Ohio Legacy (OLCB) 10-Q 2008 Q3 Quarterly report

UNITED STATES SECURITIES

AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2008
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number: 000-31673

OHIO LEGACY CORP

(Exact name of small business issuer as specified in its charter)

OHIO

(State or other jurisdiction of incorporation or organization)

34-1903890

(I.R.S. Employer Identification No.)

2375 Benden Drive Suite C, Wooster, OH, 44691

(Address of principal executive offices)

(330) 263-1955

Issuer's telephone number

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 x No ¨

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

Large accelerated filer ¨Accelerated filer ¨ Non-accelerated filer ¨ 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 ¨ No x

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court Yes ¨ No ¨

As of November 13, 2008, the latest practicable date, there were 2,214,564 shares of the issuer’s Common Stock, without par value, issued and outstanding.

OHIO LEGACY CORP

FORM 10-Q

AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008

THIRD QUARTER REPORT

	Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis	12
Item 3. Not Applicable for Smaller Reporting Companies	22
Item 4. Controls and Procedures	22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3. Defaults Upon Senior Securities	23
Item 4. Submission of Matters to a Vote of Security Holders	23
Item 5. Other Information	23
Item 6. Exhibits	24
SIGNATURES	25

2.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

OHIO LEGACY CORP

CONSOLIDATED BALANCE SHEETS

As of September 30, 2008, and December 31, 2007 

	September 30,			December 31,
	2008			2007
	(unaudited)
ASSETS
Cash and due from banks	$	4,553,318		$	5,764,580
Federal funds sold and interest-bearing deposits in financial institutions		98,392			1,350,625
Cash and cash equivalents		4,651,710			7,115,205
Certificate of deposit in financial institution		100,000			100,000
Securities available for sale		32,952,733			29,010,334
Securities held to maturity (fair value of $2,813,719 and $2,995,122 at September 30, 2008 and December 31, 2007)		3,000,504			3,002,754
Loans held for sale		902,149			911,906
Loans, net of allowance of $1,631,011 and $1,622,906 at September 30, 2008 and December 31, 2007		127,650,714			131,642,471
Federal bank stock		1,462,050			1,541,200
Premises and equipment, net		3,329,997			2,901,906
Intangible asset		78,726			150,322
Other real estate owned		4,057,165			2,416,367
Accrued interest receivable and other assets		1,796,739			1,488,214
Total assets	$	179,982,487		$	180,280,679
LIABILITIES
Deposits:
Noninterest-bearing demand	$	16,999,844		$	14,329,339
Interest-bearing demand		8,962,164			9,995,343
Savings		49,678,454			49,566,417
Certificates of deposit, net		64,437,996			73,458,253
Total deposits		140,078,458			147,349,352
Repurchase agreements		1,831,504			2,022,869
Short term Federal Home Loan Bank advances		3,100,000			2,025,000
Long term Federal Home Loan Bank advances		21,000,000			12,000,000
Fed funds purchased		898,000			-
Capital lease obligations		475,448			493,168
Accrued interest payable and other liabilities		1,300,755			1,076,647
Total liabilities		168,684,165			164,967,036
SHAREHOLDERS’ EQUITY
Preferred stock, no par value, 500,000 shares authorized, none outstanding		-			-
Common stock, no par value, 5,000,000 shares authorized, 2,214,564 shares issued and outstanding at September 30, 2008, and December 31, 2007, respectively		18,803,771			18,781,925
Accumulated earnings (loss)		(7,368,933	)		(3,472,218	)
Accumulated other comprehensive earnings (loss)		(136,516	)		3,936
Total shareholders’ equity		11,298,322			15,313,643
Total liabilities and shareholders’ equity	$	179,982,487		$	180,280,679

3.

OHIO LEGACY CORP

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Nine Months Ended September 30, 2008 and 2007

(Unaudited)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Interest and dividends income:
Loans, including fees	$	2,092,490		$	3,241,838		$	6,622,956		$	9,742,370
Securities, taxable		447,153			270,750			1,302,585			807,507
Securities, tax-exempt		28,560			25,842			85,788			75,110
Interest-bearing deposits and federal funds sold and other		6,286			54,840			66,709			197,862
Dividends on federal bank stock		20,211			25,999			61,913			74,122
Total interest and dividends income		2,594,700			3,619,269			8,139,951			10,896,971
Interest expense:
Deposits		931,120			1,699,420			3,255,333			5,122,294
Short term Federal Home Loan Bank advances		22,463			-			51,033			-
Long term Federal Home Loan Bank advances		177,320			238,107			516,865			634,446
Subordinated debentures		-			48,766			-			190,211
Repurchase agreements		4,810			23,157			22,644			64,279
Capital leases		19,359			34,486			58,791			107,526
Total interest expense		1,155,072			2,043,936			3,904,666			6,118,756
Net interest income		1,439,628			1,575,333			4,235,285			4,778,215
Provision for loan losses		608,996			3,089,650			620,496			3,146,650
Net interest income (loss) after provision for loan losses		830,632			(1,514,317	)		3,614,789			1,631,565
Noninterest income:
Service charges and other fees		254,638			279,658			715,290			835,282
Gain on sale of loans		47,126			46,570			142,144			141,864
Gain (loss) on disposition of other real estate owned		(2,434	)		(658,849	)		6,736			(654,018	)
Direct write-down of other real estate owned		(436,006	)		-			(436,006	)		-
Gain on redemption of equity interest in Visa		-			-			18,392			-
Loss on sale of securities available for sale, net		-			(340,066	)		-			(340,066	)
Other than temporary impairment of securities		(2,700,024	)		-			(2,859,024	)		-
Gain on sale of branch		-			2,077,556			-			2,077,556
Other income		91,429			27,004			108,972			80,587
Total noninterest income		(2,745,271	)		1,431,873			(2,303,496	)		2,141,205
Noninterest expense:
Salaries and benefits		848,020			1,030,342			2,482,923			3,044,077
Occupancy and equipment		296,434			268,575			752,916			738,139
Professional fees		67,451			194,111			248,349			484,417
Franchise tax		43,973			61,209			143,045			187,862
Data processing		171,688			183,819			507,056			533,523
Marketing and advertising		48,531			57,355			144,268			159,201
Stationery and supplies		24,372			31,736			76,513			92,156
Amortization of intangible asset		21,393			31,662			71,595			102,687
Deposit expenses and insurance		68,041			102,852			197,478			221,453
Other expenses		265,416			131,665			583,866			455,737
Total noninterest expense		1,855,319			2,093,326			5,208,009			6,019,252
Earnings (loss) before income tax expense		(3,769,958	)		(2,175,770	)		(3,896,716	)		(2,246,482	)
Income tax expense (benefit)		-			(742,977	)		-			(773,926	)
Net earnings (loss)	$	(3,769,958	)	$	(1,432,793	)	$	(3,896,716	)	$	(1,472,556	)
Basic earnings (loss) per share	$	(1.70	)	$	(0.65	)	$	(1.76	)	$	(0.66	)
Diluted earnings (loss) per share	$	(1.70	)	$	(0.65	)	$	(1.76	)	$	(0.66	)

4.

OHIO LEGACY CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2008 and 2007

(Unaudited)

	For the Nine Months Ended September 30,
	2008			2007
Cash flows from operating activities:
Net earnings (loss)	$	(3,896,716	)	$	(1,472,556	)
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation and amortization		408,452			412,579
Securities amortization and accretion, net		16,335			65,921
Origination of loans held for sale		(14,668,786	)		(19,897,924	)
Proceeds from sales of loans held for sale		14,820,687			18,714,839
Provision for loan losses		620,496			3,146,650
Loss from Ohio Legacy Trust 1		-			(706	)
(Gain) loss on disposition of other real estate		(6,736	)		10,789
Direct write-down of other real estate		436,006			643,229
Gain on sale of loans held for sale		(142,144	)		(141,864	)
Loss on sale of securities available for sale		-			340,066
Gain on sale of branch		-			(2,077,556	)
Accretion of fair value purchase adjustments		-			(8,049	)
FHLB stock dividend		(39,600	)		-
Stock option expense		21,846			33,101
Other than temporary impairment of securities		2,859,024			-
Net change in:
Accrued interest receivable and other assets		(236,172	)		(2,697,951	)
Accrued interest payable and other liabilities		224,105			(72,759	)
Deferred loan fees		(43,219	)		(44,367	)
Net cash from operating activities		373,578			(3,046,558	)
Cash flows from investing activities:
Purchases of securities held to maturity		(100,000	)		(804,847	)
Purchases of securities available for sale		(9,920,610	)		(12,913,004	)
Sales of securities available for sale		-			13,147,235
Maturities, calls and paydowns of securities available for sale		2,892,300			3,674,738
Maturities, calls and paydowns of securities held to maturity		100,000			-
Redemption of federal bank stock		118,750			-
Proceeds from sales of other real estate owned		235,973			694,068
Proceeds from sales of loans		-			612,264
Net change in loans		1,444,839			(1,052,119	)
Expenditures to improve other real estate owned		(336,399	)		(98,633	)
Net cash from branch sale		-			17,750,281
Purchases of premises and equipment		(764,947	)		(140,813	)
Net cash from investing activities		(6,330,094	)		20,869,170
Cash flows from financing activities:
Net change in deposits		(7,270,894	)		(10,326,816	)
Net change in repurchase agreements		(191,365	)		205,169
Net change in fed funds purchased		898,000			-
Repayment of capital lease obligations		(17,720	)		(24,165	)
Repayment of subordinated debt obligation		-			(3,325,000	)
Proceeds from short term FHLB advances, net of repayments		1,075,000			-
Proceeds from long term FHLB advances		11,000,000			-
Repayments of long term FHLB advances		(2,000,000	)		(7,389,974	)
Net cash provided by financing activities		3,493,021			(20,860,786	)
Net change in cash and cash equivalents		(2,463,495	)		(3,038,174	)
Cash and cash equivalents at beginning of period		7,115,205			13,039,865
Cash and cash equivalents at end of period	$	4,651,710		$	10,001,691
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	3,904,666		$	6,217,290
Federal income taxes		-			-
Non-cash transactions:
Transfer of loans to other real estate owned	$	1,969,642		$	106,536

5.

OHIO LEGACY OORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, National Association (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 on July 1, 1999 under the laws of the State of Ohio. The Bank began operations on October 3, 2000. The Bank provides financial services through its full-service offices in Wooster 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 and 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. Other financial instruments that potentially represent concentrations of credit risk include deposit accounts in other financial institutions and federal funds sold.

These consolidated financial statements are prepared without audit and reflect all adjustments that, in the opinion of management, are necessary to present fairly the financial position of the Company at September 30, 2008, and its results of operations and cash flows for the periods presented. All such adjustments are normal and recurring in nature. The accounting principles used to prepare the consolidated financial statements are in compliance with U.S. GAAP. However, the financial statements have been prepared in accordance with the instructions of Form 10-Q and, therefore, do not purport to contain all necessary financial and footnote disclosures required by U.S. GAAP.

The financial information presented in this report should be read in conjunction with the Company’s Form 10-KSB for the year ended December 31, 2007, which includes information and disclosures not presented in this report. Reference is made to the accounting policies of the Company described in Note 1 of the Notes to Consolidated Financial Statements. The Company has consistently followed those policies in preparing this Form 10-Q.

Use of Estimates: To prepare financial statements in conformity with U.S. GAAP, 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.

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

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.

NOTE 2 – 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 vest 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 September 30, 2008 all Director Warrants were vested and exercisable. No warrants have been exercised to date.

6.

OHIO LEGACY OORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – STOCK BASED COMPENSATION (continued)

Following is the activity under the plan.

	Nine months ended September 30, 2008 Total options outstanding
				Weighted
				Average
				Exercise
	Shares			Price
Options outstanding, beginning of period		214,150		$	10.64
Forfeited		(28,800	)		10.36
Exercised		-			-
Granted		-			-
Options outstanding, end of period		185,350		$	10.69
Options exercisable, end of period		158,250		$	10.95

The aggregate intrinsic value of all options outstanding and exercisable at September 30, 2008 was $0.

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

	Compensation
	Costs
Remainder of 2008	$	8,176
2009		17,659
2010		2,081
Total	$	27,916

NOTE 3 – EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is net earnings (loss) divided by the weighted average number of shares outstanding during the period. Diluted earnings (loss) per share include the dilutive effect of additional potential 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:

7.

OHIO LEGACY OORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – EARNINGS (LOSS) PER SHARE (continued)

	Three months ended September 30						Nine months ended September 30
	2008			2007			2008			2007
BASIC:
Net earnings (loss)	$	(3,769,958	)	$	(1,437,793	)	$	(3,896,716	)	$	(1,472,556	)
Weighted average common shares outstanding		2,214,564			2,214,564			2,214,564			2,214,564
Basic earnings (loss) per share	$	(1.70	)	$	(0.65	)	$	(1.76	)	$	(0.66	)
DILUTED:
Net earnings (loss)	$	(3,769,958	)	$	(1,437,493	)	$	(3,896,716	)	$	(1,472,556	)
Weighted average common shares outstanding		2,214,564			2,214,564			2,214,564			2,214,564
Dilutive effect of stock options		-			-			-			-
Dilutive effect of stock warrants		-			-			-			-
Total common shares and dilutive potential common shares		2,214,564			2,214,564			2,214,564			2,214,564
Diluted earnings (loss) per share	$	(1.70	)	$	(0.65	)	$	(1.76	)	$	(0.66	)

The following table details, as of September 30, dilutive potential common shares that were excluded from the computation of diluted earnings per share during the periods then ended as the effect of their exercise was antidilutive:

	Three months ended September 30,				Nine months ended  September 30,
	2008		2007		2008		2007
Stock options		185,350		222,500		185,350		222,500
Stock warrants		150,000		150,000		150,000		150,000

NOTE 4 – LOANS

Loans, by collateral type, were as follows at September 30, 2008, and December 31, 2007:

	September 30, 2008						December 31, 2007
	Balance			Percent			Balance			Percent
Residential real estate	$	38,544,533			29.8	%	$	36,548,271			27.4	%
Multifamily residential real estate		6,428,966			5.0			7,918,222			5.9
Commercial real estate		54,398,620			42.0			59,574,635			44.7
Construction		11,323,322			8.8			10,714,524			8.0
Commercial		10,913,238			8.4			12,528,137			9.4
Consumer and home equity		7,789,807			6.0			6,141,568			4.6
Total loans		129,398,487			100.0	%		133,425,357			100.0	%
Less:Allowance for loan losses		(1,631,011	)					(1,622,906	)
Net deferred loan fees		(116,761	)					(159,980	)
Loans, net	$	127,650,714					$	131,642,471

8.

OHIO LEGACY OORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 – LOANS (continued)

At September 30, 2008, and December 31, 2007, approximately $30,049,000 and $24,543,000, respectively of single-family residential real estate loans were pledged as collateral for advances from the Federal Home Loan Bank of Cincinnati.

Activity in the allowance for loan losses for the three and nine months ended September 30 was as follows:

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Balance, beginning of period	$	1,632,253		$	1,766,379		$	1,622,906		$	1,757,110
Provision for loan losses		608,996			3,089,650			620,496			3,146,650
Loans charged-off		(634,369	)		(2,852,022	)		(658,902	)		(2,904,633	)
Recoveries		24,131			361			46,511			5,241
Reduction of allowance for loans sold		-			(384,787	)		-			(384,787	)
Balance, end of period	$	1,631,011		$	1,619,581		$	1,631,011		$	1,619,581
Allowance for loan losses, percent of total loans		1.26	%		1.18	%

Loans individually considered impaired and nonaccrual loans were as follows at September 30, 2008, and December 31, 2007:

	September 30, 2008		December 31, 2007
Loans past due over 90 days still on accrual	$	-	$	-
Nonaccrual loans, includes smaller balance homogeneous loans		5,220,583		4,205,143
Impaired loans, included in nonaccrual loans		5,081,445		3,550,936
Amount of the allowance for loan losses allocated	$	-	$	11,472

NOTE 5 – OTHER REAL ESTATE OWNED

Other real estate owned was as follows at September 30, 2008 and December 31, 2007:

	September 30, 2008		December 31,  2007
Residential real estate	$	2,043,334	$	136,716
Land development		2,013,831		2,279,651
Total real estate owned	$	4,057,165	$	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 September 30, 2008 and December 31, 2007 includes a property placed into receivership until it can be improved and sold in an orderly fashion.

9.

OHIO LEGACY OORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – OTHER THAN TEMPORARY IMPAIRMENT

The Company owns preferred stock issued by the Federal Home Loan Mortgage Corporations (FHLMC) and the Federal National Mortgage Association (FNMA). As a result of the actions taken by the United States Treasury Department and the Federal Housing Finance Agency on September 7, 2008 with respect to FNMA and FHLMC, the value of the stock declined substantially. The Company determined this devaluation to be other-than-temporary in nature and recorded an additional charge to earnings of $2,700,024 as of September 30, based on the market prices at the end of the quarter. For the year to date, other-than-temporary charges on these securities total $2,859,024. The market value of the securities at the end of the quarter was $200,000. Future declines in value could result in additional impairment charges.

NOTE 7 – FAIR VALUE MEASUREMENT

Statement 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Statement 157 also 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.

Loans held for sale: The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices. If no such quoted price exists, the fair value of a loan is determined using quoted prices for a similar asset or assets, adjusted for the specific attributes of that loan.

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

	September 30, 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	$	32,952,733	$	200,000	$	32,752,733	$	-

10.

OHIO LEGACY OORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 – FAIR VALUE MEASUREMENT (continued)

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

	September 30,  2008		Quoted Prices  on Active  Markets for  Identical Assets  (Level 1)		Significant  Other  Observable  Inputs  (Level 2)		Significant  Unobservable  Inputs  (Level 3)
Impaired loans	$	5,081,445	$	-	$	685,208	$	4,396,237

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. The loans had a carrying amount of $5,081,445 with valuation allowance of $0. Impairment charges which were reflected as charge-offs through the allowance for loan losses during the period were $435,945.

NOTE 8 – OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) components and the related tax effects were as follows:

	For the three months ended September 30,						For the nine months ended  September 30,
	2008			2007			2008			2007
Net earnings (loss)	$	(3,769,958	)	$	(1,432,793	)	$	(3,896,716	)	$	(1,472,556	)
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities arising during the period		(2,561,785	)	��	106,398			(3,071,830	)		124,382
Less: reclassification adjustment for losses (gains) included in net income		2,700,024			340,066			2,859,024			340,066
Net unrealized gains (losses)		138,239			446,464			(212,806	)		464,448
Income tax effect		(47,001	)		(151,798	)		72,354			(157,912	)
Other comprehensive income (loss), net of tax		91,238			294,666			(140,452	)		306,536
Comprehensive income (loss)	$	(3,678,720	)	$	(1,138,127	)	$	(4,037,168	)	$	(1,166,020	)

NOTE 9 – PARTICIPATION IN THE TREASURY CAPITAL PURCHASE PROGRAM

On October 3, 2008, Congress passed the emergency Economic Stabilization Act of 2008 (EESA), which provides the U. S. Secretary of the Treasury with broad authority to implement certain actions to help restore stability and liquidity to U.S. markets. One of the provisions resulting from the Act is the Treasury Capital Purchase Program (CPP), which provides direct equity investment of perpetual preferred stock by the Treasury in qualified financial institutions. The program is voluntary and requires an institution to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends. Applications must be submitted by November 14, 2008 and are subject to approval by the Treasury. The CPP provides for a minimum investment of 1 percent of Total Risk-Weighted Assets, with a maximum investment equal to the lesser of 3 percent of Total Risk-Weighted Assets or $25 billion. The perpetual preferred stock investment will have a dividend rate of 5.0% per year, until the fifth anniversary of the Treasury investment, and a dividend of 9.0% thereafter. The CPP also requires the Treasury to receive warrants for common stock equal to 15% of the capital invested by the Treasury. The Company is evaluating whether to apply for participation in the CPP. Participation in the program is not automatic and is subject to approval by the Treasury.

11.

OHIO LEGACY CORP

Item 2. Management’s Discussion and Analysis

FORWARD-LOOKING STATEMENTS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (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, as amended, which can be identified by the use of forward-looking terminology, such as: "may," "might," "could," "would," “should,” "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 financial position, capital adequacy and liquidity 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;

· deterioration in securities markets due to a lack of liquidity and demand for securities related to real estate,

· changes in government regulation; and

· general economic and business conditions.

12.

OHIO LEGACY CORP

OVERVIEW

The following key items summarize the Company’s financial results through September 30, 2008:

§ The company recognized an other-than-temporary impairment (OTTI) charge of $2.7 million for Fannie Mae and Freddie Mac Preferred Shares in the third quarter and $2.9 million for the year to date

§ The company wrote down the value of assets held in its OREO portfolio by $436,006

§ The company took a loan loss provision expense of $608,996 during the third quarter

Credit Quality– The provision for loan losses totaled $609,000 and $620,500, respectively, for the quarter and the first nine months of 2008. The Company’s level of non-performing loans has increased during the year, with $5.2 million categorized as non-accrual and $4.1 million as other real estate owned (OREO.) Criticized substandard loans that are still accruing also remained high at $2.2 million. At December 31, 2007, non-accrual loans were $4.2 million, other real estate owned was $2.4 million and loans criticized but still accruing were $3.1 million. Management believes that these loans are correctly valued. The Company is actively monitoring all substandard, non-accrual and OREO assets through monthly or more frequent reviews of each relationship. The provision expense and write-down in value of OREO assets was largely due to two residential subdivisions that the company financed in 2004. The slowdown in the housing market has driven the appraised values of these properties lower through the decrease in “absorption rates”– the speed at which the subdivisions will be completed. As a result, the net present values of these properties have been reduced. Actual lot prices in both of these subdivisions seem to be holding steady; however sales across the markets in which these properties are located are sluggish. Due to the unpredictable nature of the housing economy, it is difficult to determine if and when sales could regain speed.

Net Interest Income – Interest income was down compared to the same period in 2007, reflecting both the decrease in interest rates and the reduction of $38.9 million in earning assets as a result of the sale of loans associated with the Millersburg office during the third quarter of 2007. Respectively, for the quarter and for the first nine months of 2008, interest income fell $1.0 million or 28.3% and $2.8 million or 25.3% compared to the same periods a year ago. Interest expense for the same periods declined $0.9 million or 43.5% and $2.2 million or 36.2%. The net interest margin increased to 3.41% in the third quarter, compared to 3.08% for the same period last year. For the year to date through September 30, the net interest margin was 3.34% compared to 3.08% in 2007.

Noninterest Income – Compared to the third quarter and the first nine months of 2007, noninterest income fell $4.2 million and $4.4 million, respectively. Both quarters included significant unusual transactions. We recorded an other-than-temporary impairment charge of $2.7 million on the Company’s holdings of the preferred shares of FHLMC and FNMA and direct write-downs of other real estate of $436,000 as of September 30, 2008. In the previous year, the Bank recorded a $2.1 million gain on the sale of the Millersburg branch, which was partially offset by a $660,000 write-down of other real estate owned and a $340,100 loss on the sale of available for sale securities during the third quarter.

Noninterest Expense – The Company continued to focus on reducing and stabilizing noninterest expense levels, resulting in declines of $238,000 or 11.4% and $811,200 or 13.5% for the quarter and the first nine months of 2008 compared to 2007. Salaries and professional fees accounted for the largest share of this reduction, with decreases of $182,300 and $126,700 respectively for the quarter and $561,200 and $236,100 respectively for the first nine months of the year. Other non-interest expense is the only category showing material increases, which is due largely to costs associated with the management of the OREO portfolio. The Company has not disposed of several properties according to its original timetable, which is increasing the maintenance, repair and tax costs associated with holding these properties.

Loans and Leases – Loan balances decreased $4.0 million from December 31, 2007. Our financial plan for 2008 did not include any loan growth, which reflects the Company’s decision to reduce the concentration of commercial real estate assets in our portfolio. Commercial real estate loans have declined $5.2 million since the end of 2007, and residential real estate loans have increased by $2.0 million. Virtually all residential real estate loans are in-market and conforming loans.

Deposits – Non-interest bearingdemanddeposits were up $2.7 million or 18.6% since December 31, 2007, while interest-bearing demand deposits decreased $1.0 million or 10.3% during the same period. Money market and savings balances were essentially unchanged at $49.7 million Certificates of deposit declined by $9.0 million or 12.3% since year end. The changes in the mix of deposits reflect the Company’s continued focus on growing core deposit relationships and reducing its dependence on higher cost CDs. Certificate of deposit pricing in our markets has been irrationally high due largely to the liquidity positions of several large super-regional bank competitors. The Company has opted to not meet this price competition, which has contributed in large part to the CD run-off noted above. We have replaced the funding with FHLB advances, which is not a core funding strategy. However, given the dramatic differences in funding costs, the Company has consciously chosen this route for the time being.

13.

OHIO LEGACY CORP

CRITICAL ACCOUNTING POLICIES

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 uncollectibility of a loan balance is confirmed.

Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, 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.

FINANCIAL CONDITION – SEPTEMBER 30, 2008 COMPARED TO DECEMBER 31, 2007

Assets.At September 30, 2008, assets totaled $180.0 million, down from $180.3 million at December 31, 2007. Growth in securities and other real estate offset declines in net loans. Our balance sheet strategy for the year was to maintain year end levels as we continued to restructure the earning asset portfolio.

Securities. Total securities increased by $3.9 million to $36.0 million. The portfolio consists primarily of mortgage backed securities, which provide cash flow that can be used to fund additional loan growth, liability runoff or be reinvested. At September 30, 2008 we believe the effective duration of the portfolio excluding equity investments was approximately 3.8 years. The unrealized loss on the portfolio, net of tax, was approximately $136,516, compared to a gain of $3,900 at year end. The market has experienced significant volatility in prices and yields due to ongoing concerns about the economy in general and the mortgage sector in particular.

The Company recorded an other-than-temporary impairment charge of $2.9 million on its holdings of preferred shares of FHLMC and FNMA. As of September 30, the price of these securities had declined over 93% from their original cost as a result of the Treasury Department’s actions during the quarter.

Loans. At September 30, 2008, the loan portfolio, net of the allowance for loan losses and deferred fees, totaled $127.7 million, a decrease of just under $4.0 million compared to December 31, 2007. Commercial real estate loans make up the largest segment of the portfolio, but decreased from 44.7% of loans at year end to 42.0% as of September 30, 2008. Residential real estate loans increased from 27.4% of loans to 29.8% during the period. The Company remains committed to a long-term strategy of diversifying the mix of the loan portfolio by adding high-quality commercial business banking assets while maintaining or reducing real estate-based assets.

14.

OHIO LEGACY CORP

Allowance for loan losses and asset quality.Nonperforming loans totaled $5.2 million at September 30, 2008 compared to $4.2 million at December 31, 2007 and $4.0 million at June 30, 2008. The increase is the result of the addition of ten relationships totaling approximately $3.4 million to the category. This was offset by $1.8 million in balances transferred to other real estate, $0.8 million in balances paid down or paid off and $12,500 in balances charged off. Loans are considered nonperforming if they are impaired or if they are in non-accrual status. We review nonperforming loans on a weekly basis to assess the risk of loss. Our OREO totals and individual properties continue to be monitored very closely. We believe that we will continue to see movement on this front as properties that have been in foreclosure for some time work through the sheriff’s sale process and others for which we have now acquired the deeds to begin to sell. We do not believe that we will see net reductions to this category for some time; however, we believe that if we do experience movement of properties in and out of this category over the next three quarters it will represent success as we gradually eliminate the amount of impaired assets that the Company is managing.

The allowance for loan losses totaled $1.6 million at September 30, 2008, essentially unchanged since year end 2007. We continue to closely monitor credit quality and delinquencies as our loan portfolio seasons, and will increase the allowance for loan losses if we believe losses have been incurred. As a percentage of total loans, the allowance has increased from 1.22% to 1.26%.

Accrued interest receivable and other assets. Accrued interest receivable and other assets increased by $308,500 from year end. Higher balances of accrued interest on loans and securities accounts for approximately $100,000 of the increase and accounts receivable on one OREO property represents an additional $150,000 of the increase.

Deposits. Total deposits decreased $7.2 million to $140.0 million at September 30, 2008. Core deposit balances increased 2.4% to $75.6 million from $73.9 million at year end. Noninterest bearing demand deposits increased 18.6% to $17.0 million. We remain committed to our strategy of growing core deposits through the acquisition of business banking relationships. The certificate of deposit portfolio decreased $9.0 million during the period to $64.4 million or 46.0% of total deposits compared to $73.5 million or 49.9% of total deposits at year-end. Our deposit strategy continues to focus on reducing the size of the CD portfolio as a percentage of total deposits while increasing the average maturity. This will help reduce our overall cost of funds and provide protection against rising interest rates in the future.

Federal Home Loan Bank advances. Long term advances increased from $12.0 million at year end 2007 to $21.0 million at September 30, 2008. The growth was part of an asset/liability management strategy executed during the year to lock in long term borrowing rates at historically low levels. Four advances totaling $11.0 million with a weighted average original term of twenty-six months and a weighted average rate of 3.02% were added. A $2.0 million twenty-seven month advance with a rate of 4.94% matured early in the second quarter.

RESULTS OF OPERATIONS – THREE MONTHS ENDED SEPTEMBER 30, 2008

The following tables set forth information relating to our average balance sheets and reflect 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, on an annualized basis, by the average balances of interest-earning assets or interest-bearing liabilities for the periods presented.

15.

OHIO LEGACY CORP

	Three months ended September 30,
	2008							2007
	Average		Interest					Average		Interest
	Outstanding		earned/		Yield/			outstanding		earned/		Yield/
(Dollars in thousands)	Balance		paid		Rate			balance		paid		Rate
Assets
Interest-earning assets:
Interest-bearing deposits and federal funds sold	$	1,052		6		2.38	%	$	4,259	$	55		5.15	%
Securities available for sale		36,336		447		4.90			24,761		271		4.37
Securities held to maturity		3,001		29		3.79			3,004		26		3.46
Federal agency stock		1,449		20		5.55			1,541		26		6.84
Loans (1)		125,713		2,093		6.62			169,245		3,241		7.66
Total interest-earning assets		167,551		2,595		6.16	%		202,810		3,619		7.10
Noninterest-earning assets		15,329							20,001
Total assets		182,880							222,811
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	9,095		23		0.99	%	$	9,863	$	49		1.96	%
Savings accounts		5,420		11		0.82			7,277		14		0.78
Money market accounts		47,779		272		2.26			49,062		481		3.89
Certificates of deposit		66,963		625		3.72			95,266		1,155		4.81
Total interest-bearing deposits		129,257		931		2.87			161,468		1,699		4.18
Other borrowings		22,715		224		3.92			23,998		345		5.70
Total interest-bearing liabilities		151,972		1,155		3.02			185,466		2,044		4.37
Noninterest-bearing demand deposits		16,178							17,268
Noninterest-bearing liabilities		279							961
Total liabilities		168,429							203,695
Shareholders’ equity		14,451							19,116
Total liabilities and shareholders’ equity	$	182,880						$	222,811
Net interest income; interest-rate spread (2)			$	1,440		3.14	%			$	1,575		2.73	%
Net earning assets	$	15,579						$	17,344
Net interest margin (3)						3.41	%						3.09	%
Average interest-earning assets to interest-bearing liabilities		1.10x							1.09x
(1)Net of net deferred loan fees and costs and loans in process. Non-accrual loans are reported in non-interest earning assets in this table.
(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, annualized, divided by average interest-earning assets.

Net earnings (loss) totaled $(3.8) million for the three months ended September 30, 2008, or $(1.70) per diluted share, compared to $(1.4) million or ($0.65) per diluted share during the third quarter of 2007.

Net interest income. During the three months ended September 30, 2008, net interest income was $1.4 million, compared to net interest income of $1.6 million in the comparable quarter last year. The decrease in the volume of earning assets due to the branch sale was offset in large part by an increase in the net interest margin from 3.09% to 3.41%.

Interest income. Total interest income for the quarter was $2.6 million, down 28.3% from $3.6 million in the same quarter in 2007. The decrease in the both the volume and yield on earning assets contributed to the decline. Average earning assets were $167.5 million in the third quarter of 2008, compared to $202.8 in 2007. The sale of the branch in September 2007 had greater impact in subsequent quarters than in the quarter in which it occurred. The yield on earning assets decreased by 101 basis points from 7.17% to 6.16%, which also had a negative impact on total interest income.

Interest expense. For the three months ended September 30, total interest expense was $1.2 million compared to $2.0 million in the prior year. Average interest bearing liabilities declined from $203.7 million in the third quarter of 2007 to $168.4 million for the same period in 2008. The average rate dropped 135 basis points from 4.37% to 3.02%, reflecting the redemption of the Company’s subordinated debt, active management of the liability mix to reduce costs and an overall decrease in rates over the year.

16.

OHIO LEGACY CORP

Provision for loan losses. The provision for loan losses totaled $609,000 during the third quarter of 2008, compared to $3.1 million in the third quarter of 2007. One loan represented $544,000 of the 2008 total. The amount recorded in 2007 represented significant write-downs in value of a small number of large commercial relationships. As discussed above in the “Allowance for loan losses,” our provision for loan losses can be expected to fluctuate from period to period.

Noninterest income. Noninterest income (loss) for the third quarter of 2008 was $(2.7) million compared to $1.4 million for the same period the prior year. Both periods included significant unusual items. In 2008, the Bank recorded an other-than-temporary impairment charge of $2.7 million related to FNMA and FHLMC preferred stock and $436,000 in direct write-downs of other real estate.. In 2007, the Bank recorded a gain of $2.1 million on the sale of the branch, which was offset by a loss of $340,100 on the sale of securities and a write-down in the value of loans of $660,200. Service charge income declined by $25,000, primarily as a result of the branch sale in 2007. Other income increased $64,400, due in large part to loan sales resulting from the Company’s relationship with Midwest Marketing, LLC.

Noninterest expense. Total noninterest expense decreased $238,000 to $1.9 million compared to $2.1 million for the prior year quarter. The significant changes are described below.

Salary and benefits. The largest portion of the decrease is due to a $182,300 reduction in salary and benefits as a result of the branch sale and the elimination of additional positions in the fourth quarter of 2007.

Professional fees. In the third quarter, professional fees were $126,700 lower than in the previous year, due in part to the expenses associated with the branch sale and other new product development in 2007.

Other expenses. Legal expenses related to troubled commercial loans and improvements to real estate owned increased approximately $101,200 in the third quarter of 2008 compared to the same period in 2007.

17.

OHIO LEGACY CORP

RESULTS OF OPERATIONS – NINE MONTHS ENDED SEPTEMBER 30, 2008

	Nine months ending September 30,
	2008							2007
	Average		Interest					Average		Interest
	Outstanding		earned/		Yield/			outstanding		earned/		Yield/
(Dollars in thousands)	balance		Paid		Rate			balance		paid		Rate
Assets
Interest-earning assets:
Interest-bearing deposits and federal funds sold	$	3,407	$	67		2.62	%	$	5,049	$	198		5.23	%
Securities available for sale		32,860		1,302		5.29			25,240		808		4.27
Securities held to maturity		3,002		86		3.81			2,889		75		3.46
Federal agency stock		1,485		62		5.56			1,541		74		6.43
Loans (1)		128,203		6,623		6.90			172,659		9,742		7.52
Total interest-earning assets		168,957		8,140		6.44			207,378		10,897		7.03
Noninterest-earning assets		16,017							20,491
Total assets	$	184,974						$	227,869
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	9,508		82		1.16		$	9,488		89		1.25
Savings accounts		5,416		33		0.82			8,151		48		0.79
Money market accounts		46,835		955		2.72			45,290		1,310		3.87
Certificates of deposit		71,361		2,185		4.09			102,644		3,676		4.79
Total interest-bearing deposits		133,120		3,255		3.27			165,573		5,123		4.14
Other borrowings		20,348		650		4.25			23,766		996		5.61
Total interest-bearing liabilities		153,468		3,905		3.40			189,339		6,119		4.32
Noninterest-bearing demand deposits		15,435							18,129
Noninterest-bearing liabilities		548							759
Total liabilities		169,451							208,227
Shareholders’ equity		15,523							19,642
Total liabilities and shareholders’ equity	$	184,974						$	227,869
Net interest income; interest-rate spread (2)			$	4,235		3.04	%			$	4,778		2.71	%
Net earning assets	$	15,489						$	18,039
Net interest margin (3)						3.34	%						3.08	%
Average interest-earning assets to interest-bearing liabilities		1.10x							1.10x

FOOTNOTES TO YIELD TABLE

(1) Net of net deferred loan fees and costs and loans in process. Nonaccrual loans are included in noninterest-earning assets.

(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, annualized, divided by average interest-earning assets.

Net earnings (loss) totaled $(3.9) million for the nine months ended September 30, 2008, or $(1.76) per diluted share, compared to $(1.5) million or $(0.66) per diluted share during the first nine months of 2007.

Net interest income. During the nine months ended September 30, 2008, net interest income was $4.2 million, compared to $4.8 million for the same period the prior year.

Interest income. Total interest income was $8.1 million for the first nine months of 2008, compared to $10.9 million for the comparable period in 2007. The decline is due to both a lower volume of earning assets as a result of the branch sale and a lower yield on those assets as the FOMC reduced the target federal funds rate 225 basis points during the nine month period. The yield on loans dropped approximately 60 basis points during the period, from 7.5% to 6.9% as variable rate notes reset downward and new volume was added at lower rates. The decline was partially offset by an increase in the yield on securities from 4.3% to 5.3% as the result of a restructuring transaction the third quarter of 2007 and ongoing purchases at market rates.

Interest expense. Total interest expense fell $2.2 million to $3.9 million in 2008, compared to $6.1 million for the same period in 2007. Deposit expense reductions accounted for $1.9 million of the decrease as a result of the both the branch sale and the previously announced strategy of focusing on lower cost transaction deposits. The redemption of the Company’s subordinated debt contributed an additional $190,000 in expense savings.

18.

OHIO LEGACY CORP

Provision for loan losses. The provision for loan losses totaled $620,500 during the first nine months of 2008, compared to $3.1 million during the same period in 2007. One commercial loan accounted for $544,000 of the provision in 2008. The amount recorded in 2007 represented significant write-downs in value of a small number of large commercial relationships. As discussed above in the “Allowance for loan losses,” our provision for loan losses can be expected to fluctuate from period to period.

Noninterest income. Noninterest income was $(2.3) million for the first nine months of 2008, compared to $2.1 million for the same period last year. Results for both periods included material unusual entries. During 2008, the Company recorded an other-than-temporary impairment of $2.9 million related to its holdings of FNMA and FHLMC preferred securities and a $369,000 direct write-down of other real estate. During 2007, the Company recorded a gain of $2.1 million related to the branch sale, a loss of $340,100 on the sale of available for sale securities and $643,200 in write-downs of commercial loans. Total service charge income declined $120,000 due primarily to the sale of branch deposit accounts in September, 2007.

Noninterest expense. Total noninterest expense declined $811,200 to $5.2 million compared to $6.0 million for the first nine months of the prior year. The significant changes are described below.

Salary and benefits. The largest portion of the decrease is due to a $561,200 reduction in salary and benefits as a result of the branch sale and the elimination of additional positions in the fourth quarter of 2007.

Professional fees. In the first nine months of 2008, professional fees were $248,300 compared to $484,400 in the prior year. The decrease is due to fees incurred in 2007 for the sale of the branch, new deposit product development and expenses related to the sale of non-performing loans.

Other expenses. Legal expenses related to troubled commercial loans and improvements to real estate owned increased approximately $135,900 during the first nine months of 2008 compared to the same period in 2007.

STRATEGIC DEVELOPMENTS

The announcement by the Department of Treasury to cease dividend payments to preferred shareholders of Fannie Mae and Freddie Mac, both Government Sponsored Enterprises (GSEs), was stunning both in its impact and speed. Management purchased these securities less than a year ago and through the first five and a half months of this year saw little or no temporary impairment, let alone permanent impairment, in the underlying value of the securities. The first sign of potential weakness in this investment was in mid-to-late June. By the end of August these securities were trading at less than 10 cents on the dollar.

The other-than-temporary impairment charge that we recognized on this investment loss represented approximately 19.0% of our capital and creates a number of challenges for the Company. Since August we have been working through the impacts on capital and earnings and how we will adjust our Company’s profile to accommodate this latest issue. We are extremely disappointed but we still believe that efforts we have made are beginning to show progress. We continue to grow low cost deposits, our margin has been steadily improving throughout the year, our service charge and fee income numbers continue to improve, our non-interest expense numbers are better in the absolute and when adjusted for one time OREO charges, show real promise.

We continue to be challenged by a mixed story on credit quality. There is continued deterioration in segments of our commercial real estate portfolio that have multi-family or residential exposure. The increases in our OREO and non-accrual loans for the period are almost exclusively multi-family and residential real estate development loans. Most of this increase did not represent surprises as it involved loans that had been on our “quality radar” for some time. We have taken write-downs consistent with mark-to-market accounting principles and believe that we have valued these loans correctly and further, that any additional material losses on these loans are unlikely.

Credit quality continues to be our biggest concern, followed closely by capital. The improvements we are making in the core performance of the Company on net interest margin, non-interest income and non-interest expense are very important to the future strength and viability of our Company. However, we must continue to address our credit problems.

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OHIO LEGACY CORP

The next few years will be as interesting as we work through the unprecedented market events and economic upheaval of the last few months. We believe that there will be consolidation involving many of our larger competitors, which will create even more opportunity for strong community-focused banks to thrive. It is imperative that we improve our credit quality and capital positions in order to be able to take advantage of these times.

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

There have been no material changes in the Company’s contractual obligations since December 31, 2007.

At September 30, 2008, we had no active unconsolidated, related special purpose entities, nor did we engage in derivatives and hedging contracts, such as interest rate swaps, that might 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, 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 our financial commitments and to capitalize on opportunities for business expansion in the context of managing the Company’s 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, loan and security repayments and maturities, sales of securities, borrowings from the FHLB and capital transactions. Alternative sources of funds include repurchase agreements and brokered CDs and the sale of loans. 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.

We have activated our liquidity contingency funding plan that identifies liquidity thresholds and red flags that may provide evidence of impending liquidity crises due to recent national events. Additionally, the liquidity 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.

At September 30, 2008, the balances in cash and cash equivalents were down $2.5 million from year end 2007. The reduction is due to normal business activities. Cash and cash equivalents represented 2.6% of total assets at September 30, 2008 and 4.0% of total assets at December 31, 2007.

CAPITAL RESOURCES

Total shareholders’ equity was $11.3 million at September 30, 2008, a decrease of $4.0 million from the prior year-end balance. The reduction in equity was due to the other-than-temporary impairment charge of $2.9 million related to the FNMA and FHLMC preferred shares owned by the Company, $620,000 in loan loss provision and the $436,000 direct write-down of other real estate.

The Bank is 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.

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OHIO LEGACY CORP

Actual and required capital amounts (in thousands) and ratios are presented below at September 30, 2008:

											To Be Well-
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets	$	12,565		9.3	%	$	10,794		8.0	%	$	13,493		10.0	%
Tier 1 capital to risk-weighted assets	$	10,934		8.1	%	$	5,397		4.0	%	$	8,096		6.0	%
Tier 1 capital to average assets	$	10,934		6.0	%	$	7,325		4.0	%	$	9,156		5.0	%

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. As a result of the write-downs in value of both loans and securities in the third quarter, the Bank no longer meets the definition of well-capitalized. In addition to the dividend restrictions above, the Bank is not permitted to issue brokered deposits without prior approval from its regulators.

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OHIO LEGACY CORP

Item 3. Not applicable for Smaller Reporting Companies.

Item 4. Controls and Procedures

As of September 30, 2008, an evaluation was conducted under the supervision and with the participation of Ohio Legacy Corp’s management, including our Chief Executive Officer and acting Chief Financial Officer of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended). Based on their evaluation, our Chief Executive Officer and acting Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in Ohio Legacy Corp’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended September 30, 2008, that has materially affected, or is reasonably likely to materially affect, Ohio Legacy’s Corp’s internal control over financial reporting.

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OHIO LEGACY CORP

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

There are no matters required to be reported under this item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

There are no matters required to be reported under this item.

Item 3. Defaults Upon Senior Securities.

There are no matters required to be reported under this item.

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

There are no matters required to be reported under this item.

Item 5. Other Information.

There are no matters required to be reported under this item.

23.

OHIO LEGACY CORP

Item 6. Exhibits.

Exhibit
Number	Note	Description of Document
3.1	(1)	Second Amended and Restated Articles of Incorporation of Ohio Legacy Corp
3.2	(2)	Code of Regulations of Ohio Legacy Corp, as amended by Amendment No. 1
4.1	(3)	See Pages 1 through 9 of Exhibit 3.1 for provisions defining the rights of the holders of common shares
4.2	(3)	Form of Organizer Stock Purchase Warrant
4.4	(2)	2004 Amendment to Omnibus Stock Option, Stock Ownership and Long Term Incentive Plan of Ohio Legacy Corp
10.1	(3)	Omnibus Stock Option, Stock Ownership and Long Term Incentive Plan
10.2	(4)	2002 Amendment to Omnibus Stock Option, Stock Ownership and Long Term Incentive Planof Ohio Legacy Corp
10.5	(3)	Lease Agreement dated August 24, 1999, by and among Jack K. and Heidi M. Gant and Ohio Legacy Corp
10.6	(3)	Lease Agreement dated November 30, 1999, by and between Schoeppner Properties and Ohio Legacy Corp
10.8	(5)	Lease Agreement dated October 2001 by and between Shee-Bree’s, L.L.C. and Ohio Legacy Corp
10.11	(7)	Employment Agreement with Mr. Kramer
10.12	(8)	Change in Control Agreement with Mr. Williams
10.13	(8)	Change in Control Agreement with Mr. Spradlin
10.14	(8)	Change in Control Agreement with Mr. Dodds
10.15		Loan Processing Agreement dated April 28, 2008 by and between Midwest Mortgage Processing, LLC and Ohio Legacy Bank, N.A.
10.16		Administrative Services Agreement dated April 28, 2008 by and between JMC Marketing Ltd. And Ohio Legacy Bank, N.A.
10.17		Guaranty dated April 28, 2008 by and between James A. Hinkle, Cheldon Rose, Michael Prall and Ohio Legacy Bank, N.A.
10.18		First Addendum to Administrative Services Agreement dated September 30, 2008 by and between JMC Marketing Ltd. And Ohio Legacy Bank, N.A.
11		Statement Regarding Computation of Per Share Earnings (incorporated by reference to Note 3 on page 8 of this Form 10-Q)
31.1		Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer and acting Chief Financial Officer
32.1		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, 2001, filed on April 1, 2002

(7)-Incorporated by reference to Registrant’s Form 8-K filed on May 6, 2005

(8) - Incorporated by reference to Registrant’s Form 10-K filed on April 7, 2008

24.

OHIO LEGACY CORP

SIGNATURES

In accordance with the requirements 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)
Date: November 14, 2008	By:	/s/ D. Michael Kramer
	D. Michael Kramer, President,
	President, Chief Executive Officer and acting
	Chief Financial Officer

25.