Using secondary
market approval standards management assesses the borrower’s ability to repay
the debt through review of credit history and ratings, verification of
employment and other income, review of debt-to-income ratios and other measures
of repayment ability.  The Bank generally makes these loans in amounts
of 90% or less of the value of collateral.  An appraisal is obtained
from a qualified real estate appraiser for substantially all loans secured by
real estate.  Beginning in November of 2006 the bank began originating
residential real estate loans and selling these loans to the secondary
market.  It is the strategy of the Company going forward to sell these
types of loans.





Consumer
installment loans to individuals include loans secured by automobiles and other
consumer assets, including second mortgages on personal
residences.  Consumer loans for the purchase of new automobiles
generally do not exceed 85% of the purchase price of the car.  Loans
for used cars generally do not exceed average wholesale or trade-in value as
stipulated in a recent auto industry used car price guide.  Overdraft
protection loans are unsecured personal lines of credit to individuals of
demonstrated good credit character with reasonably assured sources of income and
satisfactory credit histories.  Consumer loans generally involve more
risk than residential mortgage loans because of the type and nature of
collateral and, in certain types of consumer loans, the absence of
collateral.  Since these loans generally are repaid from ordinary
income of an individual or family unit, repayment may be adversely affected by
job loss, divorce, ill health or by general decline in economic
conditions.  The Bank assesses the borrower’s ability to make
repayment through a review of credit history, credit ratings, debt-to-income
ratios and other measures.





Residential
real estate, consumer and home equity loans comprised 34.5% of the total loan
portfolio at December 31, 2008.





Deposit
Products





The Bank
offers a broad range of deposit products, such as personal and business
checking, savings and money market accounts, certificates of deposit, internet
banking, cash management and direct-deposit services. Deposit accounts are
tailored to each market area at rates competitive with those offered in Wayne
and Stark Counties in Ohio and consistent with the Bank’s asset-liability
management goals. All deposit accounts are insured by the Federal Deposit
Insurance Corporation (FDIC) up to the maximum amount permitted by law. The Bank
solicits deposit accounts from individuals, businesses, associations, financial
institutions and government entities. The Bank is not significantly affected by
seasonal activity or large deposits of any individual depositor.





Employees





At
December 31, 2008, the Bank employed 54 full-time equivalent employees. The Bank
provides a number of benefits to its employees, such as health, disability and
life insurance for all qualified employees.  No employee is
represented by a union or collective bargaining group.  Management
considers its employee relations to be good.  Ohio Legacy has no
employees who are not also employed by the Bank.





Competition





The Bank
operates in a highly competitive industry.  In its primary market
areas of Stark and Wayne Counties in Ohio, the Bank competes for new deposit
accounts and loans with numerous other commercial banks, both large regional
banks and smaller community banks, as well as savings and loan associations,
credit unions, finance companies, insurance companies, brokerage firms and
investment companies.  The ability to generate earnings is impacted in
part by interest rates offered on loans and deposits, and by changes in the
rates on various securities which comprise the Bank’s investment
portfolio.  The Bank is competitive with respect to the interest rates
and loan fees it charges, as well as in the variety of accounts and interest
rates it offers to the depositor.  The dominant pricing mechanisms on
loans are the Prime interest rate as published in the Wall Street Journal and U.S.
Treasury Note rates with three-year or five-year maturities.  The
interest margin in excess of the applicable base rate depends on the overall
account relationship and the creditworthiness of the borrower. Deposit rates are
reviewed and set weekly by management.  The Bank’s primary objective
in setting deposit rates is to remain competitive in the market area while
maintaining an adequate interest rate spread (the difference between the yield
earned on interest-earning assets and the rates paid on deposits and borrowed
funds) to meet overhead costs and provide a profitable return.




4





Supervision and
Regulation





The Bank
is subject to supervision, regulation and periodic examination by the Office of
the Comptroller of the Currency (OCC) and Ohio Legacy is supervised by the Board
of Governors of the Federal Reserve System (Federal Reserve
Board).  Earnings of the Company are affected by state and federal
laws and regulations and by policies of various regulatory
authorities.  These policies include, for example, statutory maximum
lending rates, requirements on maintenance of reserves against deposits,
domestic monetary policies of the Federal Reserve Board, United States federal
government fiscal policy, international currency regulations and monetary
policies, certain restrictions on banks’ relationships with the securities
business, capital adequacy requirements and liquidity restraints.





Regulation
of Ohio Legacy





Bank Holding Company
Act.  As a bank holding company, Ohio Legacy is subject to
regulation under the Bank Holding Company Act of 1956, as amended (BHCA). Under
the BHCA, Ohio Legacy is subject to periodic examination by the Federal Reserve
Board and is required to file periodic reports regarding its operations and any
additional information that the Federal Reserve Board may require.





The BHCA
generally limits the activities of a bank holding company to banking, managing
or controlling banks, furnishing services to or performing services for its
subsidiaries and engaging in any other activities that the Federal Reserve Board
has determined to be so closely related to banking or to managing or controlling
banks as to be a proper incident to those activities.  In addition,
the BHCA requires every bank holding company to obtain the approval of the
Federal Reserve Board prior to acquiring substantially all the assets of any
bank, acquiring direct or indirect ownership or control of more than 5% of the
voting shares of a bank or merging or consolidating with another bank holding
company.





Sarbanes-Oxley Act of
2002.  The Sarbanes-Oxley Act of 2002 contains requirements for
public companies in the area of financial disclosure and corporate
governance.  In accordance with section 302(a) of the Sarbanes-Oxley
Act, written certifications by the Company’s Chief Executive Officer and Chief
Financial Officer are required.  These certifications attest that the
Company’s quarterly and annual reports filed with the Securities and Exchange
Commission (SEC) do not contain any untrue statement of a material fact.
Beginning with the fiscal year ended December 31, 2007, additional certification
regarding effective disclosure controls and procedures related to financial
reporting will also be required. The Company’s independent registered public
auditing firm will be required to issue an opinion as to the effectiveness of
these controls as of December 31, 2009.





Gramm-Leach-Bliley
Act.  In November 1999, the Gramm-Leach-Bliley Act of 1999
(GLBA) went into effect making substantial revisions to statutory restrictions
separating banking activities from other financial activities.  Under
the GLBA, bank holding companies that are well-capitalized, well-managed and
have at least a satisfactory Community Reinvestment Act rating (see below) can
elect to become “financial holding companies.” Financial holding companies and
their subsidiaries may engage in or acquire companies that engage in a broad
range of financial services that were not permitted previously, such as
insurance underwriting, securities underwriting and distribution, merchant
banking and certain other financial activities as determined by the Federal
Reserve Board.  Ohio Legacy has not registered as a financial holding
company.





The GLBA
adopts a system of functional regulation under which the Federal Reserve Board
is designated as the umbrella regulator for financial holding companies.
However, financial holding company affiliates are regulated by functional
regulators such as the FDIC, the SEC and state insurance regulators, depending
on the nature of the business of the financial holding company’s
affiliates.




5





The GLBA
contains extensive provisions on a customer’s right to privacy of non-public
personal information.  Under these provisions, a financial institution
must provide to its customers the institution’s policies and procedures
regarding the handling of customers’ non-public personal
information.  Except in certain cases, an institution may not provide
personal information to unaffiliated third parties unless the institution
discloses that such information may be disclosed and the customer is given the
opportunity to opt out of such disclosure.  Ohio Legacy and the Bank
are also subject to certain state laws that deal with the use and distribution
of non-public personal information.





Capital Guidelines. The OCC
and the Federal Reserve Board each have adopted risk-based and leverage capital
guidelines to evaluate the adequacy of capital of national banks and bank
holding companies.  The guidelines involve a process of assigning
various risk weights to different classes of assets, then evaluating the sum of
the risk-weighted balance sheet structure against the capital
base.  Failure to meet capital guidelines could subject a banking
institution to various penalties, including termination of FDIC deposit
insurance.  In addition, the OCC and the FDIC may take various
corrective actions against any undercapitalized bank and any bank that fails to
submit an acceptable capital restoration plan or fails to implement a plan
accepted by the OCC or the FDIC.  These powers include, but are not
limited to, requiring the institution to be recapitalized, prohibiting asset
growth, restricting interest rates paid, requiring prior approval of capital
distributions by any bank holding company that controls the institution,
requiring divestiture by the institution of its subsidiaries or by the holding
company of the institution itself, requiring new election of directors, and
requiring the dismissal of directors and officers.





At
December 31, 2008, the Bank was undercapitalized according to the guidelines
above. The Board of Directors of the Bank entered into a Consent agreement
with the OCC dated February 17, 2009 that calls for the Bank to reach and
maintain a minimum of 8.75% tier 1 capital and 13.25% risk based capital by
August 31, 2009. The Bank initiated several short and intermediate term
strategies to improve its capital position. The Board of Directors has retained
the services of the investment banking firm of Stifel, Nicolaus to explore the
options of raising private equity capital, or merging with or being acquired by
another financial institution or other interested investors. Additionally,
during the first quarter of 2009, the Bank sold approximately $28.4 million of
debt and mortgage backed securities issued by FNMA or FHLMC, which have a 20%
risk weighting, and purchased the same amount of mortgage backed securities
issued by GNMA, which have a 0% risk weighting. The gain of $685,900 realized
from the sales will result in an increase in capital of the same amount. The
Company also expects to recognize a tax refund of approximately $245,000 as the
result of a recent change in the tax code that extends the ability to carry net
operating losses back five years. Management anticipates the results of these
strategies will return the Bank to adequately capitalized as defined under the
prompt corrective action regulations at March 31, 2009. See Note 17 for
additional discussion on these matters.





Regulation
of the Bank





The Bank
is also subject to federal regulation regarding such matters as reserves,
limitations on the nature and amount of loans and investments, issuance or
retirement of its securities, limitations on the payment of dividends and other
aspects of banking operations.





The Bank
is a member of the Federal Reserve System and, because it is a national bank, is
regulated by the OCC.  Accordingly, the Bank is subject to periodic
examinations by the OCC.  These examinations are designed primarily
for the protection of the depositors of the Bank and not for its shareholder,
Ohio Legacy, or for the shareholders of the Company.





Dividend
Restrictions.  The Bank is a legal entity separate and distinct
from Ohio Legacy, though Ohio Legacy owns 100% of the Bank.  Virtually
all of Ohio Legacy’s revenues will result from dividends paid by the
Bank.  The Bank is subject to laws and regulations that limit the
amount of dividends it can pay.  Under OCC regulations, a national
bank, such as Ohio Legacy Bank, may not declare a dividend in excess of its
undivided profits, which means that the Bank must recover any start-up losses
before it may pay a dividend to Ohio Legacy.  Additionally, the Bank
may not declare a dividend if the total amount of all dividends declared by the
Bank in any calendar year, including the proposed dividend, exceeds the total of
the Bank’s retained net income of that year to date, combined with its retained
net income of the two preceding years. However, such a dividend may be approved
by the OCC in certain circumstances.  The Bank may not declare or pay
any dividend if, after making the dividend, the Bank would be
“undercapitalized,” as defined in the federal regulations and described above
under the heading “Capital Guidelines.”




6





Interstate Banking and Branching.The Interstate Banking and Branch Efficiency Act of 1995 has eased
restrictions on interstate expansion and consolidation of banking operations by,
among other things: (a) permitting interstate bank acquisitions regardless of
host state laws, (b) permitting interstate merger of banks unless specific
states have opted out of this provision and (c) permitting banks to establish
new branches outside the state provided the law of the host state specifically
allows interstate bank branching.





FDIC.The FDIC is
an independent federal agency that insures the deposits of federally-insured
banks and savings associations up to prescribed limits. The FDIC safeguards the
safety and soundness of financial institutions through examinations of insured
institutions.  The Bank is subject to examination by the FDIC and the
Bank’s deposits are assessed deposit insurance premiums by the Bank Insurance
Fund of the FDIC.  Under the FDIC’s deposit insurance assessment
system, the assessment rate for any insured institution may vary according to
regulatory capital levels of the institution and other factors such as
supervisory evaluations.





The FDIC
is authorized to prohibit any insured institution from engaging in any activity
that poses a serious threat to the insurance fund and may initiate enforcement
actions against banks.  The FDIC may also terminate the deposit
insurance of any institution that has engaged in unsafe or unsound practices, is
in an unsafe or unsound condition to continue operations or has violated any
applicable law, order or condition imposed by the FDIC.  If deposit
insurance is terminated, the deposits at the institution at the time of
termination, less subsequent withdrawals, will continue to be insured for a
period from six months to two years, as determined by the FDIC.  The
Company is not aware of any existing circumstances that could result in
termination of the Bank’s deposit insurance.





Community Reinvestment
Act.The Community Reinvestment Act (CRA) requires depository
institutions to assist in meeting the credit needs of their market areas,
including low and moderate-income areas, consistent with safe and sound banking
practice.  Under the CRA, each institution is required to adopt a
statement for each of its marketing areas describing the depository
institution’s efforts to assist in its community’s credit
needs.  Depository institutions are examined periodically for
compliance and are assigned ratings.  Banking regulators consider
these ratings when considering approval of a proposed transaction by an
institution.





USA PATRIOT Act. Title III of
the USA PATRIOT Act requires that financial institutions, including the Bank,
help prevent, detect and prosecute international money laundering and the
financing of terrorism. The Bank has augmented its systems and procedures to
accomplish these goals. The Secretary of the Treasury has proposed additional
regulations to further accomplish these goals that may result in significant
additional compliance costs to the Company.





Effects
of Government Monetary Policy





The
earnings of the Company are affected by general and local economic conditions
and by the policies of various governmental regulatory
authorities.  In particular, the Federal Reserve Bank Board regulates
monetary policy, credit conditions and interest rates that may influence general
economic conditions primarily through open market acquisitions or dispositions
of United States Government securities, varying the discount rate on member bank
borrowings and setting reserve requirements against member and nonmember bank
deposits. The Federal Reserve Bank Board’s monetary policies have had a
significant effect on the interest income and interest expense of commercial
banks, including Ohio Legacy Bank, and are expected to continue to do so in the
future.





Future
Regulatory Uncertainty





Federal
regulation of bank holding companies and financial institutions changes
regularly and is the subject of constant legislative debate.  For
example, further regulations may arise from the events of September 11, 2001,
such as the USA PATRIOT Act of 2001, which grants law enforcement officials
greater powers over financial institutions to combat terrorism and money
laundering.  In addition, further regulations may be issued by the SEC
pursuant to the Sarbanes-Oxley Act of 2002 that could impact the Company’s
profitability. As a result of the continuous changes in legislation related to
the financial services industry, the Company cannot forecast how federal
regulation of financial institutions may change in the future or its impact on
the Company’s operations and profitability.





Forward-Looking
Statements.This annual report on Form 10-K includes
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934
(Exchange Act), as amended, which can be identified by the use of
forward-looking terminology, such as may, might, could, would, believe, expect,
intend, plan, seek, anticipate, estimate, project or continue or the negative
thereof or comparable terminology.  All statements other than
statements of historical fact included in this annual report on Form 10-K
regarding our outlook, financial position and results of operation, liquidity,
capital resources and interest rate sensitivity are forward-looking
statements.  These forward-looking statements also include, but are
not limited to:




7




·
            anticipated
      changes in industry conditions created by state and federal legislation
      and regulations;





·
            anticipated
      changes in general interest rates and the impact of future interest rate
      changes on our profitability, capital adequacy and the fair value of our
      financial assets and liabilities;





·
            retention
      of our existing customer base and our ability to attract new
      customers;


·
            the
      development of new products and services and their success in the
      marketplace;





·
            the
      adequacy of the allowance for loan losses;
and,





·
            statements
      regarding our anticipated loan and deposit account growth, expense levels,
      liquidity and capital resources and projections of
    earnings.





These
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause our actual results to be materially different from
any future results expressed or implied by such forward-looking statements.
Although we believe the expectations reflected in such forward-looking
statements are reasonable, we can give no assurance such expectations will prove
to have been correct. Important factors that could cause actual results to
differ materially from those in the forward-looking statements included herein
include, but are not limited to:





·
            competition
      in the industry and markets in which we
operate;





·
            changes
      in general interest rates;





·
            rapid
      changes in technology affecting the financial services
      industry;





·
            changes
      in government regulation; and





·
            general
      economic and business conditions.




Statistical
Disclosures





The
following schedules present, for the periods indicated, certain financial and
statistical information of the Company as required under the Securities and
Exchange Commission’s Industry Guide 3, or a specific reference as to the
location of required disclosures included as a part of this Form
10-K.








8





Industry Guide 3 - Item I.
Distribution of Assets,
Liabilities and Stockholders’ Equity; Interest Rates and Interest
Differential





A. &
B.  Average Balance Sheets and Related Analysis of Net Interest
Earnings





The
following table sets forth information relating to the Company’s average balance
sheet and reflects the average yield on interest-earning assets and the average
cost of interest-bearing liabilities for the periods indicated.  These
yields and costs are derived by dividing income or expense by the average
balances of interest-earning assets or interest-bearing liabilities for the
periods presented.





Year ended December 31,2008
            
            
            2007Average
      Outstanding Balance
            
            
            Interest
      Earned/ Paid
            
            
            Yield/
      Rate
            
            
            Average
      Outstanding Balance
            
            
            Interest
      Earned/ Paid
            
            
            Yield/
      Rate(Dollars
      in thousands)AssetsInterest-earning
      assets:Interest-bearing
      deposits and federal funds sold
            
            
            2,677
            
            
            
            69
            
            
            
            2.59
            %
            
            
            5,245
            
            
            
            263
            
            
            
            5.01
            %Securities available for
      sale
            
            
            32,839
            
            
            
            1,731
            
            
            
            5.27
            
            
            
            24,895
            
            
            
            1,116
            
            
            
            4.48Securities held to
      maturity
            
            
            3,001
            
            
            
            115
            
            
            
            3.81
            
            
            
            2,917
            
            
            
            111
            
            
            
            3.81Federal bank
    stock
            
            
            1,478
            
            
            
            82
            
            
            
            5.49
            
            
            
            1,541
            
            
            
            98
            
            
            
            6.36Loans (1)
            
            
            127,825
            
            
            
            8,681
            
            
            
            6.79
            
            
            
            164,216
            
            
            
            12,198
            
            
            
            7.43Total interest-earning
      assets
            
            
            167,820
            
            
            
            10,678
            
            
            
            6.36
            
            
            
            198,814
            
            
            
            13,786
            
            
            
            6.94Noninterest-earning assets
            
            
            16,342
            
            
            
            
            
            
            
            
            
            
            
            17,637Total assets
            
            $
            184,162
            
            
            
            
            
            
            
            
            
            
            $
            216,451Liabilities and
      Shareholders’ EquityInterest-bearing
      liabilities:Interest-bearing
      demand deposits
            
            
            9,299
            
            
            
            99
            
            
            
            1.07
            
            
            
            9,465
            
            
            
            135
            
            
            
            1.43Savings
accounts
            
            
            6,737
            
            
            
            91
            
            
            
            1.36
            
            
            
            7,578
            
            
            
            59
            
            
            
            0.78Money market
      accounts
            
            
            45,317
            
            
            
            1,159
            
            
            
            2.56
            
            
            
            45,160
            
            
            
            1,725
            
            
            
            3.82Certificates
      of deposit
            
            
            69,298
            
            
            
            2,741
            
            
            
            3.95
            
            
            
            95,738
            
            
            
            4,563
            
            
            
            4.77Total
      interest-bearing deposits
            
            
            130,651
            
            
            
            4,090
            
            
            
            3.13
            
            
            
            157,941
            
            
            
            6,482
            
            
            
            4.10Other
borrowings
            
            
            22,776
            
            
            
            908
            
            
            
            3.98
            
            
            
            21,404
            
            
            
            1,194
            
            
            
            5.58Total
      interest-bearing liabilities
            
            
            153,427
            
            
            
            4,998
            
            
            
            3.26
            
            
            
            179,345
            
            
            
            7,676
            
            
            
            4.28Noninterest-bearing
      demand deposits
            
            
            15,930
            
            
            
            
            
            
            
            
            
            
            
            16,834Noninterest-bearing liabilities
            
            
            500
            
            
            
            
            
            
            
            
            
            
            
            923Total
    liabilities
            
            
            169,857
            
            
            
            
            
            
            
            
            
            
            
            197,102Shareholders’
      equity
            
            
            14,305
            
            
            
            
            
            
            
            
            
            
            
            19,349Total
      liabilities and shareholders’ equity
            
            $
            184,162
            
            
            
            
            
            
            
            
            
            
            $
            216,451Net
      interest income; interest-rate spread (2)
            
            
            
            
            
            
            5,680
            
            
            
            3.10
            %
            
            
            
            
            
            
            6,110
            
            
            
            2.66
            %Net
      earning assets
            
            
            14,393
            
            
            
            
            
            
            
            
            
            
            $
            19,469Net
      interest margin (3)
            
            
            
            
            
            
            
            
            
            
            3.38
            %
            
            
            
            
            
            
            
            
            
            
            3.08
            %Average
      interest-earning assets tointerest-bearing liabilities
            
            
            1.09
            x
            
            
            
            
            
            
            
            
            
            
            1.11
            x


(1)
                Average
      loans are net of net deferred loan fees and costs and loans in process.
      Nonaccrual loans are included in noninterest-earning assets. Fee income is
      included in interest earned.
 (2)
                Interest
      rate spread represents the difference between the yield on
      interest-earning assets and the cost of interest-bearing
      liabilities.
 (3)
                Net
      interest margin represents net interest income divided by average
      interest-earning
assets.






9




C.  Interest
Differential





The table
below describes the extent to which changes in interest rates and changes in
volume of interest-earning assets and interest-bearing liabilities have affected
the Company’s interest income and interest expense during the years
indicated.  For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in volume (change in balances multiplied by prior year rate), (2)
changes in rate (change in rates multiplied by prior year balance) and (3) total
changes in rate and volume.  The combined effects of changes in both
volume and rate, which are not separately identified, have been allocated
proportionately to the change due to volume and the change due to
rate.





Year
      ended December 31,2008
      vs. 2007
            
            
            2007
      vs. 2006Increase
      (Decrease) due to
            
            
            Increase
      (Decrease) due to(Dollars
      in thousands)
            
            Volume
            
            
            Rate
            
            
            Total
            
            
            Volume
            
            
            Rate
            
            
            TotalChange in interest
      income attributable to:Interest-bearing
      deposits and federal funds sold
            
            
            (97
            )
            
            
            (97
            )
            
            
            (194
            )
            
            
            33
            
            
            
            (1
            )
            
            
            32Securities
      available for sale
            
            
            396
            
            
            
            219
            
            
            
            615
            
            
            
            (239
            )
            
            
            163
            
            
            
            (76
            )Securities
      held to maturity
            
            
            3
            
            
            
            1
            
            
            
            4
            
            
            
            110
            
            
            
            4
            
            
            
            114Federal
      bank stock
            
            
            (4
            )
            
            
            (12
            )
            
            
            (16
            )
            
            
            2
            
            
            
            7
            
            
            
            9Loans
            
            
            (2,536
            )
            
            
            (981
            )
            
            
            (3,517
            )
            
            
            (426
            )
            
            
            594
            
            
            
            168Total
      assets
            
            $
            (2,238
            )
            
            $
            (870
            )
            
            $
            (3,108
            )
            
            $
            (520
            )
            
            $
            767
            
            
            $
            247Change in interest
      expense attributable to:Interest-bearing
      demand deposits
            
            
            (2
            )
            
            
            (34
            )
            
            
            (36
            )
            
            
            4
            
            
            
            64
            
            
            
            68Savings
      accounts
            
            
            (7
            )
            
            
            39
            
            
            
            32
            
            
            
            (32
            )
            
            
            (5
            )
            
            
            (37
            )Money
      market accounts
            
            
            6
            
            
            
            (572
            )
            
            
            (566
            )
            
            
            458
            
            
            
            150
            
            
            
            608Certificates
      of deposit
            
            
            (1,128
            )
            
            
            (694
            )
            
            
            (1,822
            )
            
            
            (199
            )
            
            
            591
            
            
            
            392Other
      borrowings
            
            
            73
            
            
            
            (359
            )
            
            
            (286
            )
            
            
            (520
            )
            
            
            171
            
            
            
            (349
            )Total
      interest-bearing liabilities
            
            $
            (1,058
            )
            
            $
            (1,620
            )
            
            $
            (2,678
            )
            
            $
            (289
            )
            
            $
            975
            
            
            $
            683Change
      in net interest income
            
            
            
            
            
            
            
            
            
            $
            (430
            )
            
            
            
            
            
            
            
            
            
            $
            (436
            )




Industry
Guide 3 - Item II. Investment Portfolio




A.
            This
      information is contained in Note 2 to the Consolidated Financial
      Statements on page 37.




B.
                    Other
      securities consist of Federal Home Loan Bank and Federal Reserve Bank
      stock that bears no stated maturity or yield and FNMA and FHLMC preferred
      stock that has a stated rate and an initial call date of five years from
      the date of issuance. However, based on actions taken by the Treasury
      Department on September 7, 2008, the dividend on the preferred stock has
      been suspended
indefinitely.





10








Maturities
      of Investment Securities (Dollars in thousands)No
      Stated Maturity
            
            
            Due
      in one
                year
      or less
            
            
            Due
      after one
                through
      five years
            
            
            Due
      after five
                through
      ten yearsAmount
            
            
            Weighted
      Average Yields
            
            
            Amount
            
            
            Weighted
      Average Yields
            
            
            Amount
            
            
            Weighted
      Average Yields
            
            
            Amount
            
            
            Weighted
      Average YieldsU.S.
      Governmentsponsored
      agencies
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,032
            
            
            
            5.0
            %
            
            
            -
            
            
            
            -Mortgage-backed
            
            
            -
            
            
            
            -
            
            
            
            20
            
            
            
            5.1
            %
            
            
            554
            
            
            
            4.5
            %
            
            
            1,411
            
            
            
            4.6
            %Municipal
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,114
            
            
            
            5.1
            %Other
      securities (1)
            
            
            1,513
            
            
            
            5.1
            %
            
            
            100
            
            
            
            2.4
            %
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      securities
            
            
            1,513
            
            
            
            5.1
            %
            
            
            120
            
            
            
            2.8
            %
            
            
            1,586
            
            
            
            4.8
            %
            
            
            2,525
            
            
            
            4.8
            %




Due
      after ten years
            
            
            TotalAmount
            
            
            Weighted
      Average Yields
            
            
            Amount
            
            
            Weighted
                Average
                YieldU.S.
      Governmentsponsored
      agencies
            
            
            -
            
            
            
            -
            
            
            
            1,032
            
            
            
            5.0
            %Mortgage-backed
            
            
            29,652
            
            
            
            5.4
            %
            
            
            31,637
            
            
            
            5.4
            %Municipal
            
            
            1,890
            
            
            
            5.7
            %
            
            
            3,004
            
            
            
            5.5
            %Other
      securities
            
            
            -
            
            
            
            -
            
            
            
            1,613
            
            
            
            4.9
            %31,542
            
            
            
            5.4
            %
            
            
            37,286
            
            
            
            5.3
            %




Actual
maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations.





C.
            At
      December 31, 2008, there were no holdings of securities of any one issuer,
      other than mortgage backed securities issued by U.S. Government -sponsored
      enterprises, in an amount greater than 10% of shareholders’
      equity.




Industry
Guide 3 - Item III. Loan Portfolio





A.
            Types
      of Loans





This
information is contained in Note 3 to the Consolidated Financial Statements on
page 40.





B.
            Maturities
      and Sensitivities of Loans to Changes in Interest
  Rates





The
following is a schedule of maturities of loans based on contractual terms and
assuming no amortization or prepayments, excluding residential real estate and
consumer loans, as of


December
31, 2008:





11





Maturing(Dollars
      in thousands)
            
            One
      year
                or
      less
            
            
            After
      one through
                five
      years
            
            
            After
      five years
            
            
            TotalCommercial
            
            $
            7,633
            
            
            $
            2,380
            
            
            $
            2,069
            
            
            $
            12,082Commercial
      real estate
            
            
            5,372
            
            
            
            4,711
            
            
            
            52,397
            
            
            
            62,480Real
      estate construction
            
            
            6,846
            
            
            
            623
            
            
            
            3,331
            
            
            
            10,800Total
            
            $
            19,851
            
            
            $
            7,714
            
            
            $
            57,797
            
            
            $
            85,362





Amount of
loans reported above due after one year, which have adjustable interest
rates:





Fixed
      rate
            
            $
            5,471Adjustable
      rate
            
            
            60,040Total
            
            $
            65,511





C.
            Risk
      Elements





1.
            Nonaccrual,
      Past Due and Restructured Loans - This information is contained in Note 3
      to the Consolidated Financial Statements on page
  40.





The
policy for placing loans on nonaccrual status is to cease accruing interest on
loans when management believes that collection of interest is doubtful or when
loans are past due as to principal and interest 90 days or more, except that in
certain circumstances interest accruals are continued on loans deemed by
management to be fully collectible.  In such cases, loans are
evaluated individually in order to determine whether to continue income
recognition after 90 days beyond the due dates.  When loans are placed
on nonaccrual, any accrued interest that will not be collected is charged
against interest income.





When
analysis of a borrower's operating results and financial condition indicates the
borrower’s underlying cash flows are not adequate to meet debt service
requirements, the loan is evaluated for impairment. Smaller-balance homogeneous
loans are evaluated for impairment in total.  These loans include
residential first mortgage and construction loans secured by one- to four-family
residences, consumer, credit card and home equity loans.  Commercial,
agricultural and commercial real estate loans are evaluated individually for
impairment.  In addition, loans held for sale and leases are excluded
from consideration of impairment.





Loans
individually considered impaired are carried at (a) the present value of
expected cash flows, discounted at the loan’s effective interest rate, or (b) at
fair value of collateral, if the loan is collateral dependent.  A
portion of the allowance for loan losses is allocated to impaired loans.
Impaired loans, or portions thereof, are charged off when deemed
uncollectible.





2.
            Potential
      Problem Loans - At December 31, 2008, no loans were identified that
      management had serious doubts about the borrowers’ ability to comply with
      present loan repayment terms and that are not included above in Industry
      Guide 3 - Item III.C.1.





3.
            Foreign
      Outstandings - There were no foreign loans outstanding during any period
      presented.





4.
            Loan
      Concentrations - At December 31, 2008, approximately $5,332,000 of loans
      were made to individuals or companies involved in the rental of
      residential real estate. This concentration accounts for 4.1% of total
      loans at that date.  Loans to individuals or companies involved
      in the leasing of commercial real estate total $7,905,000 or 6.1% of total
      loans at December 31, 2008.





C.
            Other
      Interest-bearing Assets - At December 31, 2008, there were no other
      interest-bearing assets required to be disclosed under Industry Guide 3 -
      Item III.C.1. or 2 if such assets were
loans.




12




Industry
Guide 3 - Item IV.  Summary of Loan Loss Experience





A.
            Analysis
      of the Allowance for Loan Losses





Activity
in the allowance for loan losses for the years ended December 31 was as
follows:





2008
            
            
            2007Balance,
      January 1
            
            $
            1,622,906
            
            
            $
            1,757,110Provision
      for loan losses
            
            
            2,361,496
            
            
            
            3,482,854Loans
      charged-off:Commercial
            
            
            (162,775
            )
            
            
            (1,807,150
            )Residential real
      estate
            
            
            (19,190
            )
            
            
            (1,033,553
            )Construction
            
            
            (544,000
            )
            
            
            (378,757
            )Consumer and home
      equity
            
            
            (39,630
            )
            
            
            (23,051
            )Total loans
      charged-off
            
            
            (765,595
            )
            
            
            (3,242,511
            )RecoveriesCommercial
            
            
            104,353
            
            
            
            5,000Residential
      real estate
            
            
            20,603
            
            
            
            2,500Consumer
      and home
            
            
            54,520
            
            
            
            2,740Total
      recoveries
            
            
            179,477
            
            
            
            10,240Reduction
      in allowance for loans sold
            
            
            -
            
            
            
            (384,787
            )Balance,
      December 31
            
            $
            3,398,284
            
            
            $
            1,622,906Balance
      as a percentage of total loans
            
            
            2.61
            %
            
            
            1.22
            %





The
allowance for loan losses balance and provision charged to operating expense are
determined by management based on periodic reviews of the loan portfolio,
economic conditions and various other circumstances that are subject to change
over time.  In making this judgment, management reviews selected large
loans as well as loans individually considered impaired, other delinquent,
nonaccrual and problem loans and loans to industries experiencing economic
difficulties.  The collectability of these loans is evaluated after
considering current operating results and financial position of the borrower,
estimated market value of collateral, guarantees and the Company’s collateral
position versus other creditors.  Judgments, which are necessarily
subjective, as to probability of loss and amount of such loss are formed on
these loans, as well as other loans taken together.





B.
            Allocation
      of the Allowance for Loan Losses





While
managements’ periodic analysis of the adequacy of the allowance for loan losses
may allocate portions of the allowance to specific problem loan situations, the
entire allowance is available for any loan charge-offs that occur. The following
schedule is a breakdown of the allowance for loan losses allocated by type of
loan and related ratios at December 31:





13





2008
            
            
            2007Allowance
      Amount
            
            
            Percentage
      of Loans in Each Category to Total Loans
            
            
            Allowance
      Amount
            
            
            Percentage
      of Loans in Each Category to Total LoansCommercial
            
            $
            911,294
            
            
            
            9.3
            %
            
            $
            185,283
            
            
            
            9.4
            %Commercial
      real estate
            
            
            1,040,594
            
            
            
            43.7
            
            
            
            744,692
            
            
            
            44.7Multifamily
      residential real estate
            
            
            182,758
            
            
            
            4.2
            
            
            
            99,936
            
            
            
            5.9Residential
      real estate
            
            
            485,628
            
            
            
            28.5
            
            
            
            357,254
            
            
            
            27.4Construction
            
            
            617,375
            
            
            
            8.3
            
            
            
            164,850
            
            
            
            8.0Consumer
      and home equity
            
            
            160,635
            
            
            
            6.0
            
            
            
            70,891
            
            
            
            4.6Total
            
            $
            3,398,284
            
            
            
            100.0
            %
            
            $
            1,622,906
            
            
            
            100.0
            %





Industry
Guide 3 - Item V. Deposits





A.
            Average
      Amount and Average Rate Paid On Deposits. This information is contained in
      Note 7 to the Consolidated Financial
Statements.





B.
            Other
      categories – not applicable.





C.
            Foreign
      deposits – not applicable.





D.
            The
      following is a schedule of maturities of certificates of deposit in
      amounts of $100,000 or more as of December 31,
  2008:





Three
      months or less
            
            $
            5,575,710Over
      three through six months
            
            
            2,409,268Over
      six through twelve months
            
            
            8,944,264Over
      twelve months
            
            
            10,982,327Total
            
            $
            27,911,569





E.
            Time
      deposits greater than $100,000 issued by foreign offices – not
      applicable.





Industry
      Guide 3 - Item VI.  Return on Equity and
  Assets





2008
            
            
            2007Return
      on average assets
            
            
            (3.28
            )
            
            
            (1.68
            )Return
      on average equity
            
            
            (42.27
            )
            
            
            (18.81
            )Dividend
      payout ratio
            
            
            0.0
            
            
            
            0.0Average
      shareholders equity to average assets
            
            
            7.77
            
            
            
            8.94




Industry
      Guide 3 - Item VII. Short-Term
Borrowings





During
2008 the Company entered into repurchase agreements and short-term FHLB
advances.  This information is contained in Notes 8 and 9 to the
Consolidated Financial Statements.





14





Item
2. Description of Property.





The Bank
currently owns or leases and operates four banking offices, including its main
office, and an operations center:





1.
            Wooster
      Main Office, 305 West Liberty Street, Wooster, Ohio, 44691 (capital
      lease)


2.
            Canton
      Branch Office, 4026 Dressler Road N.W., North Canton, Ohio, 44735
      (operating lease)


3.
            Wooster
      Milltown Branch Office, 3562 Commerce Parkway, Wooster, Ohio 44681
      (own)


4.
            North
      Canton Branch Office, 600 South Main Street, North Canton, Ohio 44720
      (own)


5.
            Wooster
      Operations Center, 2375 Benden Drive Suite C, Wooster, Ohio, 44691
      (operating lease)





The Bank
considers the physical properties it occupies to be in good operating condition
and suitable and adequate for the purposes for which they are being
used.





Item
3. Legal Proceedings





The
Company is not a party to any pending material legal or administrative
proceedings, other than ordinary routine litigation incidental to the business
of the Company.  Further, there are no material legal proceedings in
which any director, executive officer, principal shareholder or affiliate of the
Company is a party or has a material interest that is adverse to the
Company.  No routine litigation in which the Company is involved is
expected to have a material adverse impact on the financial position or results
of operations of the Company.





Item
4. Submission of Matters to a Vote of Security Holders.





No
      matters were submitted to a vote of the security holders in the fourth
      quarter of 2008.




PART
II





Item
5. Market for Common Equity and Related Stockholder Matters





The
Company’s common stock is publicly traded on the NASDAQ SmallCap Market under
the ticker symbol OLCB. At March 15, 2009, there were 2,214,564 Common Shares of
the Company issued and outstanding and there were 249 holders of record. The
following table summarizes the highest and lowest closing price of the Company’s
stock during 2008 and 2007:








2008
            
            
            2007HIGH
            
            
            LOW
            
            
            HIGH
            
            
            LOWFirst
      Quarter
            
            $
            7.00
            
            
            $
            5.02
            
            
            $
            10.40
            
            
            $
            8.31Second
      Quarter
            
            
            6.75
            
            
            
            5.50
            
            
            
            9.06
            
            
            
            8.08Third
      Quarter
            
            
            6.75
            
            
            
            4.36
            
            
            
            8.88
            
            
            
            8.00Fourth
      Quarter
            
            
            5.08
            
            
            
            1.20
            
            
            
            8.90
            
            
            
            4.20








No cash
dividends were paid during 2008 or 2007. The information regarding the
restrictions on the Company’s ability to pay dividends is contained in Note 13
to the Consolidated Financial Statements.





There are
no matters to report under (b) and (c) of this Item 5.





Item
6.  Selected Financial Data





There are
no matters to report under this item.





15





Item
7.  Management’s Discussion and Analysis





In the
following section, management presents an analysis of Ohio Legacy Corp's
financial condition and results of operations as of and for the years ended
December 31, 2008 and 2007. This discussion is provided to give shareholders a
more comprehensive review of the issues facing management than could be obtained
from an examination of the financial statements alone.  This analysis
should be read in conjunction with the consolidated financial statements and
related footnotes and the selected financial data elsewhere in this
report.  As used herein and except as the context may otherwise
require, references to "the Company," "we," "us," or "our" means, collectively,
Ohio Legacy Corp (Ohio Legacy) and its wholly-owned subsidiary, Ohio Legacy
Bank, N.A. (the Bank).





FORWARD-LOOKING
STATEMENTS





This
Management’s Discussion and Analysis (MD&A) includes forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934 (Exchange Act),
as amended, which can be identified by the use of forward-looking terminology,
such as may, might, could, would, believe, expect, intend, plan, seek,
anticipate, estimate, project or continue or the negative thereof or comparable
terminology.  All statements other than statements of historical fact
included in this MD&A regarding our outlook, financial position and results
of operation, liquidity, capital resources and interest rate sensitivity are
forward-looking statements.  These forward-looking statements also
include, but are not limited to:





·
            anticipated
      changes in industry conditions created by state and federal legislation
      and regulations;





·
            anticipated
      changes in general interest rates and the impact of future interest rate
      changes on our profitability, capital adequacy and the fair value of our
      financial assets and liabilities;





·
            retention
      of our existing customer base and our ability to attract new
      customers;





·
            the
      development of new products and services and their success in the
      marketplace;





·
            the
      adequacy of the allowance for loan losses;
and,





·
            statements
      regarding our anticipated loan and deposit account growth, expense levels,
      liquidity and capital resources and projections of
    earnings.





These
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause our actual results to be materially different from
any future results expressed or implied by such forward-looking statements.
Although we believe the expectations reflected in such forward-looking
statements are reasonable, we can give no assurance such expectations will prove
to have been correct. Important factors that could cause actual results to
differ materially from those in the forward-looking statements included herein
include, but are not limited to:





·
            competition
      in the industry and markets in which we
operate;





·
            changes
      in general interest rates;





·
            rapid
      changes in technology affecting the financial services
      industry;





·
            changes
      in government regulation; and





·
            general
      economic and business conditions.





16





OVERVIEW
OF STRATEGIC DEVELOPMENTS





The major
focus of the Company at the current time is credit quality and capital
restoration. Continued weakness in the overall economy has had a negative impact
on the performance of loans in the portfolio. The effort to manage the Company’s
portfolio of other real estate represents a significant commitment of time and
resources. The OREO portfolio at year end consisted of 12 relationships and a
total of 31 properties. The market for these types of impaired properties is
extremely distressed at this time. However, during the fourth quarter the
company acquired the deeds to two residential real estate subdivisions and four
residential rental properties. During the same period we disposed of two
residential rental properties. Since year-end, the Company has entered into
contracts to sell five single family properties, totaling nearly $1,000,000 in
carrying value. Management continues to work to sell the remaining
inventory.  We anticipate acquiring another seven property deeds in
2009, with a goal of disposing of 22 existing properties during the year. With
the housing economy continuing to struggle, disposal of these assets without
taking additional losses will be difficult. Our preference is to acquire the
deeds through negotiated agreement but in several instances we have been forced
to initiate foreclosure proceedings. Given the extent of the backlog in the
foreclosure courts, this process continues to be unusually slow and long, which
further delays the point at which we can begin to market the
properties.




As a
result of credit-related charges and the loss associated with the Fannie Mae and
Freddie Mac securities, our capital has been reduced by over $8.9 million in the
last two years. On an operating basis, we continue to focus on reducing funding
costs and operating expense and maintaining or increasing our margins. To that
end, during the fourth quarter we eliminated several positions, reducing our
projected 2009 salary and benefit costs over $400,000. However, these savings
will be offset, at least in part, by rising Federal Deposit Insurance
Corporation premiums and other regulatory related costs. The loss of capital and
our strategies to effectively deal with this situation is a compelling challenge
on which management and the Board of Directors is focused.





The Board
of Directors of the Bank entered into a Consent Order with the OCC on February
17, 2009, the details of which were announced in an 8-K filed with the SEC on
February 20, 2009.  The Order has four articles focusing on capital
adequacy and asset quality.  Management and the Board of Directors of
the Bank are committed to being in compliance with each article within the
prescribed timeframes, to the best of their ability.  Management and
the Board of Directors of the Bank are exploring each and every option that will
enable the Bank to reach the capital minimums and asset quality ratios
prescribed by the Order. The Board of Directors has retained the services of the
investment banking firm Stifel, Nicolaus to explore the specific option of
raising private equity capital or merging with or being acquired by another
financial institution or other interested investors.Additionally, during the first
quarter of 2009, the Bank sold approximately $28.4 million of debt and mortgage
backed securities issued by FNMA or FHLMC, which have a 20% risk weighting, and
purchased the same amount of mortgage backed securities issued by GNMA, which
have a 0% risk weighting. The gain of $685,900 realized from the sales will
result in an increase in capital of the same amount. The Company also expects to
recognize a tax refund of approximately $245,000 as the result of a recent
change in the tax code that extends the ability to carry net operating losses
back five years. Management anticipates the results of these strategies will
return the Bank to adequately capitalized as defined under the prompt corrective
action regulations at March 31, 2009. See Note 17 for additional discussion on
these matters.




CRITICAL
ACCOUNTING POLICIES





The
preparation of consolidated financial statements and related disclosures in
accordance with U.S. generally accepted accounting principles requires us to
make judgments, assumptions and estimates at a specific point in time that
affect the amounts reported in the accompanying consolidated financial
statements and related notes.  In preparing these financial
statements, we have utilized available information including our past history,
industry standards and the current economic environment, among other factors, in
forming our estimates and judgments of certain amounts included in the
consolidated financial statements, giving due consideration to
materiality.  It is possible that the ultimate outcome as anticipated
by management in formulating our estimates inherent in these financial
statements may not materialize.  Application of the critical
accounting policies described below involves the exercise of judgment and the
use of assumptions as to future uncertainties and, as a result, actual results
could differ from these estimates.  In addition, other companies may
utilize different estimates, which may impact the comparability of our results
of operation to similar businesses.




17





Allowance for
loan losses. The allowance for loan losses is a valuation allowance for
probable incurred credit losses, increased by the provision for loan losses and
decreased by charge-offs.  We estimate the allowance balance by
considering the nature and volume of the portfolio, information about specific
borrower situations and estimated collateral values, economic conditions and
other factors.  Allocations of the allowance may be made for specific
loans, but the entire allowance is available for any loan that, in our judgment,
should be charged off.  Loan losses are charged against the allowance
when we believe the loan balance cannot be collected.





We
consider various factors, including portfolio risk, economic environment and
loan delinquencies, when determining the level of the provision for loan losses.
We monitor loan quality monthly and use an independent third party each quarter
to review our loan grading system.





Valuation
allowance for deferred tax assets. Another critical accounting policy
relates to valuation of the deferred tax asset for net operating losses. Net
operating loss carryforwards of approximately $2,138,000 will expire as follows:
$1,419,000 on December 31, 2027 and $1,094,000 on December 31, 2028. A valuation
allowance has been recorded for the related deferred tax asset for these
carryforwards and other net deferred tax assets recorded by the Company to
reduce the carrying amount of these assets to zero. Additional information is
included in Notes 1 and 11 to our audited consolidated financial
statements.





FINANCIAL
CONDITION – DECEMBER 31, 2008, COMPARED TO DECEMBER 31, 2007





Cash and cash
equivalents.Cash and cash equivalents increased by $4.4 million during
the year. The change was primarily the result of growth in deposits in response
to special deposit promotions begun in mid-December, 2008.





Securities.The portfolio increased by $3.7 million to $35.7 million at year end. As
the economy continued to worsen throughout the year, available funds were added
to the portfolio as opportunities for profitable loan growth diminished. The
increase was offset in part by a $2.9 million write-down due to an
other-than-temporary impairment of the Company’s holdings of preferred stock
issued by the Federal National Mortgage Association (FNMA) and the Federal Home
Loan Mortgage Corporation (FHLMC.)





Loans.At
December 31, 2008, the loan portfolio, net of the allowance for loan losses
and deferred fees, was $126.8 million, a decrease of $4.8 million, or
3.7% from December 31, 2007.  This was largely the result of the
Company’s continued emphasis on reducing its concentration of commercial real
estate loans as that sector of the market started showing weaknesses that
transferred from the subprime mortgage sector.





Allowance for
loan losses.The allowance for loan losses increased to $3.4 million at
December 31, 2008 compared to $1.6 million at December 31, 2007.  The
allowance for loan losses as a percentage of loans increased from 1.22% at
December 31, 2007, to 2.61% at December 31, 2008. The increase in both the
dollar amount and the ratio is due  in part to a revision in the
calculation method for the allowance that more heavily weights recent loss
experience and also to increases in reserves for two specific
loans.





Provision
for loan loss expense year-over-year decreased from $3.5 million in 2007 to $2.4
million in 2008. Provision expense replaces reserves used to charge off or write
down existing loans as well as to provide reserves for probable future
losses.  Of the total expensed in 2008, $620,000 was related to
valuation write-downs and charge-offs of specific non-performing loans, $969,000
was to increase the overall level of reserves to total loans and $772,000 was to
create specific reserves for two loans as a result of events subsequent to
December 31, 2008. During the first quarter of 2009, management has determined
that the collateral pledged to secure a $572,000 loan to a real estate developer
has little or no value and the ability of the borrower to fulfill his personal
guarantee is impaired. The loan was 90 days past due at year-end. The second
loan, with a balance of $663,800, involves a condominium project that has
experienced construction issues requiring the project to be stopped and vacated.
Management has determined that this loan has impairment characteristics that
necessitate a specific reserve of $200,000. The owners, the bank group
participants and the insurance company providing the builder’s risk policy have
agreed to a mediation hearing, scheduled for May, 2009. This hearing will
provide more clarity as to the potential risk of loss for this
property.




18





Premises and
equipment.The net investment in premises and equipment increased from
$2.9 million at December 31, 2007 to $3.3 million at December 31, 2008, as a
result of the purchase of the Milltown branch building that was previously
leased.





Intangible
assets.The Company continues to amortize its intangible assets on an
accelerated schedule. These assets are the identified intangibles associated
with the acquisition of certain core deposits in 2004. At year-end,
approximately $60,000 remains to be amortized by 2010.





Federal bank
stock.We are required to purchase shares of stock in the Federal Reserve
Bank and the Federal Home Loan Bank based on our capital and borrowing levels.
During 2008, the Company redeemed 2,514 shares totaling $125,700 to the Federal
Reserve Bank as a result of losses recorded in 2007 and 2008. The Company
acquired 396 additional shares of Federal Home Loan Bank stock totaling $39,600
through the mandatory reinvestment of dividends. The outstanding balances at
December 31, 2008 were $435,100 and $1,020,000, respectively.





Accrued interest
receivable and other assets.Accrued interest receivable and other assets
decreased from $1.5 million to $1.4 million as a result of normal business
activities.





Deposits.During 2008, total deposits decreased $1.6 million to $145.7
million.  The Company continued to focus on growing low cost core
deposits and reducing higher cost certificate of deposit balances, especially in
cases where no other deposit or loan relationship exists. As a result,
non-interest bearing deposits increased by 16.3% to $16.7 million and savings
account balances grew by 166.2% to $14.5 million. Money market accounts
decreased by $5.1 million or 11.6%.and certificates of deposit decreased by $8.0
million or 10.8%.





Repurchase
agreements.During the year repurchase agreements decreased
from $2.0 million to $1.4 million.  As interest rates declined
throughout the year, this product became a less attractive option for
clients.





FHLB
advances.  At year end 2008,
Federal Home Loan Bank advances were $27.9 million versus $14.0 million for the
same period a year ago. The Company took advantage of the low rate environment
to lock in rates for two and three year terms in lieu of higher cost
certificates of deposit.





Accrued interest
payable and other liabilities.Accrued interest payable and other
liabilities increased from $1.1 million to $1.6 million during the year. The
difference is primarily the result of an increase in accrued taxes on the
unrealized gain in the securities portfolio.




RESULTS
OF OPERATIONS – YEARS ENDED DECEMBER 31, 2008 AND 2007





Net interest
income.For the year ended December 31, 2008, net interest income was
lower at $5.7 million, compared to $6.1 million for 2007. Net interest margin
increased to 3.38% compared to 3.10% in 2007.





Interest income.Interest income decreased from $13.8 million to $10.7 million as a result
of both a reduction in average earning assets of approximately $31.0 million and
a 57 basis point decrease in the average yield on those assets. The level of
earning assets reflects the full year impact of the sale of the Millersburg
branch in the third quarter of 2007. The decline in the average yield is the
result of the Federal Reserve Board’s 425 basis point reduction in interest
rates during 2008.





Interest expense.Total interest expense declined from $7.7 million to $5.0 million, a
decrease of 34.9%.Interest
expense on deposits decreased $2.4 million to $4.1 million compared to $6.5
million in 2007.  This decline is due to a number of factors,
including the full-year impact of the sale of the Millersburg branch, the
strategies to reduce the level of higher cost deposits and the overall decline
in market rates. Total interest expense on Federal Home Loan Bank advances
increased $16,000 as the Company increased its total advances to take advantage
of low rates during periods when regional pressures kept deposit rates at
extremely high levels in comparison to national averages. Lower market rates
contributed to a 71.9% reduction in expense on repurchase agreements from
$87,500 to $24,600. The Company paid off its subordinated debentures in the
third quarter of 2007, resulting in a $190,000 decrease in 2008 by comparison.
Capital lease expense also declined as the Company purchased its Milltown
building during the third quarter of 2008.




19





Provision for
loan losses.The provision for loan losses in 2008 was $2.4 million
compared to $3.5 million in 2007. Although the amount declined significantly, it
is still high from a historical perspective. Approximately $970,000 of the
provision was the result of a change in the calculation of the Bank's
historical loan loss experience included in the allowance estimate to
more heavily weight recent years with higher levels of loan charge-offs. An
additional $772,000 was to establish specific reserves on two loans, and the
remainder was to replace balances charged off throughout the year.





Noninterest
income.For the year ended December 31, 2008, noninterest income
decreased from $1.9 million to $(2.1 million). This decrease was predominately
the result of a $2.9 million other than temporary impairment charge related to
the Company’s holdings of FNMA and FHLMC preferred stock and a $544,000 direct
writedown of other real estate. Service charge income declined $123,000,
reflecting the full-year impact of the sale of the Millersburg branch in 2007.
The gain on the sale of loans held for sale fell $27,300, or 13.2% as the
secondary residential mortgage market continued to experience widespread
disruption. Other income increased by $107,100, which was primarily the result
of the Company’s arrangement with a third party mortgage processor. The Company
terminated this arrangement in the fourth quarter of 2008. Noninterest income
for 2007 also included a number of significant items, including a $2.1 million
gain on the sale of the Millersburg branch, a $1.2 million direct write-down of
other real estate owned and a $340,100 loss of the sale of securities available
for sale.





Noninterest
expense.Total noninterest expense decreased by $786,200 to
$7.3 million. The three areas detailed below account were significant
contributors to the total.





Salaries
and benefits decreased $791,600 from 2007, reflecting the full-year impact of
the positions eliminated from the sale of the Millersburg branch and the
restructuring during the fourth quarter of 2007.





Professional
fees decreased $294,200 from the prior year.  The total for 2007
included legal fees associated with a number of problem credits and investment
banking fees associated with the sale of the Millersburg office, and also
included expenses associated with the development of several new deposit
products and services.





Other
expenses were approximately $481,900 higher in 2008 than in 2007. The increases
were due to various expenses related to maintaining and managing properties in
the OREO portfolio.





Income taxes.  The Company has no income tax expense or benefit for the
year. A valuation allowance has been recorded to reduce to zero the tax benefits
that would otherwise have been recorded as a result of the Company’s operating
loss for 2008.








CONTRACTUAL
OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET
ARRANGEMENTS





The
following table presents, as of December 31, 2008, our significant fixed and
determinable contractual obligations by payment date. The payment amounts
represent those amounts contractually due to the recipient and do not include
any unamortized premiums or discounts, hedge basis adjustments, or other similar
adjustments. Further discussion of the nature of each obligation is included in
the referenced Note to the consolidated financial statements.





(Dollars
      in thousands)
            
            Note
              Reference
            
            
            2009
            
            
            2010
            
            
            2011
            
            
            2012
            
            
            2013
            
            
            ThereafterCertificates
      of deposit
            
            
            7
            
            
            $
            35,111
            
            
            $
            19,723
            
            
            $
            8,521
            
            
            $
            1,998
            
            
            $
            138
            
            
            $
            -Repurchase
      agreements
            
            
            8
            
            
            
            1,406
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -FHLB
      advances
            
            
            9
            
            
            
            5,500
            
            
            
            13,500
            
            
            
            2,000
            
            
            
            -
            
            
            
            -
            
            
            
            -Capital
      lease obligations (1)
            
            
            5
            
            
            
            102
            
            
            
            102
            
            
            
            111
            
            
            
            116
            
            
            
            116
            
            
            
            270Operating
      leases
            
            
            5
            
            
            
            156
            
            
            
            161
            
            
            
            82
            
            
            
            67
            
            
            
            40
            
            
            
            94Deposits
      without maturity
            
            
            
            
            
            
            80,214
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -





(1)
            Includes
      $348 of amounts allocable to interest payments over the remaining term of
      the leases.






20




Note 14
to the consolidated financial statements discuses in greater detail other
commitments and contingencies and the various obligations that exist under those
agreements. Examples of these commitments and contingencies include commitments
to extend credit to borrowers under lines of credit.





At
December 31, 2008, we had no unconsolidated, related special purpose entities,
nor did we engage in derivatives and hedging contracts, such as interest rate
swaps, that may expose us to liabilities greater than the amounts recorded on
the consolidated balance sheet. Our investment policy prohibits engaging in
derivatives contracts for speculative trading purposes; however, in the future,
we may pursue certain contracts, such as interest rate swaps, in our efforts to
execute a sound and defensive interest rate risk management policy.




LIQUIDITY





Liquidity
refers to our ability to fund loan demand and customers’ deposit withdrawal
needs and to meet other commitments and contingencies. The purpose of liquidity
management is to ensure sufficient cash flow to meet all of our financial
commitments and to capitalize on opportunities for business expansion in the
context of managing our interest rate risk exposure. This ability depends on our
financial strength, asset quality and the types of deposit and loan instruments
we offer to our customers.





Our
principal sources of funds are deposits, repurchase agreements, loan and
security repayments and maturities, sales of securities, capital transactions
and borrowings from the FHLB and correspondent banks.  While scheduled
loan repayments and maturing investments are relatively predictable, deposit
flows and early loan and security prepayments are more influenced by interest
rates, general economic conditions, and competition. We maintain investments in
liquid assets based upon our assessment of our need for funds, our expected
deposit flows, yields available on short-term liquid assets and the objectives
of our asset/liability management program.





Our
liquidity contingency funding plan identifies liquidity thresholds and raises
red flags that may evidence liquidity issues. Additionally, the contingency plan
details specific actions to be taken by management and the Board of Directors
and identifies sources of emergency liquidity, both asset and liability-based,
should we encounter a liquidity crisis. We actively monitor liquidity risk and
analyze various scenarios that could impact our ability to access emergency
funding in conjunction with our asset/liability and interest rate risk
management activities.





Cash and
cash equivalents increased from $7.1 million to $11.5 million at December 31,
2008. Cash and cash equivalents represented 6.1% of total assets at year-end
2008, and 3.9% of total assets at year-end 2007. The increase is primarily due
to deposit promotions that were in effect in December, 2008.





We
monitor our liquidity position on a regular basis in conjunction with our
asset/liability and interest rate risk management activities. We believe our
current liquidity level, including contingency funding available through
borrowing facilities, is sufficient to meet anticipated future growth in loans
and deposits under our three-year strategic plan and to maintain compliance with
regulatory capital ratios.





The
Company was successful in extending the average maturity of the certificate of
deposit portfolio from eight months to over 14 months at year end, which reduces
the magnitude of fluctuations in liquidity needs as well as the pricing risk
associated with high volumes of maturities in any one month. We continued to
utilize our overnight borrowing capacity at the Federal Home Loan Bank to
provide temporary liquidity as deposit rates in the market remained at
historically wide spreads to market rates.  The Company plans to
broaden its base of low cost core deposits by continuing the successful
strategies implemented in 2008.





CAPITAL
RESOURCES





Total
shareholders’ equity was $9.5 million at December 31, 2008, compared to $15.3
million at December
31, 2007.  The decrease was due to net losses posted for the
year.




21





Banks are
subject to regulatory capital requirements administered by federal banking
agencies.  Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities and certain off
balance sheet items calculated under regulatory accounting
practices.  Capital amounts and classifications are also subject to
qualitative judgments by regulators.  Failure to meet capital
requirements can initiate regulatory action.





Regulations
require a total risk-based capital ratio of 8.0%, at least half of which must be
Tier 1 capital, and a leverage ratio of 4.0%. The Bank’s total risk-based
capital is made up of Tier 1 capital and Tier 2 capital. Tier 1 capital is total
shareholders’ equity, less any intangible assets. Tier 2 capital is Tier 1
capital plus the allowance for loan losses (includible up to a maximum of 1.25%
of risk-weighted assets). As a result of the write-downs in value of both loans
and securities, the Bank no longer meets the definition of adequately
capitalized (see Note 13 to the consolidated financial statements). On February
17, 2009, the Company entered into an Order of Consent with the Comptroller of
the Currency of the United States of America. The Order requires the Bank to
increase its capital to specific levels above the minimum for well capitalized
by August 31, 2009.The Board of Directors has
retained the services of the investment banking firm of Stifel, Nicolaus to
explore the options of raising private equity capital, or merging with or being
acquired by another financial institution or other interested
investors.





The
payment of dividends by the Bank to Ohio Legacy and by Ohio Legacy to
shareholders is subject to restrictions by regulatory agencies.  These
restrictions generally limit dividends to the sum of current year’s and the
prior two years’ retained earnings, as defined.  In addition,
dividends may not reduce capital levels below the minimum regulatory
requirements as described above. Based on its year to date and previous year’s
earnings, the Company is not able to declare dividends without prior approval
from its regulators. In addition to the dividend restrictions above, the Bank is
not permitted to issue brokered deposits without prior approval from its
regulators.





INTEREST
RATE SENSITIVITY





The
following table details the variable rate composition of our interest-earning
assets at December 31:





Percent variable rate2008
            
            
            2007Interest-bearing
      deposits and federal funds sold
            
            
            100
            %
            
            
            100
            %Securities
            
            
            19
            
            
            
            21Loans
            
            
            76
            
            
            
            52Federal
      bank stock
            
            
            100
            
            
            
            100Total
      interest-earning assets
            
            
            64
            
            
            
            49





The
Company performs liquidity risk analysis monthly and interest rate risk analysis
at least quarterly. This information is used to assist in managing the balance
sheet to reduce the impact of changes in interest rates on earnings and equity.
Approximately 29% of the interest-earning assets and 63% of the interest-bearing
liabilities on our balance sheet at December 31, 2008, were scheduled to mature
or could reprice during 2009.





We
believe that the Bank is "liability sensitive" over a twelve-month horizon at
December 31, 2008. Usually, this would mean an increasing rate environment would
cause a drop in net interest income and a falling rate scenario would have the
inverse effect. However, we can not be certain that our net interest income will
contract because the composition of our assets and liabilities is constantly
changing due to the variability of our loan prepayment experience, the behavior
of core deposit customers and other factors.




IMPACT
OF INFLATION AND CHANGING PRICES





The
majority of our assets and liabilities are monetary in nature; therefore, we
differ greatly from most commercial and industrial companies that have
significant investments in fixed assets or inventories. However, inflation does
have an important impact on the growth of total assets in the banking industry
and the resulting need to increase equity capital at higher than normal rates in
order to maintain an appropriate equity-to-assets ratio. Inflation significantly
affects noninterest expense, which tends to rise during periods of general
inflation. Deflation, or a decrease in overall prices from one period to the
next, could have a negative impact on the Company’s operations and financial
condition. Deflationary periods impute a higher borrowing cost to debtors as the
purchasing power of a dollar increases with time. This may decrease the demand
for loan products offered by the Bank.




22




We
believe the most significant impact on financial results is our ability to react
to changes in interest rates. While we seek to maintain a fairly balanced
position between interest rate sensitive assets and liabilities and to actively
manage the balance sheet in order to protect against the effects of wide
interest rate fluctuations on net income and shareholders’ equity, constraints
on capital and other factors may also influence the implementation of various
strategies.





CORPORATE
GOVERNANCE AND AVAILABILITY OF REPORTS





The
Company’s Board of Directors and management are focused on implementing and
monitoring a strong corporate governance program and culture.  The
following is a summary of specific steps the Board of Directors has taken to
improve the Company’s corporate governance program:




·
              The
      Chairman of the Board of Directors is a non-employee
    director.
 ·
              After
      the Company’s 2005 Annual Meeting of Shareholders the Board of Directors
      restructured the composition of the holding company’s
      board.  This restructuring resulted in seven of the nine
      directors of Ohio Legacy meeting the more stringent independence
      requirements of Rule 10A-3 of the Securities Exchange Act and Section
      301(3)(B) of the Sarbanes-Oxley Act of 2002.  At December 31,
      2008, eight of nine directors met this
  threshold.
 
 ·
              The
      Company has a Nominating and Corporate Governance Committee which includes
      three independent directors.
 
 ·
              The
      Company’s Audit and Compliance Committee comprises four independent
      directors.  The Board has identified an audit committee
      financial expert who serves as Chairman of the Audit and Compliance
      Committee.
 
 ·
              The
      Board of Directors has adopted and implemented a Code of Ethics for Senior
      Financial Officers, a Director Code of Conduct and a Code of Business
      Conduct and Ethics for all employees of the Company and its
      subsidiary.
 
 ·
              The
      Audit and Compliance Committee has developed a process for the receipt,
      retention and investigation of anonymous submissions by employees or
      external parties of concerns regarding questionable accounting or auditing
      matters.
 The
Company filed a number of corporate governance documents, including codes of
conduct and ethics and committee charters with the SEC. These documents are also
available on the Company’s website at http://www.ohiolegacycorp.com. On that
website, shareholders and other interested parties can access the Company’s
periodic and annual filings with the SEC, the Company’s Annual Report to
Shareholders and insider transaction filings subject to Section 16(a) of the
Exchange Act. These documents are provided free of charge and will be posted to
the website as soon as practicable after the documents are filed electronically
with the SEC. Additionally, inquiries or requests for paper documents can be
made through the contacts listed on page 54 of this
document.





PERFORMANCE
GRAPH





The
following graph compares the cumulative total shareholder return on the
Company’s common shares from December 31, 2003, until December 31, 2008, with
the cumulative total return, including reinvestment of dividends, of the NASDAQ
Composite Index and the NASDAQ Bank Index.  The graph assumes the
investment of $100 in the Company’s common shares, the NASDAQ Composite Index
and the NASDAQ Bank Index.










12/31/03
            
            
            12/31/04
            
            
            12/31/05
            
            
            12/31/06
            
            
            12/31/07
            
            
            12/31/08Ohio
      Legacy Corp.
            
            
            100.0
            
            
            
            138.0
            
            
            
            86.5
            
            
            
            80.5
            
            
            
            47.1
            
            
            
            20.7NASDAQ
      Stock Market (US Companies)
            
            
            100.0
            
            
            
            108.8
            
            
            
            111.2
            
            
            
            122.1
            
            
            
            132.4
            
            
            
            63.8NASDAQ
      Banks
            
            
            100.0
            
            
            
            114.4
            
            
            
            111.8
            
            
            
            125.5
            
            
            
            99.5
            
            
            
            72.5





23





Item
8.  Financial Statements





CONSOLIDATED
BALANCE SHEETS


As of
December 31, 2008 and 2007





2008
            
            
            2007ASSETSCash
      and due from banks
            
            $
            7,652,710
            
            
            $
            5,764,580Federal
      funds sold and interest-bearing deposits in financial
      institutions
            
            
            3,815,227
            
            
            
            1,350,625Cash and cash
      equivalents
            
            
            11,467,937
            
            
            
            7,115,205Certificate
      of deposit in financial institution
            
            
            100,000
            
            
            
            100,000Securities
      available for sale
            
            
            32,726,863
            
            
            
            29,010,334Securities
      held to maturity (fair value of $3,003,825 and $2,995,122 atDecember
      31, 2008 and 2007
            
            
            2,999,813
            
            
            
            3,002,754Loans
      held for sale
            
            
            1,012,038
            
            
            
            911,906Loans,
      net of allowance of $3,398,284 and $1,622,906 at December 31,2008
      and 2007
            
            
            126,836,473
            
            
            
            131,642,471Federal
      bank stock
            
            
            1,455,100
            
            
            
            1,541,200Premises
      and equipment, net
            
            
            3,284,884
            
            
            
            2,901,906Intangible
      assets
            
            
            59,901
            
            
            
            150,322Other
      real estate owned
            
            
            5,215,696
            
            
            
            2,416,367Accrued
      interest receivable and other assets
            
            
            1,375,369
            
            
            
            1,488,214Total assets
            
            $
            186,534,074
            
            
            $
            180,280,679LIABILITIESDeposits:Noninterest-bearing
      demand
            
            $
            16,659,300
            
            
            $
            14,329,339Interest-bearing
      demand
            
            
            10,070,737
            
            
            
            9,995,343Savings and money
      market
            
            
            53,483,533
            
            
            
            49,566,417Certificates of deposit,
      net
            
            
            65,491,464
            
            
            
            73,458,253Total deposits
            
            
            145,705,034
            
            
            
            147,349,352Repurchase
      agreements
            
            
            1,405,619
            
            
            
            2,022,869Short
      term Federal Home Loan Bank advances
            
            
            6,850,000
            
            
            
            2,025,000Federal
      Home Loan Bank advances
            
            
            21,000,000
            
            
            
            12,000,000Capital
      lease obligations
            
            
            469,060
            
            
            
            493,168Accrued
      interest payable and other liabilities
            
            
            1,583,504
            
            
            
            1,076,647Total liabilities
            
            
            177,013,217
            
            
            
            164,967,036Commitments
      and contingent liabilities (Note 15)SHAREHOLDERS’
      EQUITYPreferred
      stock, no par value, 500,000 shares authorized andNone
      outstanding
            
            
            -
            
            
            
            -Common
      stock, no par value, 5,000,000 shares authorized and2,214,564
      outstanding in 2008 and 2007
            
            
            18,808,311
            
            
            
            18,781,925Accumulated
      earnings (deficit)
            
            
            (9,519,307
            )
            
            
            (3,472,218
            )Accumulated
      other comprehensive income (loss)
            
            
            231,853
            
            
            
            3,936Total shareholders’
      equity
            
            
            9,520,857
            
            
            
            15,313,643Total liabilities and
      shareholders’ equity
            
            $
            186,534,074
            
            
            $
            180,280,679


See
accompanying notes
  24


CONSOLIDATED
STATEMENTS OF OPERATIONS


For the
years ended December 31, 2008 and 2007





2008
            
            
            2007Interest
      and dividends income:Loans, including
    fees
            
            $
            8,681,283
            
            
            $
            12,197,884Securities,
taxable
            
            
            1,731,333
            
            
            
            1,116,060Securities,
    tax-exempt
            
            
            114,443
            
            
            
            111,028Interest-bearing deposits and
      federal funds sold and other
            
            
            69,435
            
            
            
            262,913Dividends on federal bank
      stock
            
            
            81,115
            
            
            
            98,307Total interest and dividends
      income
            
            
            10,677,609
            
            
            
            13,786,192Interest
      expense:Deposits
            
            
            4,090,296
            
            
            
            6,481,949Short term Federal Home Loan Bank
      advances
            
            
            76,638
            
            
            
            95,600Federal Home Loan Bank
      advances
            
            
            728,176
            
            
            
            693,267Subordinated
      debentures
            
            
            -
            
            
            
            190,213Repurchase
    agreements
            
            
            24,598
            
            
            
            87,504Capital leases
            
            
            77,898
            
            
            
            127,580Total interest
      expense
            
            
            4,997,606
            
            
            
            7,676,113Net
      interest income
            
            
            5,680,002
            
            
            
            6,110,079Provision
      for loan losses
            
            
            2,361,496
            
            
            
            3,482,854Net
      interest income after provision for loan losses
            
            
            3,318,506
            
            
            
            2,627,225Noninterest
      income:Service charges and other
      fees
            
            
            955,226
            
            
            
            1,078,284Gain on sales of
    loans
            
            
            179,474
            
            
            
            206,760Gain
      (loss) on sales of securities available for sale, net
            
            
            -
            
            
            
            (340,066
            )Other
      than temporary impairment of securities
            
            
            (2,859,024
            )
            
            
            -Gain (loss) on disposition or
      direct write-down of other real estate owned
            
            
            (537,770
            )
            
            
            (1,167,229
            )Gain on sale of
    branch
            
            
            -
            
            
            
            2,077,556Other income
            
            
            203,270
            
            
            
            96,196Total other
income
            
            
            (2,058,824
            )
            
            
            1,951,501Noninterest
      expense:Salaries
      and benefits
            
            
            3,386,041
            
            
            
            4,177,669Occupancy
      and equipment
            
            
            965,895
            
            
            
            968,484Professional
      fees
            
            
            333,348
            
            
            
            627,552Franchise
      tax
            
            
            189,009
            
            
            
            249,070Data
      processing
            
            
            677,666
            
            
            
            702,988Marketing
      and advertising
            
            
            177,218
            
            
            
            222,610Stationery
      and supplies
            
            
            105,907
            
            
            
            118,030Amortization
      of intangible asset
            
            
            90,421
            
            
            
            132,066Deposit
      expenses and insurance
            
            
            282,647
            
            
            
            277,785Other
      expenses
            
            
            1,098,619
            
            
            
            616,728Total
      noninterest expense
            
            
            7,306,771
            
            
            
            8,092,982Earnings
      (loss) before income taxes
            
            
            (6,047,089
            )
            
            
            (3,514,256
            )Income
      tax expense
            
            
            -
            
            
            
            124,377Net
      earnings (loss)
            
            $
            (6,047,089
            )
            
            $
            (3,638,633
            )Basic
      net earnings (loss) per share
            
            $
            (2.73
            )
            
            $
            (1.64
            )Diluted
      net earnings (loss) per share
            
            $
            (2.73
            )
            
            $
            (1.64
            )











25





CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


For the
years ended December 31, 2008 and 2007





Outstanding
            
            
            
            
            
            
            
            
            AccumulatedShares
      of
            
            
            
            
            
            Accumulated
            
            
            Other
            
            
            TotalCommon
            
            
            Common
            
            
            Earnings
            
            
            Comprehensive
            
            
            Shareholders’Stock
            
            
            Stock
            
            
            (Deficit)
            
            
            Income (Loss)
            
            
            EquityBalance,
      January 1, 2007
            
            
            2,214,564
            
            
            $
            18,737,150
            
            
            $
            166,415
            
            
            $
            (485,008
            )
            
            $
            18,418,557Stock
      based compensation expense
            
            
            
            
            
            
            44,775
            
            
            
            
            
            
            
            
            
            
            
            44,775Comprehensive
      income (loss):Net
      earnings (loss)
            
            
            -
            
            
            
            -
            
            
            
            (3,638,633
            )
            
            
            -
            
            
            
            (3,638,633
            )Net
      unrealized gain (loss) on securities available for sale arising during the
      period
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            488,944
            
            
            
            488,944Total
      comprehensive income (loss)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,149,689
            )Balance,
      December 31, 2007
            
            
            2,214,564
            
            
            
            18,781,925
            
            
            
            (3,472,218
            )
            
            
            3,936
            
            
            
            15,313,643Stock
      based compensation expense
            
            
            -
            
            
            
            26,386
            
            
            
            -
            
            
            
            -
            
            
            
            26,386Comprehensive
      income (loss):Net
      income (loss)
            
            
            -
            
            
            
            -
            
            
            
            (6,047,089
            )
            
            
            -
            
            
            
            (6,047,089
            )Net
      unrealized gain (loss) on securities available for sale  arising
      during the period including effect of reclassifications
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            227,917
            
            
            
            227,917Total
      comprehensive income (loss)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (5,819,172
            )Balance,
      December 31, 2008
            
            
            2,214,564
            
            
            $
            18,808,311
            
            
            $
            (9,519,307
            )
            
            $
            231,853
            
            
            $
            9,520,857









26





CONSOLIDATED
STATEMENTS OF CASH FLOWS


For the
years ended December 31, 2008 and 2007





2008
            
            
            2007Cash
      flows from operating activities:Net
      earnings (loss)
            
            $
            (6,047,089
            )
            
            $
            (3,638,633
            )Adjustments
      to reconcile net earnings (loss) to net cash from operating
      activities:Depreciation
      and amortization
            
            
            500,519
            
            
            
            532,371Securities
      amortization and accretion, net
            
            
            19,006
            
            
            
            70,729Federal
      Home Loan Bank (FHLB) stock dividends
            
            
            (39,600
            )
            
            
            -Origination
      of loans held for sale
            
            
            (14,199,868
            )
            
            
            (26,150,822
            )Proceeds
      from sale of loans held for sale
            
            
            14,279,210
            
            
            
            26,658,146Provision
      for loan losses
            
            
            2,361,496
            
            
            
            3,482,854Loss
      from Ohio Legacy Trust I
            
            
            -
            
            
            
            (754
            )Loss
      on disposition or write-down on other real estate owned
            
            
            537,770
            
            
            
            1,167,229Loss
      (gain) on sale of securities available for sale
            
            
            -
            
            
            
            340,066Other
      than temporary impairment of securities
            
            
            2,859,024
            
            
            
            -Gain
      on sale of loans held for sale
            
            
            (179,474
            )
            
            
            (206,760
            )Gain
      on sale of branch
            
            
            -
            
            
            
            (2,077,556
            )Accretion
      of fair value purchase adjustments
            
            
            -
            
            
            
            (8,048
            )Change
      in deferred income taxes and valuation allowance
            
            
            -
            
            
            
            693,103Stock
      based compensation expense
            
            
            26,386
            
            
            
            44,775Net
      change in:Accrued interest receivable and
      other assets
            
            
            112,845
            
            
            
            (700,908
            )Accrued interest payable and
      other liabilities
            
            
            389,445
            
            
            
            403,005Deferred loan
fees
            
            
            (47,517
            )
            
            
            (63,948
            )Net cash
      from operating activities
            
            
            572,153
            
            
            
            544,848Cash
      flows from investing activities:Purchases
      of securities available for sale
            
            
            (9,920,610
            )
            
            
            (19,217,045
            )Purchases
      of securities held to maturity
            
            
            -
            
            
            
            (804,847
            )Sales
      of securities available for sale
            
            
            -
            
            
            
            13,147,235Maturities,
      calls and paydowns of securities available for sale
            
            
            3,674,321
            
            
            
            4,338,301Proceeds
      from sale of other real estate owned
            
            
            385,614
            
            
            
            734,348Net
      cash from branch sale
            
            
            -
            
            
            
            17,750,281(Purchases)
      or redemptions of federal bank stock
            
            
            125,700
            
            
            
            -Net
      change in loans
            
            
            (874,530
            )
            
            
            2,601,426Proceeds
      from sale of loans
            
            
            -
            
            
            
            612,264Improvements
      to real estate owned
            
            
            (356,164
            )
            
            
            (1,507,968
            )Purchases
      of premises and equipment
            
            
            (793,076
            )
            
            
            (217,797
            )Net cash from investing
      activities
            
            
            (7,758,745
            )
            
            
            (17,436,193
            )Cash
      flows from financing activities:Net
      change in deposits
            
            
            (1,644,318
            )
            
            
            (15,847,672
            )Net
      change in repurchase agreements
            
            
            (617,250
            )
            
            
            705,342Repayment
      of capital lease obligations
            
            
            (24,108
            )
            
            
            (29,606
            )Repayment
      of debt obligation
            
            
            -
            
            
            
            (3,325,000
            )Proceeds
      from short term FHLB advances, net of repayments
            
            
            4,825,000
            
            
            
            2,025,000Proceeds
      from FHLB advances
            
            
            11,000,000
            
            
            
            -Repayments
      of FHLB advances
            
            
            (2,000,000
            )
            
            
            (7,433,776
            )Net
      cash from (used by) financing activities
            
            
            11,539,324
            
            
            
            (23,905,706
            )Net
      change in cash and cash equivalents
            
            
            4,352,732
            
            
            
            (5,924,660
            )Cash
      and cash equivalents at beginning of period
            
            
            7,115,205
            
            
            
            13,039,865Cash
      and cash equivalents at end of period
            
            $
            11,467,937
            
            
            $
            7,115,205Supplemental
      disclosures of cash flow information:Cash
      paid during the year for:Interest
            
            $
            5,040,396
            
            
            $
            7,824,289Federal income
    taxes
            
            
            -
            
            
            
            -Noncash
      transactions:Transfer of loans to other real
      estate owned
            
            $
            3,366,549
            
            
            $
            243,590










27





NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Nature of Operations and Principles
of Consolidation:  The consolidated financial statements
include Ohio Legacy Corp (Ohio Legacy) and its wholly-owned subsidiary, Ohio
Legacy Bank, N.A. (Bank). Intercompany transactions and balances are eliminated
in consolidation. References to the Company include Ohio Legacy, consolidated
with its subsidiary, the Bank.





Ohio
Legacy is a bank holding company, incorporated in July 1999 under the laws of
the State of Ohio.  The Bank provides financial services through its
full-service offices in Wooster, North Canton and Canton, Ohio.  Its
primary deposit products are checking, savings and certificate of deposit
accounts, and its primary lending products are residential mortgage, commercial
and installment loans.  Substantially all loans are secured by
specific items of collateral including business assets, consumer assets and real
estate.  Commercial loans are expected to be repaid from cash flow
from operations of businesses.  Real estate loans are secured by
residential and commercial real estate.  Loans to lessors of
buildings, warehouse and residential properties and to commercial and industrial
building contractors represent 397.5% and 40.6% of capital, respectively. Other
financial instruments that potentially represent concentrations of credit risk
include deposit accounts in other financial institutions and federal funds
sold.




Basis of Presentation: As more fully described in Note 17, the Board of
Directors of the Company's bank subsidiary entered into a consent order with the
Bank's primary federal regulator. The stringent capital requirements of this
consent order create an uncertainty about the Company's ability to continue as a
going concern. Management is actively pursuing various options to satisfy these
requirements. The financial statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going
concern.





Use of
Estimates:  To prepare financial statements in conformity with
U.S. generally accepted accounting principles, management makes estimates and
assumptions based on available information.  These estimates and
assumptions affect the amounts reported in the financial statements and the
disclosures provided, and actual results could differ.  The allowance
for loan losses, judgments about the other than temporary impairment of
securities, fair value of financial instruments, valuation of deferred tax
assets and the fair value of other real estate owned are particularly subject to
change.





Cash Flows:  Cash
and cash equivalents includes cash, deposits with other financial institutions
with original maturities of less than 90 days and federal funds
sold.  Net cash flows are reported for customer loan and deposit
transactions, interest bearing deposits in other financial institutions, and
federal funds purchased and repurchase agreements.





Interest–Bearing Deposits in Other
Financial Institutions: Interest-bearing deposits in other financial
institutions mature within one year and are carried at cost.





Restrictions on
Cash:  Cash on hand or on deposit with the Federal Reserve Bank
of $1,287,000 and $1,358,000 was required to meet regulatory reserve and
clearing requirements at December 31, 2008 and 2007, respectively.





Securities:  Securities
are classified as held to maturity and carried at amortized cost when management
has the positive intent and ability to hold them to
maturity.  Securities are classified as available for sale when they
might be sold before maturity.  Equity securities with readily
determinable fair values are classified as available for sale. Securities
available for sale are carried at fair value, with unrealized holding gains and
losses reported in other comprehensive income, net of tax.





Interest
income includes amortization of purchase premium or
discount.  Premiums and discounts on securities are amortized on the
level-yield method without anticipating prepayments, except for mortgage-backed
securities when prepayments are anticipated.  Gains and losses on
sales are recorded on the trade date and determined using the specific
identification method.





Declines
in the fair value of securities below their cost that are other than temporary
are reflected as realized losses.  In estimating other-than-temporary
losses, management considers the length of time and extent that fair value has
been less than cost, the financial condition and near term prospects of the
issuer, and the Company’s ability and intent to hold the security for a period
sufficient to allow for any anticipated recovery in fair value.





Loans Held for
Sale:  Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of aggregate cost or market, as
determined by outstanding commitments from investors.  Net unrealized
losses, if any, are recorded as a valuation allowance and charged to
earnings.  Mortgage loans held for sale are generally
sold with servicing rights released.  Gains and losses on sales of
mortgage loans are based on the difference between the selling price and the
carrying value of the related loan sold.





28





NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)




Loans:  Loans that
management has the intent and ability to hold for the foreseeable future or
until maturity or payoff are reported at the principal balance outstanding, net
of deferred loan fees and costs and an allowance for loan losses.





Interest
income is accrued on the unpaid principal balance.  Loan origination
fees, net of certain direct origination costs, are deferred and recognized in
interest income using the level-yield method without anticipating
prepayments.





Interest
income on loans is discontinued at the time the loan becomes 90 days delinquent
unless the credit is well-secured and in process of collection. In all cases,
loans are placed on nonaccrual status or charged-off at an earlier date if
collection of principal or interest is considered
doubtful.  Delinquency status is based on contractual payment due
date.





All
interest accrued but not received for loans placed on nonaccrual status are
reversed against interest income. Interest received on such loans is accounted
for on the cash-basis or cost-recovery method until qualifying for return to
accrual. Loans are returned to accrual status when all principal and interest
amounts contractually due are brought current and future payments are reasonable
assured.





Allowance for Loan
Losses:  The allowance for loan losses is a valuation allowance
for probable incurred credit losses. Loan losses are charged against the
allowance when management believes the loan balance cannot be collected.
Subsequent recoveries, if any, are credited to the allowance. Management
estimates the allowance balance required by considering the nature and volume of
the portfolio, information about specific borrower situations and estimated
collateral values, economic conditions and other factors.  Allocations
of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management’s judgment, should be
charged-off.  The allowance consists of specific and general
components.  The specific component relates to loans that are
individually classified as impaired or loans otherwise classified as substandard
or doubtful.  The general component covers non-classified loans and is
based on historical loss experience adjusted for current factors.





A loan is
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement.  Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due.  Loans that
experience insignificant payment delays and payment shortfalls generally are not
classified as impaired.  Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower’s
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed.  Impairment is measured on a loan by loan
basis for commercial and construction loans by either the present value of
expected future cash flows discounted at the loan’s effective interest rate, the
loan’s obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.  Large groups of smaller balance homogeneous
loans are collectively evaluated for impairment.  Accordingly, the
Company does not separately identify individual consumer and residential loans
for impairment disclosures.





Transfers of Financial Assets:
Transfers of financial assets are accounted for as sales, when control over the
assets has been relinquished. Control over transferred assets is deemed to be
surrendered when the assets have been isolated from the Company, the transferee
obtains the right (free of conditions that constrain it from taking advantage of
that right) to pledge or exchange the transferred assets, and the Company does
not maintain effective control over the transferred assets through an agreement
to repurchase them before their maturity.




Federal Bank
Stock:  The Bank is a member of the Federal Home Loan Bank
(FHLB) system.  Members are required to own a certain amount of stock
based on the level of borrowing and other factors, and may invest in additional
amounts.  FHLB stock is carried at cost, classified as federal bank
stock on the balance sheet, and periodically evaluated for impairment based on
ultimate recovery of par value.  Both cash and stock dividends are reported
as income.  Federal Reserve Bank stock is also carried at
cost.  Cash dividends are reported as income.  At December
31, 2008, federal bank stock consisted of Federal Home Loan Bank stock of
$1,020,000 and Federal Reserve Bank stock of $435,100. As of December 31, 2007,
federal bank stock consisted of Federal Home Loan Bank stock of $980,400 and
Federal Reserve Bank stock of $560,800.




29




NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





Premises and
Equipment:  Land is carried at cost.  Premises and
equipment are stated at cost less accumulated
depreciation.  Depreciation is computed over an asset’s useful life,
primarily using the straight line method. Leasehold improvements and office
building under a capital lease are amortized over the original term of the
lease. Furniture, fixture and equipment have useful lives ranging from 3 to 15
years. Buildings have useful lives ranging from 15 to 20 years. Premises and
equipment and other long-lived assets are reviewed for impairment when events
indicate their carrying amount may not be recoverable through future
undiscounted cash flows. If impaired, the assets are recorded at fair
value.





Intangible
Assets:  Intangible assets consist primarily of core deposit
intangible assets arising from a branch acquisition.  They are
initially measured at fair value and then are amortized on an accelerated method
over their useful lives, which are approximately six years.





Other Real Estate
Owned:  Assets acquired through or instead of loan foreclosure
are initially recorded at fair value less costs to sell when acquired,
establishing a new cost basis.  If fair value declines, a valuation
allowance is recorded through expense.  Costs after acquisition are
expensed. Improvements that improve the fair value of the property are
capitalized. Real estate owned at December 31, 2008 and 2007 includes a property
placed into receivership until it can be improved and sold in an orderly
fashion.





Long-Term Assets: Premises and
equipment, intangible assets, and other long-term assets are reviewed for
impairment when events indicate their carrying amount may not be recoverable
from future undiscounted cash flows. If impaired, the assets are recorded at
fair value.





Income
Taxes:  Income tax expense is the total of the current year
income tax due or refundable and the change in deferred tax assets and
liabilities.  Deferred tax assets and liabilities are the expected
future tax amounts for the temporary differences between carrying amounts and
tax bases of assets and liabilities, computed using enacted tax
rates.  A valuation allowance, if needed, reduces deferred tax assets
to the amount expected to be realized.





The
Company adopted FASB Interpretation 48, Account for Uncertainty in Income Taxes
(“FIN 48”), as of January 1, 2007. A tax position is recognized as a benefit
only if it is “more likely than not” that the tax position would be sustained in
a tax examination, with a tax examination being presumed to occur. The amount
recognized is the largest amount of tax benefit that is greater than 50% likely
of being realized on examination. For tax positions not meeting the “more likely
than not” test, no tax benefit is recorded. The adoption had no effect on the
Company’s financial statements. The Company recognizes interest and/or penalties
related to income tax matters in income tax expense.





Earnings Per
Share:  Basic earnings (loss) per share is net earnings (loss)
divided by the weighted average number of common shares outstanding during the
period.  Diluted earnings (loss) per share includes the dilutive
effect of additional potential common shares that may be issued upon the
exercise of stock options and stock warrants.  The following table
details the calculation of basic and diluted earnings (loss) per share for the
years ended December 31:





2008
            
            
            2007BASIC:Net
      earnings (loss)
            
            $
            (6,047,089
            )
            
            $
            (3,638,633
            )Weighted
      average common shares outstanding
            
            
            2,214,564
            
            
            
            2,214,564Basic earnings (loss) per
      share
            
            $
            (2.73
            )
            
            $
            (1.64
            )





30





NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





2008
            
            
            2007DILUTED:Net
      earnings (loss)
            
            $
            (6,047,089
            )
            
            $
            (3,638,633
            )Weighted
      average common shares outstanding
            
            
            2,214,564
            
            
            
            2,214,564Dilutive
      effect of stock options
            
            
            -
            
            
            
            -Dilutive
      effect of stock warrants
            
            
            -
            
            
            
            -Total common shares and dilutive
      potential
              common shares
            
            
            2,214,564
            
            
            
            2,214,564Diluted
      earnings (loss) per share
            
            $
            (2.73
            )
            
            $
            (1.64
            )





The
computation of diluted earnings per share excludes dilutive potential common
shares if the effect of their exercise would be antidilutive. The number of
shares excluded in 2008 and 2007 was 334,700 and 364,150,
respectively.





Stock-Based
Compensation:  Compensation cost is recognized for stock
options and restricted stock awards issued to employees, based on the fair value
of these awards at the date of grant. A Black-Scholes model is utilized to
estimate the fair value of stock options, while the market price of the
Corporation’s common stock at the date of grant is used for restricted stock
awards. Compensation cost is recognized over the required service period,
generally defined as the vesting period. For awards with graded vesting,
compensation cost is recognized on a straight-line basis over the requisite
service period for the entire award.





Loan Commitments and Related
Financial Instruments:  Financial instruments include
off-balance sheet credit instruments, such as commitments to make loans and
commercial letters of credit issued to meet customer financing
needs.  The face amount for these items represents the exposure to
loss before considering customer collateral or ability to repay.  Such
financial instruments are recorded when they are funded.





Comprehensive Income
(Loss):  Comprehensive income (loss) consists of net earnings
(loss) and other comprehensive income (loss).  Other comprehensive
income (loss) includes unrealized gains and losses on securities available for
sale, which are also recognized as a separate component of equity, net of
tax.





Loss
Contingencies:  Loss contingencies, including claims and legal
actions arising in the ordinary course of business, are recorded as liabilities
when the likelihood of loss is probable and an amount or range of loss can be
reasonably estimated.  Management does not believe there are any such
matters that will have a material effect on the financial
statements.





Dividend
Restriction:  Banking regulations require the Bank to maintain
certain capital levels and may limit the dividends paid by the Bank to Ohio
Legacy.  See Note 14 for further descriptions of regulatory
restrictions.





Fair Values of Financial
Instruments:  Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in Note 10.  Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments and other factors, especially in the absence of broad markets for
particular items.  Changes in assumptions or in market conditions
could significantly affect the estimates.





Operating
Segments:  While the Company’s chief decision-makers monitor
the revenue streams of the Company’s various products and services, the
identifiable segments are not material and operations are managed and financial
performance is evaluated on a Company-wide basis.  Accordingly, all of
the Company’s financial services operations are considered by management to be
aggregated into one reportable operating segment.





31




NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





Reclassifications:  Some
items in the prior-year financial statements were reclassified to conform to the
current year’s presentation.





Adoption of New Accounting
Standards:  In September 2006, the FASB issued Statement No.
157, Fair ValueMeasurements(FAS
157).  This Statement defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value
measurements.  This Statement establishes a fair value hierarchy about
the assumptions used to measure fair value and clarifies assumptions about risk
and the effect of a restriction on the sale or use of an asset.  The
standard was effective for fiscal years beginning after November 15,
2007.  In February 2008, the FASB issued Staff Position (FSP)
157-2,Effective Date of FASB
Statement No. 157.This FSP delays the effective date of FAS
157 for all nonfinancial assets and nonfinancial liabilities, except those that
are recognized or disclosed at fair value on a recurring basis (at least
annually) to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years. The impact of adoption was not material. In October
2008, the FASB issued Staff Position (FSP) 157-3, Determining the Fair Value of a
Financial Asset when the Market for That Asset Is Not
Active.  This FSP clarifies the application of FAS 157 in a
market that is not active.  The impact of adoption was not
material.





In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities.  The standard provides
companies with an option to report selected financial assets and liabilities at
fair value and establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities.  The new
standard was effective for the Company on January 1, 2008.  The
Company did not elect the fair value option for any financial assets or
financial liabilities as of January 1, 2008.





In
September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4,
Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements.  This issue requires that a liability
be recorded during the service period when a split-dollar life insurance
agreement continues after participants’ employment or retirement.  The
required accrued liability will be based on either the post-employment benefit
cost for the continuing life insurance or based on the future death benefit
depending on the contractual terms of the underlying agreement.  This
issue was effective for fiscal years beginning after December 15,
2007.  The impact of adoption was not material.





On
November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at
Fair Value through Earnings(“SAB 109”). Previously, SAB 105, Application of Accounting Principles to Loan
Commitments, stated that in measuring the fair value of a derivative loan
commitment, a company should not incorporate the expected net future cash flows
related to the associated servicing of the loan. SAB 109 supersedes SAB 105 and
indicates that the expected net future cash flows related to the associated
servicing of the loan should be included in measuring fair value for all written
loan commitments that are accounted for at fair value through
earnings.  SAB 105 also indicated that internally-developed intangible
assets should not be recorded as part of the fair value of a derivative loan
commitment, and SAB 109 retains that view.  SAB 109 was effective for
derivative loan commitments issued or modified in fiscal quarters beginning
after December 15, 2007.  The impact of adoption was not
material.





In
December 2007, the SEC issued SAB No. 110, which expresses the views of the SEC
regarding the use of a “simplified” method, as discussed in SAB No. 107, in
developing an estimate of expected term of “plain vanilla” share options in
accordance with SFAS No. 123(R), Share-Based Payment.  The SEC
concluded that a company could, under certain circumstances, continue to use the
simplified method for share option grants after December 31,
2007.  The Company does not use the simplified method for share
options and therefore SAB No. 110 has no impact on the Company’s consolidated
financial statements.





Effect of Newly Issued But Not Yet
Effective Accounting Standards:  In December 2007, the
FASB issued FAS No. 141 (revised 2007), Business Combinations (“FAS 141(R)”),
which establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in an acquiree, including
the recognition and measurement of goodwill acquired in a business
combination.  FAS No. 141(R) is effective for fiscal years beginning
on or after December




32




NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





15,
2008.  Earlier adoption is prohibited.  The adoption of this standard
is not expected to have a material effect on the Corporation’s results of
operations or financial position.





In
December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB
No. 51”  (“SFAS No. 160”), which will change the
accounting and reporting for minority interests, which will be recharacterized
as noncontrolling interests and classified as a component of equity within the
consolidated balance sheets. FAS No. 160 is effective as of the beginning
of the first fiscal year beginning on or after December 15,
2008.  Earlier adoption is prohibited and the Corporation does not
expect the adoption of FAS No. 160 to have a significant impact on its results
of operations or financial position.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of SFAS No. 133”. FAS No. 161 amends and
expands the disclosure requirements of SFAS No. 133 for derivative instruments
and hedging activities. FAS No. 161 requires qualitative disclosure about
objectives and strategies for using derivative and hedging instruments,
quantitative disclosures about fair value amounts of the instruments and gains
and losses on such instruments, as well as disclosures about credit-risk
features in derivative agreements. FAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged.  The adoption of this
standard is not expected to have a material effect on the Corporation’s results
of operations or financial position.





NOTE
2 – SECURITIES





The fair
value of available for sale securities and the related gross unrealized gains
and losses recognized in accumulated other comprehensive income (loss) were as
follows:





Gross
            
            
            GrossFair
            
            
            Unrealized
            
            
            UnrealizedAvailable
      for sale, carried at fair value:
            
            Value
            
            
            Gains
            
            
            LossesDecember 31,
      2008U.S.
      Government -sponsored enterprises
            
            $
            1,031,763
            
            
            $
            31,762
            
            
            $
            -Equity
      securities
            
            
            58,000
            
            
            
            -
            
            
            
            (142,000
            )Mortgage-backed
      securities
            
            
            31,637,100
            
            
            
            622,755
            
            
            
            (161,225
            )Total
            
            $
            32,726,863
            
            
            $
            654,517
            
            
            $
            (303,225
            )December 31,
      2007U.S.
      Government -sponsored enterprises
            
            $
            1,017,652
            
            
            $
            17,652
            
            
            $
            -Equity 
      Securities
            
            
            3,043,687
            
            
            
            -
            
            
            
            (21,894
            )Mortgage-backed
      securities
            
            
            24,948,995
            
            
            
            178,256
            
            
            
            (168,051
            )Total$
            29,010,334
            
            
            $
            195,908
            
            
            $
            (189,945
            )








33





NOTE
2 – SECURITIES (continued)




The
carrying amount, unrecognized gains and losses, and fair value of securities
held to maturity were as follows:





Carrying
      Amount
            
            
            Gross
      Unrecognized Gains
            
            
            Gross
      Unrecognized Losses
            
            
            Fair
      ValueHeld
      to maturity, carried atamortized
      cost:December 31,
      2008Obligations of local
      governments
            
            $
            2,999,813
            
            
            $
            19,143
            
            
            $
            (15,131
            )
            
            $
            3,003,825December 31,
      2007Obligations of local
      governments
            
            $
            3,002,754
            
            
            $
            8,222
            
            
            $
            (15,854
            )
            
            $
            2,995,122





Securities
with unrealized losses at December 31, 2008 aggregated by investment category
and the length of time that individual securities have been in a continuous
unrealized loss position were as follows:





Less
      than
                12
      months
            
            
            12
      months
                or
      more
            
            
            Total(Dollars
      in thousands)
            
            Fair
                Value
            
            
            Unrealized
                Loss
            
            
            Fair
                Value
            
            
            Unrealized
                Loss
            
            
            Fair
                Value
            
            
            Unrealized
                LossAvailable
      for sale:U.S.
      Government-sponsored enterprises
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Mortgage-backed
      securities
            
            
            1,494
            
            
            
            (28
            )
            
            
            1,766
            
            
            
            (133
            )
            
            
            3,260
            
            
            
            (161
            )Equity
      securities
            
            
            58
            
            
            
            (142
            )
            
            
            -
            
            
            
            -
            
            
            
            58
            
            
            
            (142
            )Total
            
            $
            1,552
            
            
            $
            (170
            )
            
            $
            1,766
            
            
            $
            (133
            )
            
            $
            3,318
            
            
            $
            (303
            )(Dollars
      in thousands)Held
      to maturity:Obligations of local
      governments
            
            $
            1,539
            
            
            $
            (15
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            1,539
            
            
            $
            (15
            )




Securities
with unrealized losses for less than one year and one year or more at December
31, 2007, were as follows:





Less
      than
                12
      months
            
            
            12
      months
                or
      more
            
            
            Total(Dollars
      in thousands)
            
            Fair
                Value
            
            
            Unrealized
                Loss
            
            
            Fair
                Value
            
            
            Unrealized
                Loss
            
            
            Fair
                Value
            
            
            Unrealized
                LossAvailable
      for sale:U.S.
      Government-sponsored enterprises
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Mortgage-backed
      securities
            
            
            3,540
            
            
            
            (13
            )
            
            
            7,641
            
            
            
            (155
            )
            
            
            11,181
            
            
            
            (168
            )Equity
      securities
            
            
            3,044
            
            
            
            (22
            )
            
            
            -
            
            
            
            -
            
            
            
            3,044
            
            
            
            (22
            )Total
            
            $
            6,584
            
            
            $
            (35
            )
            
            $
            7,641
            
            
            $
            (155
            )
            
            $
            14,225
            
            
            $
            (190
            )(Dollars
      in thousands)Held
      to maturity:Obligations of local
      governments
            
            $
            698
            
            
            $
            (7
            )
            
            $
            771
            
            
            $
            (9
            )
            
            $
            1,469
            
            
            $
            (16
            )




At
December 31, 2008, there were no securities with other than temporary declines
in fair value as the decline in fair value is largely due to an increase in
market sector pricing differentials.  Timely repayment of principal
and interest




34




NOTE
2 – SECURITIES (continued)





on
mortgage-backed securities issued by FNMA, FHLMC and GNMA is guaranteed by the
issuer.  One non-agency issued mortgage-backed security has a current
market value of approximately 83.7% of the amortized cost of the
security.  To date, there have been no delinquencies or losses in the
underlying loans and the issuer’s bonds are of high credit quality. At December
31, 2008 the Company has the intent to hold the investments until the forecasted
recovery period, so the unrealized losses have not been recorded as other than
temporary.





As a
result of the actions of the Treasury Department in 2008, the Company recognized
an other than temporary impairment of the value of preferred equity securities
issued by FNMA and FHLMC in both the second and third quarters. These changes to
earnings were $159,000 and $2,700,000, as of June 30, 2008 and September 30,
2008, respectively, based on the market prices at the end of the indicated
quarters. For the year to date, other than temporary charges on the securities
total $2,859,000. At December 31, 2008 the market value of the equities was
$58,000, compared to a book value of $200,000. The decline in value in the
fourth quarter was due in large part to a temporary change in the tax treatment
of losses recognized on the securities if they were sold in 2008. Increases in
the market prices were observed early in 2009, so management concluded the
decline in value in the fourth quarter of 2008 represented only temporary
impairment of these securities.





The fair
value of debt securities and carrying amount, if different, at year end 2008 by
contractual maturity were as follows.  Securities not due at a single
maturity date, mortgage-backed securities and equity securities are shown
separately.





Held-to-maturity
            
            
            Available
      for sale(Dollars
      in thousands)
            
            Carrying
              Amount
            
            
            Fair
              Value
            
            
            Fair
              ValueDue
      in one year or less
            
            $
            -
            
            
            $
            -
            
            
            $
            1,032Due
      from one to five years
            
            
            514
            
            
            
            521Due
      from five to ten years
            
            
            2,486
            
            
            
            2,483
            
            
            
            -Due
      after ten years
            
            
            
            
            
            
            
            
            
            
            -Equity
      securities
            
            
            -
            
            
            
            -
            
            
            
            58Mortgage-backed
            
            
            -
            
            
            
            -
            
            
            
            31,637Total
            
            $
            3,000
            
            
            $
            3,004
            
            
            $
            32,727




Securities
with a fair value of $4,514,000 and $9,767,000 were pledged as collateral for
public fund deposits at December 31, 2008 and 2007,
respectively.  Available for sale securities with a fair value of
$3,844,000 and $4,410,000 were pledged as collateral for repurchase agreements
(see Note 8) as of December 31, 2008 and 2007 respectively. Available for sale
securities with a fair value of $10,165,000 were pledged as collateral to the
Federal Home Loan Bank as of December 31, 2008.





At
December 31, 2008, there were no holdings of securities of any one issuer, other
than mortgage backed securities issued by U.S. Government-sponsored enterprises,
in an amount greater than 10% of shareholders’ equity. At December 31, 2007
there were no such holdings except mortgage-backed securities issued by U.S.
Government-sponsored enterprises and debentures issued by the Federal Home Loan
Bank.





35





NOTE
3 – LOANS





Loans, by
collateral type, were as follows at December 31:





2008
            
            
            2007Balance
            
            
            Percent
            
            
            Balance
            
            
            PercentResidential
      real estate
            
            $
            37,091,918
            
            
            
            28.5
            %
            
            $
            36,548,270
            
            
            
            27.4
            %Multifamily
      residential real estate
            
            
            5,558,771
            
            
            
            4.2
            
            
            
            7,918,222
            
            
            
            5.9Commercial
      real estate
            
            
            56,921,284
            
            
            
            43.7
            
            
            
            59,574,635
            
            
            
            44.7Construction
            
            
            10,799,541
            
            
            
            8.3
            
            
            
            10,714,524
            
            
            
            8.0Commercial
            
            
            12,082,242
            
            
            
            9.3
            
            
            
            12,528,137
            
            
            
            9.4Consumer
      and home equity
            
            
            7,893,464
            
            
            
            6.0
            
            
            
            6,141,569
            
            
            
            4.6Total
      loans
            
            
            130,347,220
            
            
            
            100.0
            %
            
            
            133,425,357
            
            
            
            100.0
            %Less: Allowance
      for loan losses
            
            
            (3,398,284
            )
            
            
            
            
            
            
            (1,622,906
            )Net
      deferred loan fees
            
            
            (112,463
            )
            
            
            
            
            
            
            (159,980
            )Loans,
      net
            
            $
            126,836,473
            
            
            
            
            
            
            $
            131,642,471





At
December 31, 2008 and 2007 respectively, approximately $24,656,000 and
$24,543,000 of residential real estate loans were pledged as collateral for FHLB
advances.





Activity
in the allowance for loan losses for the years ended December 31 was as
follows:





2008
            
            
            2007Balance,
      January 1
            
            $
            1,622,906
            
            
            $
            1,757,110Provision
      for loan losses
            
            
            2,361,496
            
            
            
            3,482,854Loans
      charged-off
            
            
            (765,595
            )
            
            
            (3,242,511
            )Recoveries
      of charged-off loans
            
            
            179,477
            
            
            
            10,240Reduction
      of allowance for loans sold
            
            
            -
            
            
            
            (384,787
            )Balance,
      December 31
            
            $
            3,398,284
            
            
            $
            1,622,906Balance
      as a percentage of total loans
            
            
            2.61
            %
            
            
            1.22
            %





Loans
individually considered impaired and nonperforming loans were as follows at
December 31, 2008 and 2007, and during the years then ended:





2008
            
            
            2007At December
      31:Loans
      past due over 90 days still on accrual
            
            $
            279,800
            
            
            $
            -Nonaccrual
      loans, includes smaller balance homogeneous loans
            
            
            4,636,376
            
            
            
            4,205,143Impaired
      loans, included in nonaccrual loans
            
            
            4,616,376
            
            
            
            3,550,936Impaired
      loans with no allowance for loan losses allocated
            
            
            3,380,537
            
            
            
            3,550,936Amount
      of the allowance for loan losses allocated
            
            
            772,000
            
            
            
            -During the year ended
      December 31:Average
      of impaired loans during the year
            
            $
            3,522,152
            
            
            $
            2,518,559Interest
      income recognized during impairment
            
            
            44,835
            
            
            
            55,904Cash-basis
      interest income recognized during impairment
            
            
            44,835
            
            
            
            55,904Interest
      income foregone on nonaccrual loans
            
            $
            238,239
            
            
            $
            191,756








36





NOTE
3 – LOANS (continued)





Loans to
principal officers, directors and their affiliates in 2008 were as
follows:





Balances,
      January 1
            
            $
            4,034,258New
      loans
            
            
            87,593Repayments
            
            
            (210,101
            )Balances,
      December 31
            
            $
            3,911,750





NOTE
4 – OTHER REAL ESTATE OWNED





Other
real estate owned was as follows for the years ended December 31:





2008
            
            
            2007Residential
      real estate
            
            $
            2,430,803
            
            
            $
            136,716Land
      development
            
            
            2,784,893
            
            
            
            2,279,651Total
      real estate owned
            
            $
            5,215,696
            
            
            $
            2,416,367





Assets
acquired through or instead of loan foreclosure are initially recorded at fair
value less costs to sell when acquired, establishing a new cost basis. If fair
value declines, a valuation allowance is recorded through expense.





Costs
after acquisition are expensed. Expenditures that improve the fair value of the
property are capitalized. It is the Company’s intention to make periodic
reassessments of the value of assets held in this category and record valuation adjustments
or write-downs as the reassessments dictate.  Real estate owned at
December 31, 2008 and December 31, 2007 includes a property placed into
receivership until it can be improved and sold in an orderly
fashion.





NOTE
5 - PREMISES AND EQUIPMENT





Premises
and equipment were as follows at December 31:





2008
            
            
            2007Land
            
            $
            638,786
            
            
            $
            524,559Office
      building
            
            
            2,031,368
            
            
            
            1,477,141Leasehold
      improvements
            
            
            764,767
            
            
            
            761,039Furniture,
      fixtures and equipment
            
            
            1,769,025
            
            
            
            1,648,131Premises and equipment,
      cost
            
            
            5,203,946
            
            
            
            4,410,870Less:  Accumulated
      depreciation
            
            
            (1,919,062
            )
            
            
            (1,508,964
            )Premises
      and equipment, net
            
            $
            3,284,884
            
            
            $
            2,901,906





During
the years ending December 31, 2008 and 2007, depreciation expense was $410,098
and $400,305, respectively.  Depreciation expense includes
amortization of assets leased under capital leases.





The
Company’s main banking office is located in leased premises at 305 West Liberty
Street in Wooster, Ohio.  Monthly rent for the first five years, which
ended in April 2006, was $4,200 plus an amount equal to the monthly payment to
amortize the construction costs of $550,000 over 180 months, with an interest
rate of 10%.  The base rent increases every five years by the
percentage increase in the Consumer Price Index over the same five-year
period.  The monthly base rent increased to $5,562 in May
2006.  The final scheduled increase in base rent will occur in May
2011 when it will increase to $7,108. Base rent will remain at that level until
the expiration of the lease in April 2016. The building portion of the lease is
accounted for as a capital lease while the land portion of the lease is
accounted for as an operating lease, due to the land exceeding 25% of the total
fair value of the property.





37





NOTE 5 - PREMISES AND EQUIPMENT(continued)





The
Bank’s operations center is located at 2375 Benden Drive, Suite C Wooster,
Ohio.  In 2007, the Bank entered into a five year operating lease
agreement for the property. Annual rent payments are $23,004 for the first year,
then increase annually as follows: $28,752 for the second year, $34,500 for the
third year, $40,248 for the fourth year and $45,996 for the fifth year. At the
end of the initial five years, the Bank has the right to extend the term of the
lease for five additional one year terms. The rent will increase 3.0% for each
renewal term.





The Stark
County banking office is located at 4026 Dressler Road in Canton,
Ohio.  In 2001, the Bank entered into a ten-year
operating lease agreement for the property with two five-year renewal
options.  The rent under the lease increased to $88,851 for the second
five years of the original term of the lease and would increase 15% for the
final five-year renewal term.





The
Milltown banking office is located at 3562 Commerce Parkway in Wooster, Ohio.
The Bank assumed an operating lease on the property upon the consummation of a
purchase and assumption agreement (discussed in Note 6) in August 2004, and
subsequently purchased the building in 2008.





The North
Canton banking office is located at 600 South Main Street in North Canton,
Ohio.  The Bank owns the land and building, which was constructed
during 2005.





Rent
expense was $264,800 and $266,800 for the years ended December 31, 2008 and
2007, respectively.  Estimated rental commitments under all leases for
their non-cancelable periods were as follows as of December 31,
2008:




Operating
              
              
              CapitalLeases
              
              
              Leases2009
              
              $
              155,686
              
              
              $
              101,9832010
              
              
              161,434
              
              
              
              101,9832011
              
              
              81,537
              
              
              
              111,1432012
              
              
              67,328
              
              
              
              115,7242013
              
              
              40,497
              
              
              
              115,724Thereafter
              
              
              94,493
              
              
              
              270,023Total
      minimum lease payments
              
              $
              600,975
              
              
              $
              816,580Amounts
      representing interest
              
              
              
              
              
              
              (347,520
              )Present value of minimum lease payments
              
              
              
              
              
              $
              469,060




NOTE
6 – INTANGIBLE ASSETS





As a
result of a branch acquisition in 2004, the Bank recorded intangible assets of
$749,600 related to identifiable intangibles. Accumulated amortization at
December 31, 2008 and 2007 totaled $689,700 and $599,300,
respectively.  The asset is being amortized over an estimated life of
six years using the sum-of-the-years’ digits method.  Amortization
expense totaled $90,400 and $132,100 during 2008 and 2007
respectively.  The following table summarizes estimated amortization
expense for the remainder of the asset’s estimated useful life:




2009
              
              $
              49,6322010
              
              
              10,269





38




NOTE
7 - DEPOSITS





Certificates
of deposit in denominations of $100,000 or more were $27,911,600 and $26,690,700
at December
31, 2008 and 2007, respectively.





Scheduled
maturities of certificates of deposit were as follows at December 31,
2008:




2009
              
              $
              35,111,1262010
              
              
              19,723,3032011
              
              
              8,521,2522012
              
              
              1,997,9922013
              
              
              137,791Thereafter
              
              
              -$
              65,491,464





Included
in certificates of deposit at December 31, 2008 and 2007 were $3,159,300 and
$2,961,700, respectively, obtained through the Certificate of Deposit Account
Registry Service (CDARS).  This service allows deposit customers to
maintain fully insured balances in excess of the $100,000 FDIC insurance limit
without the inconvenience of having multiple banking
relationships.  Under the reciprocal program, customers agree to allow
the Bank to place their deposits with other participating banks in the CDARS
program in insurable amounts under $100,000. In exchange, other banks in the
program agree to place their deposits with Ohio Legacy Bank, also in insurable
amounts under $100,000.





The
following is a schedule of average deposit amounts and average rates paid on
each category for the year ended December 31:





2008
            
            
            2007Average
            
            
            Average
            
            
            Average
            
            
            AverageBalances
            
            
            Rate
            
            
            Balances
            
            
            RateNoninterest-bearing
      demand deposits
            
            $
            16,017,000
            
            
            
            N/A
            
            
            $
            16,834,000
            
            
            
            N/AInterest-bearing
      demand deposits
            
            
            9,294,000
            
            
            
            1.01
            %
            
            
            9,465,000
            
            
            
            1.43
            %Savings
      accounts
            
            
            6,745,000
            
            
            
            1.32
            
            
            
            7,578,000
            
            
            
            0.78Money
      market accounts
            
            
            45,316,000
            
            
            
            2.51
            
            
            
            45,160,000
            
            
            
            3.82Certificates
      of deposit
            
            
            69,278,000
            
            
            
            3.91
            
            
            
            95,738,000
            
            
            
            4.77Total deposits
            
            $
            146,650,000
            
            
            
            
            
            
            $
            174,775,000




NOTE
8 – REPURCHASE AGREEMENTS





Repurchase
agreements are financing arrangements that mature daily. Under the agreements,
customers agree to maintain funds on deposit with the Bank and in return acquire
an interest in a pool of securities pledged as collateral against the
funds.  The securities are held in a segregated safekeeping account at
the Federal Home Loan Bank.  Information concerning the repurchase
agreements for 2008 and 2007 is summarized as follows:





2008
            
            
            2007Average
      daily balance during the year
            
            $
            1,642,594
            
            
            $
            1,997,848Average
      interest rate during the year
            
            
            1.33
            %
            
            
            4.38
            %Maximum
      month-end balance during the year
            
            $
            2,130,469
            
            
            $
            2,981,006Interest
      rate at year-end
            
            
            0.37
            %
            
            
            3.59
            %








39





NOTE
9 - FEDERAL HOME LOAN BANK ADVANCES





Overnight
borrowings from the FHLB totaled $6,850,000 at December 31, 2008 with a
variable-rate of 0.54%, which adjusts daily. For the prior year end, overnight
borrowings were $2,025,000 with a variable rate of 4.28%. The following table
details FHLB term advances as of December 31:





2008
            
            
            2007Twenty-seven
      month interest only advance4.94%
      fixed rate, maturing April 25, 2008
            
            
            -
            
            
            $
            2,000,000Three-year
      interest-only advance4.89%
      fixed rate, maturing January 16, 2009
            
            
            3,000,000
            
            
            
            3,000,000Three-year
      interest-only advance5.24%
      fixed rate, maturing February 23, 2009
            
            
            2,500,000
            
            
            
            2,500,000Four-year
      interest-only advance4.98%
      fixed rate, maturing January 25, 2010
            
            
            2,000,000
            
            
            
            2,000,000Four-year
      interest-only advance5.25%
      fixed rate, maturing February 23, 2010
            
            
            2,500,000
            
            
            
            2,500,000Two-year
      interest-only advance3.02%
      fixed rate, maturing February 26, 2010
            
            
            2,000,000
            
            
            
            -Two-year
      interest-only advance2.65%
      fixed rate, maturing March 4, 2010
            
            
            2,000,000
            
            
            
            -Two-year
      interest-only advance3.19%
      fixed rate, maturing September 16, 2010
            
            
            5,000,000
            
            
            
            -Three-year
      interest only advance2.96%
      fixed rate, maturing March 11, 2011
            
            
            2,000,000
            
            
            
            -$
            21,000,000
            
            
            $
            12,000,000




Each
interest-only advance is payable at its maturity date and has a prepayment
penalty if repaid prior to maturity.  The advances were collateralized
by a blanket pledge of eligible residential real estate loans and specific
securities in the available for sale portfolio.  At December 31, 2008,
the Bank had approximately $11,500,000 in additional borrowing capacity
available for future advances based upon current collateral.  As of
December 31, 2008, required principal payments on all FHLB advances over the
next five years were as follows:




2009
              
              $
              5,500,0002010
              
              
              13,500,0002011
              
              
              2,000,000$
              21,000,000





40





NOTE
10 – FAIR VALUE MEASUREMENT





Statement
157 establishes a fair value hierarchy which requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The standard describes three levels of inputs that may be
used to measure fair value:





Level 1:
Quoted prices (unadjusted) for identical assets or liabilities in active markets
that the entity has the ability to access as of the measurement
date.





Level 2:
Significant other observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities quoted prices in markets that are not
active, and other inputs that are observable or can be corroborated by
observable market data.





Level 3:
Significant unobservable inputs that reflect a company’s own assumptions that
market participants would use in pricing an asset or liability.





The
Company uses the following methods and significant assumptions to estimate fair
value.





Securities:
The fair values of securities available for sale are determined by obtaining
quoted prices on nationally recognized securities exchanges or matrix pricing,
which is a mathematical technique used widely in the industry to value debt
securities without relying exclusively on quoted prices for the specific
securities but rather by relying on the securities’ relationship to other
benchmark quoted securities.




Assets
measured at fair value on a recurring basis are summarized below:





December
      31, 2008
            
            
            Quoted
      Prices on Active Markets for Identical Assets
                (Level
      1)
            
            
            Significant
      Other Observable Inputs (Level 2)
            
            
            Significant
      Unobservable Inputs
                (Level
      3)Available
      for sale securities
            
            $
            32,726,863
            
            
            $
            58,000
            
            
            $
            32,668,863
            
            
            $
            -




Assets
and liabilities measured at fair value on a non-recurring basis are summarized
below:




December
      31, 2008
            
            
            Quoted
      Prices on Active Markets for Identical Assets
                (Level
      1)
            
            
            Significant
      Other Observable Inputs
                (Level
      2)
            
            
            Significant
      Unobservable Inputs
                (Level
      3)Impaired
      loans
            
            $
            1,002,322
            
            
            $
            -
            
            
            $
            -
            
            
            $
            1,002,322




Level 2
inputs, which are quoted prices from a third party in non-active markets were
obtained on a limited number of loans. Impaired loans are generally measured for
impairment using the fair value of the loan, or the fair value of the collateral
for collateral-dependent loans, which is a Level 3 input. Some impaired loans
are charged down to the fair value of the loan or the fair value of the
collateral. Impaired loans carried at fair value had a principal balance after
partial charge downs of $1,774,322, with an additional specific allocation of
the allowance for loan losses of $772,000.
Impairment charges which were reflected as charge-offs or specific allocations
through the allowance for loan losses resulted in an additional provision for
loan loss during the period of $824,493.





41




NOTE
10 – FAIR VALUE MEASUREMENT (continued)




Carrying
amounts and estimated fair values of financial instruments were as follows at
December 31:





2008
            
            
            2007Carrying
            
            
            Estimated
            
            
            Carrying
            
            
            EstimatedAmount
            
            
            Fair Value
            
            
            Amount
            
            
            Fair ValueFinancial
      assets:Cash
      and cash equivalents
            
            $
            11,468,000
            
            
            $
            11,468,000
            
            
            $
            7,115,205
            
            
            $
            7,115,000Certificate
      of deposit in financial institution
            
            
            100,000
            
            
            
            100,000
            
            
            
            100,000
            
            
            
            100,000Securities
      available for sale
            
            
            32,727,000
            
            
            
            32,727,000
            
            
            
            29,010,334
            
            
            
            29,010,000Securities held to
      maturity
            
            
            3,000,000
            
            
            
            3,004,000
            
            
            
            3,002,754
            
            
            
            2,995,000Loans held for
sale
            
            
            1,012,000
            
            
            
            1,038,000
            
            
            
            911,906
            
            
            
            927,000Loans, net
            
            
            126,836,000
            
            
            
            133,500,000
            
            
            
            131,642,471
            
            
            
            131,861,000Accrued interest
      receivable
            
            
            602,000
            
            
            
            602,000
            
            
            
            632,311
            
            
            
            632,000Financial
      liabilities:Deposits
            
            $
            (145,705,000
            )
            
            $
            (146,982,000
            )
            
            $
            (147,349,352
            )
            
            $
            (147,880,000
            )Repurchase
    agreements
            
            
            (1,406,000
            )
            
            
            (1,406,000
            )
            
            
            (2,022,869
            )
            
            
            (2,023,000
            )Overnight FHLB
      advances
            
            
            (6,850,000
            )
            
            
            (6,850,000
            )
            
            
            (2,025,000
            )
            
            
            (2,025,000
            )FHLB advances
            
            
            (21,000,000
            )
            
            
            (21,286,000
            )
            
            
            (12,000,000
            )
            
            
            (12,056,000
            )Accrued interest
      payable
            
            
            (236,000
            )
            
            
            (236,000
            )
            
            
            (278,509
            )
            
            
            (279,000
            )





Carrying
amount is the estimated fair value for cash and cash equivalents, federal bank
stock, accrued interest receivable and payable, noninterest-bearing demand
deposits and variable-rate loans, deposits that reprice frequently and fully,
repurchase agreements, certificates of deposit in financial institutions and
overnight FHLB advances.  Security fair values are based on market
prices or dealer quotes. For fixed-rate loans or deposits and for variable-rate
loans or deposits with infrequent repricing or repricing limits, fair value is
based on discounted cash flows using current market rates applied to the
estimated life and credit risk.  The fair value of borrowings is based
upon current rates for similar financing over the remaining terms of the
borrowings. It was not practicable to determine the fair value of FHLB stock due
to restrictions placed on its transferability. The estimated fair value for
other financial instruments and off-balance sheet loan commitments are
considered nominal.




NOTE
11 - INCOME TAXES





Income
tax expense (benefit) was as follows during the years ended December
31:





2008
            
            
            2007Current
      federal
            
            $
            -
            
            
            $
            (568,726
            )Deferred
      federal
            
            
            (2,109,363
            )
            
            
            (634,938
            )Change
      in valuation allowance
            
            
            2,109,363
            
            
            
            1,328,041Total
      income tax expense
            
            $
            -
            
            
            $
            124,377





Effective
tax rates differ from federal statutory rates applied to financial statement
earnings (loss) due to the following:





42





NOTE 11 – INCOME TAXES (continued)





2008
            
            
            2007Federal
      statutory rate (34%) times financial statement earnings
    (loss)
            
            $
            (2,056,010
            )
            
            $
            (1,194,847
            )Effect
      of:Tax
      exempt income net of disallowed interest expense
            
            
            (36,673
            )
            
            
            (30,775
            )Stock
      based compensation
            
            
            8,971
            
            
            
            16,801Change
      in valuation allowance
            
            
            2,109,363
            
            
            
            1,328,041Dividends
      received deduction
            
            
            (32,526
            )
            
            
            -Other,
      net
            
            
            6,875
            
            
            
            5,157Total income tax expense
      (benefit)
            
            $
            -
            
            
            $
            124,377





Deferred
tax assets and liabilities were due to the following at December
31:





2008
            
            
            2007Deferred
      tax assets:Allowance
      for loan losses
            
            $
            882,306
            
            
            $
            301,960Deferred
      loan fees
            
            
            40,156
            
            
            
            53,564Deferred
      and accrued compensation
            
            
            15,280
            
            
            
            62,819Nonaccrual
      loan interest income
            
            
            -
            
            
            
            7,142Intangible
      asset amortization
            
            
            160,873
            
            
            
            147,122Stock
      based compensation
            
            
            13,410
            
            
            
            13,410REO
      valuation allowance
            
            
            518,007
            
            
            
            343,943Net
      operating loss carryforward
            
            
            854,390
            
            
            
            482,469Other
      than temporary impairment of securities
            
            
            972,068
            
            
            
            -Depreciation
            
            
            40,177
            
            
            
            -Tax
      credit carryforward
            
            
            14,093
            
            
            
            -Other
            
            
            17,484
            
            
            
            10,849Total
      deferred tax assets
            
            
            3,528,244
            
            
            
            1,423,278Deferred
      tax liabilities:Depreciation
            
            
            -
            
            
            
            (13,294
            )Unrealized
      gain on securities available for sale
            
            
            (119,439
            )
            
            
            (2,027
            )Prepaid
      expenses
            
            
            (32,270
            )
            
            
            (36,883
            )FHLB
      stock dividends
            
            
            (58,480
            )
            
            
            (45,016
            )Other
            
            
            (90
            )
            
            
            (44
            )Total
      deferred tax liabilities
            
            
            (210,279
            )
            
            
            (97,264
            )Net
      deferred tax assets before valuation allowance
            
            
            3,317,965
            
            
            
            1,326,014Less
      valuation allowance
            
            
            (3,437,404
            )
            
            
            (1,328,041
            )Net
      deferred tax assets (liabilities)
            
            $
            (119,439
            )
            
            $
            (2,027
            )





A
valuation allowance of $3,437,404 was recorded to reduce the carrying amount of
the Company’s net deferred tax asset to zero.





At
year-end 2008, the Company had net operating loss carryforwards of approximately
$2,513,000 that will expire as follows: $1,419,000 on December 31, 2027 and
$1,094,000 on December 31, 2028. In addition, the Company has approximately
$14,000 of alternative minimum tax credits that may be carried forward
indefinitely.





43





NOTE 11 – INCOME TAXES (continued)





At
December 31, 2008 and December 31, 2007, the Company had no unrecognized tax
benefits recorded. The Company does not expect the amount of unrecognized tax
benefits to change significantly within the next twelve months.





The
Company and its subsidiary are subject to U.S. federal income tax. The Company
is no longer subject to examination by federal taxing authorities for tax years
prior to 2005. The tax years 2005, 2006 and 2007 remain open to examination by
the U.S. taxing authorities.




NOTE
12 - STOCK-BASED COMPENSATION





The
Company granted 150,000 warrants (Director Warrants) to organizers of the
Company at the time of closing of the 2000 Offering.  The Director
Warrants vested in equal percentages each year over a three-year period from the
date of grant.  Each warrant entitles the holder to purchase a share
of common stock at $10.00 per share and will expire ten years from the date of
issuance.  At December 31, 2008, all Director Warrants were vested and
exercisable and none have been exercised or forfeited to date.





The
Company’s Board of Directors has adopted an Omnibus Stock Option, Stock
Ownership and Long-Term Incentive Plan (Stock Ownership Plan).  A
total of 400,000 common shares are available for grants under the Stock
Ownership Plan. The following types of awards may be granted under the Stock
Ownership Plan to eligible persons:  nonqualified stock options,
incentive stock options and restricted stock.  Under the Stock
Ownership Plan, each nonemployee Director may be granted 2,500 nonqualified
options at the time or soon after, that person first becomes a Director. This
initial option grant will vest annually in equal amounts over a five-year
term.  In addition, each nonemployee Director may receive an annual
grant of up to 1,000 nonqualified options during his or her tenure on the Board,
which will vest immediately. No Director grants were made in
2008.  Employee option grants usually vest three years from the date
of grant.  The exercise price of an option shall not be less than the
fair market value of the underlying common stock on the date of the
grant.  In the event of a change in control of the Company, all
outstanding options may become immediately exercisable in full at the discretion
of the Compensation Committee of the Board of Directors.  Otherwise,
all outstanding options will terminate unless the successor corporation agrees
to assume or replace such options with an equivalent entitlement. Management
expects 100% of the options to vest.





The
following table details stock option grants under the Stock Ownership Plan
during the year ended December 31:





2008WeightedAverageExerciseOptions
            
            
            PriceOutstanding
      at January 1
            
            
            214,150
            
            
            $
            10.86Granted
            
            
            -
            
            
            
            -Forfeited
            
            
            (29,450
            )
            
            
            10.36Exercised
            
            
            -
            
            
            
            -Outstanding
      at December 31
            
            
            184,700
            
            
            $
            10.69Exercisable
      at December 31
            
            
            163,000
            
            
            $
            10.89




2008
            
            
            2007Weighted
      average fair value of options granted during the year:
            
            $
            -
            
            
            $
            3.77




44




NOTE 12 – STOCK BASED COMPENSATION(continued)





No
options were exercised in 2008 or 2007.





Options
outstanding at December 31, 2008 were as follows:





Outstanding
            
            
            ExercisableRange
      of Exercise Prices
            
            
            Number
            
            
            Weighted
                Average
                Remaining
                Contractual
                Life
      (years)
            
            
            Weighted
                Average
                Exercise
                Price
            
            
            Number
            
            
            Weighted
                Average
                Exercise
                Price$8.28
      - $9.99
            
            
            
            50,450
            
            
            
            6.45
            
            
            $
            9.01
            
            
            
            28,750
            
            
            $
            8.93$10.00
            
            
            
            46,000
            
            
            
            3.51
            
            
            
            10.00
            
            
            
            46,000
            
            
            
            10.00$12.00
            
            
            
            88,250
            
            
            
            5.96
            
            
            
            12.00
            
            
            
            88,250
            
            
            
            12.00184,700
            
            
            
            5.48
            
            
            $
            10.69
            
            
            
            163,000
            
            
            $
            10.89





The
intrinsic value of options outstanding as of December 31, 2008 was
$0.  The intrinsic value of exercisable options was also
$0.





The fair
value of common stock options was computed using the Black-Scholes option
pricing model. The following table details the assumptions used to value stock
options granted during the year ended December 31, 2007, as of the grant
date.  No options were granted in 2008. Expected volatilities are
based on historical volatilities of the Company’s common stock.  The
expected term of options granted is based on historical data and represents the
period of time that options granted are expected to be outstanding, which takes
into account that the options are not transferable and dividends are not
currently being paid.  The risk-free interest rate for the expected
term of the option is based on the U.S. Treasury yield curve in effect at the
time of the grant.




May2007StockOptionsOptions
      granted
              
              5,000Fair
      value, calculated
              
              $
      3.77Exercise
      price
              
              $
      8.28Risk-free
      interest rate, 10-year Treasury
              
              4.64%Expected
      stock price volatility
              
              22.52%Expected
      dividend rate
              
              NoneExpected
      life
              
              10
      years





The
compensation cost yet to be recognized for stock options that have been awarded
but not vested is as follows:





CompensationCosts2009
            
            $
            17,4292010
            
            
            2,081Total
            
            $
            19,510








45





NOTE
13 – REGULATORY CAPITAL MATTERS





Banks are
subject to regulatory capital requirements administered by federal banking
agencies. Capital adequacy guidelines and prompt corrective action regulations
involve quantitative measures of assets, liabilities and certain off-balance
sheet items calculated under regulatory accounting practices. Capital amounts
and classifications are also subject to qualitative judgments by regulators.
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, although these terms are not
used to represent overall financial condition. Failure to meet capital
requirements can initiate regulatory action At December 31, 2008, the Bank met
the definition of undercapitalized as described above.





On
February 17, 2009, the Company entered into an Order of Consent with the
Comptroller of the Currency of the United States of America. As more fully
described in Note 17, the Order requires the Bank to increase its capital to
certain specified levels.





Actual
and required capital amounts (in thousands) and ratios are presented below at
December 31:





Actual
            
            
            For
      Capital
                Adequacy
      Purposes
            
            
            To
      Be Well- Capitalized Under Prompt Corrective Action
      ProvisionsAmount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio2008Total
      capital to risk-weighted assetsOhio
      Legacy Bank
            
            $
            10,454
            
            
            
            7.6
            %
            
            $
            10,938
            
            
            
            8.0
            %
            
            $
            13,673
            
            
            
            10.0
            %Tier
      1 capital to risk-weighted assetsOhio Legacy Bank
            
            
            8,734
            
            
            
            6.4
            
            
            
            5,469
            
            
            
            4.0
            
            
            
            8,204
            
            
            
            6.0Tier
      1 capital to average assetsOhio Legacy Bank
            
            
            8,734
            
            
            
            4.8
            
            
            
            7,262
            
            
            
            4.0
            
            
            
            9,078
            
            
            
            5.02007Total
      capital to risk-weighted assetsOhio
      Legacy Bank
            
            $
            16,189
            
            
            
            11.5
            %
            
            $
            11,298
            
            
            
            8.0
            %
            
            $
            14,123
            
            
            
            10.0
            %Tier
      1 capital to risk-weighted assetsOhio Legacy Bank
            
            
            14,566
            
            
            
            10.3
            
            
            
            5,649
            
            
            
            4.0
            
            
            
            8,474
            
            
            
            6.0Tier
      1 capital to average assetsOhio Legacy Bank
            
            
            14,566
            
            
            
            8.1
            
            
            
            7,213
            
            
            
            4.0
            
            
            
            9,017
            
            
            
            5.0





The
payment of dividends by the Bank to Ohio Legacy is subject to restrictions by
regulatory agencies.  These restrictions generally limit dividends to
the sum of current year’s and the prior two years’ retained earnings, as
defined.  In addition, dividends may not reduce capital levels below
the minimum regulatory requirements as described above. Based on its year to
date and previous year’s earnings, the Company is not able to declare dividends
without prior approval from its regulators. In addition to the dividend
restrictions above, the Bank is not permitted to issue brokered deposits without
prior approval from its regulators





46





NOTE
14 - LOAN COMMITMENTS AND RELATED ACTIVITIES





Some
financial instruments, such as loan commitments, credit lines, letters of credit
and overdraft protection are issued to meet customer financing
needs.  These are agreements to provide credit or to support the
credit of others, as long as conditions established in the contract are met, and
usually have expiration dates.  Commitments may expire without being
used.  Off-balance sheet risk to credit loss exists up to the face
amount of these instruments, although material losses are not
anticipated.  The same credit policies are used to make such
commitments as are used for loans, including obtaining collateral at exercise of
the commitment.





Commitments
to make loans are generally made for periods of 30 days or less. The contractual
amount of loan commitments with off-balance sheet risk was as follows at
December 31:





2008
            
            
            2007Commitments
      to make loans:Variable-rate
            
            $
            1,486,000
            
            
            $
            1,803,000Unused
      lines of credit, variable-rate
            
            $
            14,524,000
            
            
            $
            17,982,000Standby
      letters of credit
            
            $
            153,000
            
            
            $
            100,000




NOTE
15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION





CONDENSED
      BALANCE SHEETS
            
            As
      of December 31,2008
            
            
            2007ASSETSCash
      and cash equivalents
            
            $
            862,533
            
            
            $
            468,449Investment
      in subsidiary, Ohio Legacy Bank, N.A.
            
            
            9,166,566
            
            
            
            14,733,066Other
      assets
            
            
            11,257
            
            
            
            180,463Total assets
            
            $
            10,040,356
            
            
            $
            15,381,978LIABILITIES
      AND SHAREHOLDERS’ EQUITYOther
      liabilities
            
            
            519,499
            
            
            
            68,335Shareholders’
      equity
            
            
            9,520,857
            
            
            
            15,313,643Total liabilities and
      shareholders’ equity
            
            $
            10,040,356
            
            
            $
            15,381,978








47





NOTE
15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(continued)





CONDENSED
      STATEMENTS OF OPERATIONS
            
            For
      the year ended December 31,2008
            
            
            2007Interest
      income
            
            $
            -
            
            
            $
            -Interest
      expense
            
            
            -
            
            
            
            (190,212
            )Net
      interest expense
            
            
            -
            
            
            
            (190,212
            )Gain
      (loss) on investment in Ohio Legacy Trust I
            
            
            -
            
            
            
            754Professional
      fees
            
            
            (140,872
            )
            
            
            (171,714
            )Other
      expense
            
            
            (85,414
            )
            
            
            (74,193
            )Loss
      before undistributed earnings of subsidiary
            
            
            (226,286
            )
            
            
            (435,365
            )Equity
      in undistributed earnings (loss) of subsidiary
            
            
            (5,820,803
            )
            
            
            (3,194,741
            )Earnings
      (loss) before income taxes
            
            
            (5,820,089
            )
            
            
            (3,630,106
            )Income
      tax expense (benefit)
            
            
            -
            
            
            
            8,527Net earnings
    (loss)
            
            $
            (6,047,089
            )
            
            $
            (3,638,633
            )




CONDENSED
      STATEMENTS OF CASH FLOWS
            
            For
      the year ended December 31,2008
            
            
            2007Cash
      flows from operatingactivities:Net
      earnings  (loss)
            
            $
            (6,047,089
            )
            
            $
            (3,638,633
            )Adjustments:Equity
      in undistributed (earnings) loss of subsidiary
            
            
            5,820,803
            
            
            
            3,194,741(Gain)
      loss on investment in Ohio Legacy Trust I
            
            
            -
            
            
            
            (754
            )Stock
      based compensation expense
            
            
            
            
            
            
            -Net
      change in other assets and other liabilities
            
            
            620,370
            
            
            
            267,930Net cash used by operating
      activities
            
            
            394,084
            
            
            
            (176,716
            )Cash
      flows from investing activitiesCapital
      from bank subsidiary
            
            
            -
            
            
            
            2,700,000Net
      cash from investing activities
            
            
            -
            
            
            
            2,700,000Cash
      flows from financing activities:Repayment
      of subordinated debenture
            
            
            -
            
            
            
            (3,325,000
            )Net cash from financing
      activities
            
            
            -
            
            
            
            (3,325,000
            )Net
      change in cash and cash equivalents
            
            
            394,084
            
            
            
            (801,716
            )Beginning
      cash and cash equivalents
            
            
            468,449
            
            
            
            1,270,165Ending
      cash and cash equivalents
            
            $
            862,533
            
            
            $
            468,449








48





NOTE
16 – OTHER COMPREHENSIVE INCOME (LOSS)





Components
of other comprehensive income (loss) and the related tax effects were as follows
during the year ended


December
31:





2008
            
            
            2007Unrealized
      holding gains on available for sale securities during the
      period
            
            $
            (2,513,695
            )
            
            $
            400,757Reclassification
      adjustment for losses realized in income
            
            
            2,859,024
            
            
            
            340,066345,329
            
            
            
            740,823Tax
      effect
            
            
            (117,412
            )
            
            
            (251,879
            )Other
      comprehensive income
            
            $
            227,917
            
            
            $
            488,944




NOTE
17 – CONSENT ORDER





The Board
of Directors of the Bank entered into a Consent Order with the Bank’s primary
federal regulatory, the Office of the Comptroller of the Currency (“OCC”) dated
February 17, 2009.  The Consent Order required the Board of Directors
to submit a capital plan to the Assistant Deputy Comptroller that included
specific plans to achieve and maintain a minimum ratio of Tier 1 capital to
average assets of 8.75% and a minimum ratio of Total capital to risk-weighted
assets of 13.25% by August 31, 2009.  The Board of Directors submitted
the capital plan, which includes the engagement of an advisory firm to seek out
capital investment from parties not currently affiliated with the Company or the
Bank or attracting a merger partner.  The Company’s management and
board of directors are in active discussions with several parties in an attempt
to achieve one of these objectives.  Additionally, the capital plan
calls for management to continue to manage the Bank’s assets with the goal of
protecting and growing capital and reducing the level of criticized
assets.





The Order
provides that the OCC shall maintain the ability to take any action the OCC
deems appropriate in fulfilling its regulatory and supervisory
responsibilities during the term of the Consent Order or upon the failure of the
Bank to comply with the terms of the Consent Order.





49





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board of
Directors and Shareholders


Ohio
Legacy Corporation


Wooster,
Ohio





We have
audited the accompanying consolidated balance sheets of Ohio Legacy Corporation
as of December 31, 2008 and 2007, and the related consolidated statements of
operations, changes in shareholders' equity, and cash flows for the years then
ended.  These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting.  Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting.  Accordingly, we express no such
opinion.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Ohio Legacy Corporation at
December 31, 2008 and 2007, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.





The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern.  As discussed in Note 17 to
the consolidated financial statements, the Company’s bank subsidiary is
considered undercapitalized as of December 31, 2008 based on regulatory
standards, and has entered into a consent order with its primary federal
regulator that requires, among other provisions, that it achieve regulatory
capital thresholds by August 31, 2009 that are significantly in excess of its
current actual capital levels.  This capital deficiency raises
substantial doubt about the Company’s ability to continue as a going
concern.  Management’s plans in regard to this matter are also
described in Note 17. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.








Crowe Horwath LLP





Cleveland,
Ohio


March 31,
2009





50





EXECUTIVE
OFFICERS OF OHIO LEGACY CORP AND OHIO LEGACY BANK, N.A.




D.
Michael Kramer, President and Chief Executive Officer


Gregory
A. Spradlin, Senior Vice President and Chief Credit Officer


Vanessa
M. Richards, Senior Vice President and Chief Financial Officer







DIRECTORS
OF OHIO LEGACY CORP




D.
      William Allen
              
              Gregory
      A. LongChief
      Financial Officer,
              
              President,
      Long, Cook & Samsa, Inc. CPA'sNational
      Pro Football Hall of Fame
              
              Wooster,
      OhioCanton,
      OhioJ.
      Edward Diamond
              
              Daniel
      H. Plumly, ChairmanPrivate
      investor
              
              Member,
      Critchfield, Critchfield & Johnston, Ltd.Canton,
      Ohio
              
              Wooster,
      OhioRobert
      F. Belden
              
              D.
      Michael KramerPresident,
      Belden Brick Company
              
              President
      and Chief Executive OfficerCanton,
      Ohio
              
              Ohio
      Legacy Corp and Ohio Legacy Bank, N.A.Wooster,
      OhioScott
      J. Fitzpatrick
              
              Melvin
      YoderPartner,
      Fitzpatrick Enterprises
              
              President,
      Yoder LumberCanton,
      Ohio
              
              Sugarcreek,
      OhioThomas
      W. SchervishPresident,
      Stark Management ServicesCanton,
      Ohio





CORPORATE
AND BANK LOCATIONS




Main Office
                  
                  Milltown Office
                  
                  Canton Office
                  
                  North Canton Office305
      West Liberty Street
                  
                  3562
      Commerce Parkway
                  
                  4026
      Dressler Road NW
                  
                  600
      South Main StreetWooster,
      Ohio 44691
                  
                  Wooster,
      Ohio 44691
                  
                  Canton,
      Ohio 44718
                  
                  North
      Canton, Ohio 44718


Corporate Office and
      Operations Center2375
      Benden Drive Suite C.Wooster,
      Ohio 44691




51





Item
9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure.





No
changes in or disagreements with the independent accountants on accounting and
financial disclosure have occurred.





Item
9A(T). Controls and Procedures.





The
management of Ohio Legacy Corp is responsible for establishing and maintaining
effective disclosure controls and procedures, as defined under Rules 13a-14 and
15d-14 of the Securities Exchange Act of 1934. As of the end of the period
covered by this report, an evaluation was performed under the supervision, and
with the participation of management, including the Chief Executive Officer and
acting Chief Financial Officer, of the effectiveness of the design and operation
of the Company's disclosure controls and procedures. Based on that evaluation,
management concluded that the Company's disclosure controls and procedures as of
December 31, 2008, were effective in ensuring that information required to be
disclosed in this Annual Report on Form 10-K was recorded, processed, summarized
and reported within the time period required by the United States Securities and
Exchange Commission's rules and forms. The Report of Management on the Company’s
Internal Controls Over Financial Reporting appears as Exhibit 31.3 on page
66.





There
have been no significant changes in our internal control over financial
reporting that occurred during the fourth quarter of 2008 that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.





Item
9B. Other Information.





There are
no matters to be reported under this item.








PART
III





Item
10. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.





The
information contained in the Definitive Proxy Statement for the 2009 Annual
Meeting of Shareholders of Ohio Legacy Corp (Proxy Statement) under the captions
“Proposal 1 Election of Directors” on pages 2 through 4, “Executive Officers” on
page 5, “Compliance with Section 16(a) of the Exchange Act" on page 14, and
“Report of the Audit and Compliance Committee” on page 19 is incorporated in
this document by reference.





The
Company’s Board of Directors has adopted and implemented a Code of Ethics for
Senior Financial Officers of the Company. The code of ethics is available on the
Company's website, http://www.ohiolegacycorp.com, and is incorporated by
reference to Exhibit 14 to this Form 10-K.





Item
11. Executive Compensation.





The
information contained in the Proxy Statement under the captions “Compensation of
Directors” and “Compensation of Executive Officers” on pages 6 through 11 and
“Report of the Compensation Committee” on page 11 is incorporated in this
document by reference.





Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.





The
information contained in the Proxy Statement under the captions “Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters” on pages 12 and 13 and is incorporated in this document by
reference.








52





Equity Compensation Plan
Table





The
following table summarizes the number of securities to be issued upon exercise
of (a) options granted under the Ohio Legacy Corp Omnibus Stock Option, Stock
Ownership and Long-Term Incentive Plan and (b) warrants granted to officers,
directors and organizers of the Company and the number of securities remaining
available for future issuance as of the end of the 2008 fiscal
year.





Number
      of securities to
              be
      issued upon exercise
              of
      outstanding options
              and
      warrants(a)
            
            
            Weighted-average
              exercise
      price of
              outstanding
              options
      and warrants
              (b)
            
            
            Number
      of securities
              remaining
      available
              for
      future issuance
              under
      equity
              compensation
      plans
              (excluding
      securities
              reflected
      in column (a))
              (c)Equity
      compensation plans approved by security holders
            
            
            334,700
            (1)
            
            $
            10.38
            
            
            
            65,300Equity
      compensation plans not approved by security holders
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/A








(1)
Includes 150,000 warrants granted to directors and officers of the
Company.





Item
13. Certain Relationships and Related Transactions.





The
information contained in the Proxy Statement under the caption “Certain
Relationships and Related Transactions” on pages 13 and 14 is incorporated in
this document by reference.








53





Item
14. Principal Accountant Fees and Services.
 
 The
information contained in the Proxy Statement under the caption “Principal
Accountant Fees and Services” on pages 15 through 16 and is incorporated in this
document by reference.




Item
15. Exhibits




ExhibitNumber
              
              Note
              
              Description
      of Document3.1
              
              (1)
              
              Second
      Amended and Restated Articles of Incorporation of Ohio Legacy
      Corp3.2
              
              (2)
              
              Code
      of Regulations of Ohio Legacy Corp, as amended by Amendment No.
      14.1
              
              (3)
              
              See
      Pages 1 through 9 of Exhibit 3.1 for provisions defining the rights of the
      holders of common shares4.2
              
              (3)
              
              Form
      of Organizer Stock Purchase Warrant4.4
              
              (2)
              
              2004
      Amendment to Omnibus Stock Option, Stock Ownership and Long Term Incentive
      Plan of Ohio Legacy Corp10.1
              
              (3)
              
              Omnibus
      Stock Option, Stock Ownership and Long Term Incentive
  Plan10.2
              
              (4)
              
              2002
      Amendment to Omnibus Stock Option, Stock Ownership and Long Term Incentive
      Plan of Ohio Legacy Corp10.3
              
              (3)
              
              Lease
      Agreement dated August 24, 1999, by and among Jack K. and Heidi M. Gant
      and Ohio Legacy Corp10.4
              
              (3)
              
              Lease
      Agreement dated November 30, 1999, by and between Schoeppner Properties
      and Ohio Legacy Corp10.5
              
              
              
              Lease
      Agreement dated August 1, 2007, by and between Allen P. Reinhardt and WMBC
      Company and Ohio Legacy Bank, N.A.10.6
              
              (6)
              
              Employment
      Agreement with Mr. Kramer10.7
              
              (5)
              
              Change
      in Control Agreement with Mr. Spradlin10.8
              
              
              
              Change
      in Control Agreement with Ms. Richards14
              
              
              
              Code
      of Ethics20
              
              
              
              Proxy
      Statement for the 2009 Annual Meeting of Shareholders21
              
              
              
              Subsidiary
      of Ohio Legacy Corp23
              
              
              
              Consent
      of Crowe Horwath LLP31.1
              
              
              
              Rule
      13a-14(a)/15d-14(a) Certification of Principal Executive
      Officer31.2
              
              
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer31.3
              
              
              
              Management’s
      Report of Internal Control Over Financial Reporting32.1
              
              
              
              Certification
      Pursuant To 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of
2002







(1)
              -
              Incorporated
      by reference to Registrant’s Form 10-QSB for the fiscal quarter ended June
      30, 2003, filed on August 14, 2003
 (2)
              -
              Incorporated
      by reference to Registrant’s Form 10-KSB for the fiscal year ended
      December 31, 2003, filed on March 17,
2004
 (3)
              -
              Incorporated
      by reference to Registrant’s Form SB-2, File No. 333-38328, effective June
      1, 2000
 (4)
              -
              Incorporated
      by reference to Registrant’s Form S-8, File No. 333-88842, effective May
      22, 2002
 (5)
              -
              Incorporated
      by reference to Registrant’s Form 10-KSB for the fiscal year ended
      December 31, 2007 filed on April 3,
2008
  (6)
              -
              Incorporated
      by reference to Registrant’s Form 8-K filed on May 26,
  2005





54





SIGNATURES





In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.




OHIO
      LEGACY CORP
                (Registrant)By:
              /s/
      D. Michael KramerD.
      Michael KramerPresident
      and Chief Executive Officer




In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.




By:
                /s/
      D. Michael KramerD.
      Michael KramerPresident
      and Chief Executive OfficerDate:
       March 31, 2009


By:
                  /s/
      D. William AllenD.
      William Allen, DirectorDate:
       March 31, 2009
 By:
                      /s/
      Robert F. BeldenRobert
      F. Belden, DirectorDate:
       March 31, 2009


By:
                      /s/
      Scott J. FitzpatrickScott
      J. Fitzpatrick, DirectorDate:
       March 31, 2009
  By:
                        /s/
      Gregory A. LongGregory
      A. Long, DirectorDate:
       March 31, 2009
 By:
                            /s/
      Daniel H. PlumlyDaniel
      H. Plumly, Director and SecretaryDate:
       March 31, 2009
  By:
                            /s/
      Melvin J. YoderMelvin
      J. Yoder, DirectorDate:
       March 31, 2009
 By:
                            /s/
      J. Edward DiamondJ.
      Edward Diamond, DirectorDate:
       March 31, 2009
 55