In the following section, management presents an analysis of Ohio Legacy Corp's financial condition as of March 31, 2012, and results of operations as of and for the three months ended March 31, 2012 and 2011. 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 the accompanying notes included in this Form 10-Q and the Company's annual report on Form 10-K for the year ended December 31, 2011.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q, including Management's Discussion and Analysis of Financial Condition and Results of Operations, includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act 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 version of such terms or comparable terminology. All statements other than statements of historical fact included in this Form 10-Q, including statements regarding our outlook, financial position, results of operation, liquidity, capital resources and interest rate sensitivity are forward-looking statements.

The Private Securities Litigation Reform Act provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the forward-looking statements. We desire to take advantage of the "safe harbor" provisions of that Act.

Forward-looking statements speak only as of the date on which they are made and, except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date on which the statement is made.

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 assumptions, judgments and expectations reflected in such forward-looking statements are reasonable, we can give no assurance such assumptions, judgments and 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 in this Form 10-Q include, but are not limited to:

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

· rapid changes in technology affecting the financial services industry;

· changes in government regulation;

· general economic and business conditions;

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

· 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;

· our ability to retain existing customers and attract new customers;

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

· our ability to seek additional capital in the future;

· the adequacy of our allowance for loan losses; and

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

OVERVIEW OF STRATEGIC DEVELOPMENTS

Following the recapitalization of the Company in February 2010, the Company's management has focused on a number of initiatives including the following:

· Improve the Company's regulatory risk profile to alleviate the financial and management burden of problem loans and special supervision by the Bank's principal regulator in connection with a Consent Order issued in February 2009.

o The Consent Order was removed by the OCC on September 9, 2011, reflecting improvements in the management of problem loans.

· Evaluate the markets where the Company's branch network operates to determine whether the operating costs and demographics fit with the Bank's business plan. As a result, the following events occurred:

o A full service branch office was opened in February 2012 in St. Clairsville, Ohio expanding services offered to current and prospective clients at this Belmont County location. The branch office is located in the same plaza as the Bank's Wealth office.

o Deposits totaling $74.3 million and net loans totaling $9.1 million for two branch offices located in Wayne County, Ohio, were sold in October 2011.

o Criticized loans included in the sale totaled $2.3 million.

· Develop fee-based revenue through the wealth management business started by the Bank in April 2010.

o Assets under management by the trust department totaled $114 at March 31, 2012 and $105 million at year-end 2011.

· Evaluate the core processing system to reduce costs while expanding product offerings to remain competitive through advances in technology.

o The Bank completed a core processing system conversion in April 2012.

· Deliver efficient and premier service and products for current and prospective clients and develop a sales culture throughout the Company.

In October 2011, Premier Bank & Trust completed the sale of two branch offices located in Wooster, Ohio, to The Commercial and Savings Bank of Millersburg, Ohio ("CSB"), a wholly owned subsidiary of CSB Bancorp, Inc., under an agreement (the "Agreement") entered into during June 2011. Under the terms of the Agreement, CSB purchased approximately $9 million in loans, net of an allocation of the Allowance for Loan and Lease Losses totaling $600,000, real estate, fixtures and equipment associated with the branch locations, and deposits and other liabilities of $75 million. CSB paid a premium of $3.5 million, or 5% of the average amount of assumed deposits during the ten day period prior to and the day of closing less a fixed stated amount of $166,000. In addition to the loans, real estate, and fixed assets sold to CSB, the transaction was funded with approximately $42 million in cash and $19 million in borrowings from the Federal Home Loan Bank. This transaction positions the Company to focus on our core market of Stark County, Ohio, and provides future expansion potential. The impact of the branch sale is evident when comparing the first quarter results of 2012 compared to the same quarter of 2011 particularly for deposit related noninterest income and overhead expenses.

The following key factors summarize the Company's financial condition at March 31, 2012 compared to December 31, 2011:

· Total assets increased $12.2 million to $158.8 million from $146.6 million.

· Net loans increased $5.1 million to $113.4 million, and loans held for sale increased $1.1 million to $2 million.

· Total deposits increased $8.9 million to $112.8 million contributing higher liquidity levels with cash and cash equivalents increasing by $4.0 million.

· Total shareholders' equity decreased $173,000 from $18.6 million to $18.4 million principally due to the operating loss of approximately $215,000 recorded by the Company for the three months ending March 31, 2012. This decrease in capital was partially offset by approximately $49,000 in stock-based compensation costs.

The following key factors summarize our results of operations for the three months ended March 31, 2012:

· The Company incurred a net loss of $214,974 in 2012 compared to a loss of $468,567 for the same period in 2011.

· Net interest income improved $34,963 in 2012 compared to the same period in 2011.

· The Company reduced its allowance for loan loss through a negative loan loss provision of $7,557 in 2012 compared to provision expense of $23,772 for the same period in 2011.

· Noninterest income decreased $69,523 primarily driven by a reduction in service charges and other deposit related fee income totaling $84,612 resulting from the sale of two branch offices in October 2011.

· Noninterest expense decreased by $272,201 principally due to the elimination of overhead associated with the branch sale.

The following forward-looking statements describe our near term outlook:

· Margins may decline as interest earning assets continue to adjust to lower rates given the Federal Open Market Committee's expectation to maintain a highly accommodative stance for monetary policy to support a stronger economic recovery. The FOMC has maintained the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that economic conditions-including low rates of resource utilization and a subdued outlook for inflation over the medium run-are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. The FOMC also has the ability to influence longer term interest rates through its open market operations.

· It will be difficult to reduce our cost of funds significantly below current levels.

· Commercial lending, with an emphasis on commercial and industrial lending, and new services in trust, brokerage and wealth management are expected to expand;

· Credit quality will remain a primary focus of the Company, and costs associated with credit administration and collection efforts will remain high;

· The Bank's costs associated with its regulatory risk profile including FDIC insurance and regulatory examination costs will remain elevated until asset quality and earnings improve.

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.

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 recoveries 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 engage an independent third party each quarter to help monitor and confirm our loan grading conclusions.

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 $8,026,000 will expire as follows:
$1,257,000 on December 31, 2027, $132,000 on December 31, 2028, $1,532,000 on December 31, 2029, and $5,105,000 on December 31, 2030. 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 Note 9 to the consolidated financial statements.

FINANCIAL CONDITION - March 31, 2012 compared to December 31, 2011

Assets. At March 31, 2012, total assets increased to $158.8 million, up $12.2 million from $146.6 million at December 31, 2011. The asset increase was principally due to an increase in deposits of $8.9 million.

Cash and Cash Equivalents. Cash and cash equivalents increased to $24.1 million at March 31, 2012, up $4.0 million from year-end 2011. The increase in cash and cash equivalents was due to an increase in deposits that was not otherwise invested in loans or securities.

Securities. Total securities available for sale had an estimated fair value of $12.5 million at March 31, 2012, compared to $10.7 million at year-end 2011. There were no sales of securities during the first quarter of 2012. The net unrealized gain on the securities portfolio was $446,401 at March 31, 2012 compared to a net unrealized gain of $452,816 at December 31, 2011.

Loans and Asset Quality. Total loans, net of the allowance for loan loss and deferred loan fees, increased $5.1 million to $113.4 million. Loans classified by management as special mention, substandard, doubtful and not deemed impaired represented 3.6% of total loans at March 31, 2012, compared to 5.0% at December 31, 2011. Impaired loans on nonaccrual status represented 1.3% of total loans at March 31, 2012, and totaled $1,558,394, up $223,096 from year-end 2011. Improving asset quality continues to be a prime objective for management. Outstanding loan balances are expected to increase over the remainder of the year through business development efforts. However expected loan growth may be constrained by continued economic weakness in the markets served by the Company and competitive pressure.

Allowance for loan losses. The balance of the allowance for loan loss at March 31, 2012, was $2,419,047 compared to $2,484,478 at year-end 2011. For the three months ending March 31, 2012, the allowance for loan loss was reduced by a negative loan loss provision of $7,557. Recoveries on loans previously charged-off totaled $12,695 and loans charged off totaled $70,569. The amount of the allowance for loan loss is based on a combination of actual experiential factors such as historical losses for each category of loans, information about specific borrowers, and other factors, including delinquencies, general economic conditions and the outlook for specific industries, which are more subjective in nature.

The reduction to the allowance is directionally consistent with the trends in the criticized loan portfolio. Criticized loans decreased as a result of loan risk upgrades on specific loans and principal reductions from payments. Another contributing factor was a decrease in the historical loss percentages. These loss rates are regularly updated to reflect the most recent three years of loss experience. Reductions to the estimate of incurred losses in the loan portfolio for lower loss rates and loan risk upgrades during the first quarter of 2012 were partly offset by the amount of the allowance required to support growth in loan balances since year-end 2011.

The general allowance allocated to loans not criticized by management totaled 1.73% of non-criticized loans at March 31, 2012, compared to 1.75% at year-end 2011. As a percentage of total loans, the allowance decreased to 2.09% at March 31, 2012, compared to 2.24% at year-end 2011. The allowance for loan loss as a percentage of loans not individually identified as impaired and that excludes the amount of the allowance specifically allocated to impaired loans totaled 2.06% at March 31, 2012, compared to 2.22% at year-end 2011. Specific allocations of the allowance for impaired loans increased to $125,918 at March 31, 2012 compared to $119,080 at year-end 2011.

Assets acquired in settlement of loans. These assets include other real estate owned ("OREO") and an interest in a limited liability company acquired during 2010 that owns the real estate and operations of an indoor water park and resort obtained through a U.S. Bankruptcy Code 363 sale. The limited liability company was formed by the lead bank for the banks participating in the project financing to acquire title to the real estate, conduct the operation of the facility, and market the real estate and the operations of the business for sale. The carrying value of its interest is approximately $1.3 million and is based upon the estimated fair value of the real estate less costs to sell.

Other real estate owned consisted of eight properties and totaled approximately $635,000 at March 31, 2012 compared to nine properties with a carrying value of $757,000 at year-end 2011. One property was sold for a gain of $3,609, and no properties were transferred to OREO during the first quarter of 2012.

Deposits. Total deposits increased $8.9 million to $112.8 million compared to year-end 2011. Time deposits included $17.8 million in deposits acquired from financial institutions subscribing to a national time deposit rate listing service. These deposits had a weighted average rate of 0.52% with an average remaining maturity of 214 days. This funding source is less expensive than rates paid in the retail deposit market, but there is no opportunity to cross-sell other products and services to these depositors. It has also allowed the Bank to extend the maturity term of its deposits since retail depositors have migrated into money market funds as customers tend to be unwilling to lengthen deposit maturities given low interest rates. It has also partially replaced deposits sold through the branch sale during the fourth quarter of 2011.

Federal Home Loan Bank Advances. Federal Home Loan Bank advances totaling $19 million were used as a funding source following the sale of two branches during the fourth quarter of 2012.

Accrued interest payable and other liabilities. Other liabilities increased $2.8 million to $3.7 million due to the purchase of a security prior to the end of March 2012 that did not settle until April.

Shareholders' Equity. Shareholders' Equity decreased $172,000 to $18.4 million at March 31, 2012. The decrease was due to the operating loss of approximately $215,000 incurred for the three months of 2012 which was partially offset by stock-based compensation costs, a noncash expense, of approximately $49,000. Accumulated other comprehensive income decreased by approximately $6,000.

RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2012

The net loss for the three months ending March 31, 2012, totaled $214,974 or a loss of $0.01 per diluted share compared to a net loss of $468,567, or $0.02 per diluted share during the first quarter of 2011. Average diluted shares outstanding were unchanged at 19,714,564 shares for the first quarter of 2012 compared to the same quarter of 2011.

The following table sets forth information relating to the 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, on an annualized basis, by the average balances of interest-earning assets or interest-bearing liabilities for the periods presented.

                                                        Three Months Ended March 31,
                                               2012                                       2011
                                               Interest                                   Interest
                                Average         Earned/       Yield/        Average        Earned/       Yield/
(Dollars in Thousands)           Balance         Paid          Rate         Balance         Paid          Rate
Assets
Interest-earning assets:
Interest-bearing deposits
in
other financial
institutions and federal
funds sold                    $   23,852     $       12         0.21 %   $   32,306     $       18         0.22 %
Securities available for
sale                               9,822             66         2.68 %       22,335            148         2.65 %
Securities held to maturity            -              -            -          2,816             27         3.86 %
Federal agency stock               1,598             20         5.06 %        1,556             20         5.04 %
Loans (1)                        112,162          1,345         4.82 %      100,745          1,394         5.61 %
 Total interest-earning
assets                           147,434          1,443         3.94 %      159,758          1,607         4.08 %
Noninterest-earning assets         5,212                                      8,304
Total assets                  $  152,646                                 $  168,062

Liabilities and
Shareholders' Equity
Interest-bearing
liabilities:
Interest-bearing demand
deposits                      $    5,702     $        4         0.25 %   $    9,322     $        7         0.31 %
Savings accounts                   5,528              5         0.38 %       14,548             16         0.43 %
Money market accounts             32,439             40         0.50 %       47,916             80         0.68 %
Certificates of deposit           41,022             95         0.93 %       52,015            223         1.74 %
Total interest-bearing
deposits                          84,691            144         0.68 %      123,801            326         1.07 %
Other Borrowings                  23,605             16         0.27 %        6,293             33         2.11 %
   Total Interest-bearing
liabilities                      108,296            160         0.60 %      130,094            359         1.12 %
Noninterest-bearing demand
deposits                          25,053                                     20,785
Noninterest-bearing
liabilities                          765                                        881
Total liabilities                134,114                                    151,760
Shareholders' equity              18,532                                     16,302
  Total liabilities and
   shareholders' equity       $  152,646                                 $  168,062

Net interest income;
interest rate spread (2)                     $    1,283         3.34 %                  $    1,248         2.96 %
Net earning assets            $   39,138                                 $   29,664
Net interest margin (3)                                         3.50 %                                     2.88 %

Average interest-earning
assets to interest-bearing
liabilities                          1.4   X                                    1.2   X

(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 interest income. For the three months ending March 31, 2012, net interest income was $1,282,956, up $34,963 from same period in 2011 while average total interest earning assets were down $12.3 million. Loans and liquid assets used to fund deposits sold during the third quarter of 2011 reduced the balance of earning assets. The yield on earning assets declined 0.14% to 3.94% for the first quarter of 2012 from 4.08% for the comparable period of 2011. The yield on interest-bearing liabilities declined 0.52% to 0.60% for the first quarter of 2012 from 1.12% for the same period in 2011. The net interest margin increased to 3.50% from 2.88%.

Interest Income. Total interest income for the first quarter of 2012 was $1.4 million, down from $1.6 million for the first quarter of 2011. Interest-bearing assets continue to reprice downward as low interest rates prevailed during the quarter and originations of interest earning assets are booked at lower rates contributing to lower interest income levels.

Interest expense. Interest on deposits declined $182,000 to $144,000 for the first quarter of 2012 compared to the same period in 2011. The average yield on interest-bearing deposits dropped 0.39% to 0.68%. Interest expense related to other borrowings including Federal Home Loan Bank advances declined by $17,000. During the fourth quarter of 2011, the Company took loan advances totaling $19 million from the Federal Home Loan Bank to assist in the funding of the branch deposit sale. Of this amount, $13 million is short term debt with a comparatively low cost that contributed to the reduction in the average rate paid on other borrowings to 0.27% during the first quarter of 2012 compared to 2.11% for the same period of 2011. Management expects that it will be difficult to achieve further reductions to the cost its core deposits since the current cost is already priced at historically low rates.

Provision for Loan Loss. A negative loan loss provision totaling $7,557 was recorded during the first quarter of 2012, compared to provision expense of $23,772 for the same quarter last year; negative loan loss provisions provide a positive contribution to net income. The provision for loan loss will fluctuate based on management's evaluation of the credit within the loan portfolio, changes in credit loss experience factors, and incurred losses in the loan portfolio during the period. See also the discussion above for the Allowance for Loan Losses.

Noninterest income. Noninterest income decreased $69,523 to $282,831 for the first quarter of 2012 compared to $352,354 for the same quarter of 2011. The decrease was the result of a reduction in service charges and other fees due to the sale of branch deposits during the fourth quarter of 2011.

Service charges and other fees declined $84,612, to $68,582 for the first quarter of 2012 compared to the same period of 2011. This decline resulted from the sale of deposit accounts during the fourth quarter of 2012. Those accounts generated approximately $90,000 in service charges and other fees during the first quarter of 2011.

The Bank's trust department and brokerage business generated $216,386 in gross fees during the first quarter of 2012, up from $165,838 for the comparative quarter of 2011. These services, newly introduced during the second quarter of 2010, provided asset management expertise for $114 million in assets as of March 31, 2012.

No securities were sold during the first quarter of 2012. Gains realized on the sale of securities during the first quarter of 2011 totaled $32,999. These sales were intended to reduce the price sensitivity of the investment portfolio in a period of rising rates.

Gains on sale of loans decreased $3,954 to $22,793 for the first quarter of 2012 compared to the same quarter of 2011.

Losses recorded on the other real estate owned during the first quarter of 2012 totaled $26,841, an improvement from a loss of $35,299 recorded during the first quarter of 2011. One property was sold for a gain during the first quarter of 2012. Direct write-downs in the value of OREO totaled $30,450 for two properties in the first quarter of 2012 and $0 for the comparative quarter of 2011.

Other income declined $8,301 to $1,911 for the first quarter of 2012 compared to the same quarter last year. The decline was principally due to the absence of rental income from leased office space located at one of the sold branch offices.

Noninterest expense. Noninterest expense decreased $272,201 to $1,772,941 for the first quarter of 2012 compared to $2,045,142 for the first quarter of 2011. Lower expenses were principally the result of the reduction in overhead associated with the branch offices sold during the fourth quarter of 2012. The significant changes are detailed below.

Salaries and benefits decreased $89,040 to $956,510 for the first quarter of . . .