Item 1. Description of Business.
Background
Ohio Legacy Corp (Ohio Legacy) is a bank holding company incorporated in July 1999 under the laws of the State of Ohio. Ohio Legacy has one wholly-owned subsidiary, Ohio Legacy Bank, N.A (Bank). Hereafter, unless otherwise noted, the “Company,” “us,” “we,” and “our” refer to Ohio Legacy, together with the Bank. Ohio Legacy was incorporated on October 2, 2000 and the bank opened for business on October 3, 2000.
On December 18, 2002, Ohio Legacy issued 1,000,000 common shares (2002 Offering) at a price of $8.50 per share in a public offering. Proceeds from the 2002 Offering were $7,555,755, net of offering costs of $944,245. In conjunction with the 2002 Offering, Ohio Legacy listed its common shares on the NASDAQ SmallCap Market under the ticker “OLCB.” In December 2002, Ohio Legacy contributed $4,080,000 of the proceeds of the 2002 Offering to the Bank as a capital contribution to provide additional lending capacity for the Bank. On January 17, 2003, an additional 150,000 common shares were issued at $8.50 per share to cover over-allotments in accordance with the terms of the 2002 Offering. Ohio Legacy contributed another $3,000,000 to the Bank as capital.
During the first quarter of 2002, Ohio Legacy created Ohio Legacy Trust I (Trust) for the sole purpose of issuing 8.25% trust preferred securities. The issuance of the trust preferred securities generated $3,325,000, of which $3,100,000 was infused by Ohio Legacy into the Bank as a capital contribution. Prior to December 31, 2003, the Trust was consolidated with the Company but is now reported separately as a result of the Company’s adoption of a newly issued accounting interpretation. Additional information on the accounting treatment for the Trust is detailed in Note 9 of the Ohio Legacy Corp Annual Report to Shareholders for the year ended December 31, 2005 (Annual Report), which is filed as Exhibit 13 to this Form 10-KSB.
Products and Services
The Company, through the Bank’s five offices, provides retail and commercial banking services to its customers, who are located primarily in Holmes, Stark and Wayne Counties in north east-central Ohio. These products include checking and savings accounts, cash management services, time deposits, safe deposit box facilities and courier services, commercial loans, real estate mortgage loans, installment and personal loans and night depository facilities to customers.
Commercial and Construction Lending Products
Commercial loans are primarily variable rate and include operating lines of credit and term loans made to ses based primarily on their ability to repay the loan from the cash flow of the related businesses. These loans typically are secured by business assets such as equipment or inventory. When the borrower is not an individual, the Bank generally obtains the personal guarantee of the business owner. As compared to retail lending, which includes residential real estate, personal installment loans and automobile loans, commercial lending entails significant additional risks. These loans typically involve larger loan balances and are generally dependent on the businesses’ cash flow and, thus, may be subject to adverse conditions in the general economy or in a specific industry. Management reviews the borrower’s cash flows when deciding whether or not to grant the credit. Management also evaluates if estimated future cash flows will be adequate to service principal and interest of the new obligation in addition to existing obligations. Additionally, the historical performance of the company the business principles and the industry are reviewed prior to the extension of credit. Commercial loans comprised 8% of the loan portfolio at December 31, 2005.
Commercial real estate loans are secured primarily by borrower-occupied business real estate or multifamily residential real estate, such as apartment buildings; and are dependent on the ability of the related business to generate adequate cash flow to service the debt. These loans primarily carry variable interest rates. Commercial real estate loans generally are originated with a loan-to-value ratio of 80% or less. Management performs much the same analysis when deciding whether to grant a commercial real estate loan as a commercial loan. Commercial real estate and multifamily real estate loans comprised 40.3% of the loan portfolio at December 31, 2005.
-2-
Construction loans are secured by residential and business real estate. The Bank’s construction lending program is established in a manner to minimize risk of this type of lending by not making a significant number of loans on speculative projects. While not required to do so contractually, the Bank may finance the permanent loan at the end of the construction phase. Construction loans also are generally made in amounts of 80% or less of the value of collateral. Construction loans comprised 7.3% of the loan portfolio at December 31, 2005.
Certain risks are involved in granting loans that primarily relate to the borrowers’ ability and willingness to repay the debt. Before the Bank extends a new loan to a customer, these risks are assessed through a review of the borrower’s past and current credit history, the collateral being used to secure the transaction in case the customer does not repay the debt, the borrower’s character and other factors. Once the decision has been made to extend credit, the Bank’s responsible credit officer monitors these factors throughout the life of the loan.
Retail Lending Products
Residential real estate loans, primarily fixed rate, and home equity lines of credit, primarily variable rate, are secured by the borrower’s residence. These loans are made based on the borrower’s ability to make repayment from employment and other income. Management assesses the borrower’s ability to repay the debt through review of credit history and ratings, verification of employment and other income, review of debt-to-income ratios and other measures of repayment ability. The Bank generally makes these loans in amounts of 90% or less of the value of collateral. An appraisal is obtained from a qualified real estate appraiser for substantially all loans secured by real estate.
Consumer installment loans to individuals include loans secured by automobiles and other consumer assets, including second mortgages on personal residences. Consumer loans for the purchase of new automobiles generally do not exceed 85% of the purchase price of the car. Loans for used cars generally do not exceed average wholesale or trade-in value as stipulated in a recent auto industry used car price guide. Overdraft protection loans are unsecured personal lines of credit to individuals of demonstrated good credit character with reasonably assured sources of income and satisfactory credit histories. Consumer loans generally involve more risk than residential mortgage loans because of the type and nature of collateral and, in certain types of consumer loans, the absence of collateral. Since these loans generally are repaid from ordinary income of an individual or family unit, repayment may be adversely affected by job loss, divorce, ill health or by general decline in economic conditions. The Bank assesses the borrower’s ability to make repayment through a review of credit history, credit ratings, debt-to-income ratios and other measures.
Residential real estate, consumer and home equity loans comprised 44.4% of the total loan portfolio at December 31, 2005.
Deposit Products
The Bank offers a broad range of deposit products, such as personal and business checking, savings and money market accounts, certificates of deposit, internet banking, cash management and direct-deposit services. Deposit accounts are tailored to each market area at rates competitive with those offered in Wayne, Stark and Holmes Counties in Ohio and conducive to the Bank’s asset-liability management goals. All deposit accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to the maximum amount permitted by law. The Bank solicits deposit accounts from individuals, businesses, associations, financial institutions and government entities. The Bank is not significantly affected by seasonal activity or large deposits of any individual depositor.
Employees
At December 31, 2005, the Bank employed 66 full-time equivalent employees. The Bank provides a number of benefits to its employees, such as health, disability and life insurance for all qualified employees. No employee is represented by a union or collective bargaining group. Management considers its employee relations to be good. Ohio Legacy has no employees who are not also employed by the Bank.
Competition
The Bank operates in a highly competitive industry. In its primary market areas of Stark, Wayne and Holmes Counties in Ohio, the Bank competes for new deposit accounts and loans with numerous other commercial banks, both large regional banks and smaller community banks, as well as savings and loan associations, credit unions, finance companies, insurance companies, brokerage firms and investment companies. The ability to generate earnings is impacted in part by interest rates offered on loans and deposits, and by changes in the rates on various securities which comprise the Bank’s investment portfolio. The Bank is competitive with respect to the interest rates and loan fees it charges, as well as in the variety of accounts and interest rates it offers to the depositor. The dominant pricing mechanisms on loans are the Prime interest rate as published in the Wall Street Journal and US Treasury Note rates with three-year or five-year maturities. The interest margin in excess of the applicable base rate depends on the overall account relationship and the creditworthiness of the borrower. Deposit rates are reviewed and set weekly by management. The Bank’s primary objective in setting deposit rates is to remain competitive in the market area while maintaining an adequate interest rate spread (the difference between the yield earned on interest-earning assets and the rates paid on deposits and borrowed funds) to meet overhead costs and provide a profitable return.
Supervision and Regulation
The Bank is subject to supervision, regulation and periodic examination by the Office of the Comptroller of the Currency (OCC) and Ohio Legacy is supervised by the Board of Governors of the Federal Reserve System (Federal Reserve Board). Earnings of the Company are affected by state and federal laws and regulations and by policies of various regulatory authorities. These policies include, for example, statutory maximum lending rates, requirements on maintenance of reserves against deposits, domestic monetary policies of the Federal Reserve Board, United States federal government fiscal policy, international currency regulations and monetary policies, certain restrictions on banks’ relationships with the securities business, capital adequacy requirements and liquidity restraints.
Regulation of Ohio Legacy
Bank Holding Company Act. As a bank holding company, Ohio Legacy is subject to regulation under the Bank Holding Company Act of 1956, as amended (BHCA). Under the BHCA, Ohio Legacy is subject to periodic examination by the Federal Reserve Board and is required to file periodic reports regarding its operations and any additional information that the Federal Reserve Board may require.
The BHCA generally limits the activities of a bank holding company to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries and engaging in any other activities that the Federal Reserve Board has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident to those activities. In addition, the BHCA requires every bank holding company to obtain the approval of the Federal Reserve Board prior to acquiring substantially all the assets of any bank, acquiring direct or indirect ownership or control of more than 5% of the voting shares of a bank or merging or consolidating with another bank holding company.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 contains requirements for public companies in the area of financial disclosure and corporate governance. In accordance with section 302(a) of the Sarbanes-Oxley Act, written certifications by the Company’s Chief Executive Officer and Chief Financial Officer are required. These certifications attest that the Company’s quarterly and annual reports filed with the Securities and Exchange Commission (SEC) do not contain any untrue statement of a material fact.
Gramm-Leach-Bliley Act. In November 1999, the Gramm-Leach-Bliley Act of 1999 (GLBA) went into effect making substantial revisions to statutory restrictions separating banking activities from other financial activities. Under the GLBA, bank holding companies that are well-capitalized, well-managed and have at least a satisfactory Community Reinvestment Act rating (see below) can elect to become “financial holding companies.” Financial holding companies and their subsidiaries may engage in or acquire companies that engage in a broad range of financial services that were not permitted previously, such as insurance underwriting, securities underwriting and distribution, merchant banking and certain other financial activities as determined by the Federal Reserve Board. Ohio Legacy has not registered as a financial holding company.
The GLBA adopts a system of functional regulation under which the Federal Reserve Board is designated as the umbrella regulator for financial holding companies. However, financial holding company affiliates are regulated by functional regulators such as the FDIC, the SEC and state insurance regulators, depending on the nature of the business of the financial holding company’s affiliates.
The GLBA contains extensive provisions on a customer’s right to privacy of non-public personal information. Under these provisions, a financial institution must provide to its customers the institution’s policies and procedures regarding the handling of customers’ non-public personal information. Except in certain cases, an institution may not provide personal information to unaffiliated third parties unless the institution discloses that such information may be disclosed and the customer is given the opportunity to opt out of such disclosure. Ohio Legacy and the Bank are also subject to certain state laws that deal with the use and distribution of non-public personal information.
Capital Guidelines. The OCC and the Federal Reserve Board each have adopted risk-based and leverage capital guidelines to evaluate the adequacy of capital of national banks and bank holding companies. The guidelines involve a process of assigning various risk weights to different classes of assets, then evaluating the sum of the risk-weighted balance sheet structure against the capital base. Failure to meet capital guidelines could subject a banking institution to various penalties, including termination of FDIC deposit insurance. In addition, the OCC and the FDIC may take various corrective actions against any undercapitalized bank and any bank that fails to submit an acceptable capital restoration plan or fails to implement a plan accepted by the OCC or the FDIC. These powers include, but are not limited to, requiring the institution to be recapitalized, prohibiting asset growth, restricting interest rates paid, requiring prior approval of capital distributions by any bank holding company that controls the institution, requiring divestiture by the institution of its subsidiaries or by the holding company of the institution itself, requiring new election of directors, and requiring the dismissal of directors and officers. It is the intention of the Company to remain a “well capitalized” bank. The Bank had risk-based capital ratios above regulatory minimum requirements at December 31, 2005.
Regulation of the Bank
The Bank is also subject to federal regulation regarding such matters as reserves, limitations on the nature and amount of loans and investments, issuance or retirement of its securities, limitations on the payment of dividends and other aspects of banking operations.
The Bank is a member of the Federal Reserve System and, because it is a national bank, is regulated by the OCC. Accordingly, the Bank is subject to periodic examinations by the OCC. These examinations are designed primarily for the protection of the depositors of the Bank and not for its shareholder, Ohio Legacy, or for the shareholders of the Company.
Dividend Restrictions. The Bank is a legal entity separate and distinct from Ohio Legacy, though Ohio Legacy owns 100% of the Bank. Virtually all of Ohio Legacy’s revenues will result from dividends paid by the Bank. The Bank is subject to laws and regulations that limit the amount of dividends it can pay. Under OCC regulations, a national bank, such as Ohio Legacy Bank, may not declare a dividend in excess of its undivided profits, which means that the Bank must recover any start-up losses before it may pay a dividend to Ohio Legacy. Additionally, the Bank may not declare a dividend if the total amount of all dividends declared by the Bank in any calendar year, including the proposed dividend, exceeds the total of the Bank’s retained net income of that year to date, combined with its retained net income of the two preceding years. However, such a dividend may be approved by the OCC in certain circumstances. The Bank may not declare or pay any dividend if, after making the dividend, the Bank would be “undercapitalized,” as defined in the federal regulations and described above under the heading “Capital Guidelines.”
Interstate Banking and Branching. The Interstate Banking and Branch Efficiency Act of 1995 has eased restrictions on interstate expansion and consolidation of banking operations by, among other things: (a) permitting interstate bank acquisitions regardless of host state laws, (b) permitting interstate merger of banks unless specific states have opted out of this provision and (c) permitting banks to establish new branches outside the state provided the law of the host state specifically allows interstate bank branching.
FDIC. The FDIC is an independent federal agency that insures the deposits of federally-insured banks and savings associations up to prescribed limits. The FDIC safeguards the safety and soundness of financial institutions through examinations of insured institutions. The Bank is subject to examination by the FDIC and the Bank’s deposits are assessed deposit insurance premiums by the Bank Insurance Fund of the FDIC. Under the FDIC’s deposit insurance assessment system, the assessment rate for any insured institution may vary according to regulatory capital levels of the institution and other factors such as supervisory evaluations.
The FDIC is authorized to prohibit any insured institution from engaging in any activity that poses a serious threat to the insurance fund and may initiate enforcement actions against banks. The FDIC may also terminate the deposit insurance of any institution that has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, order or condition imposed by the FDIC. If deposit insurance is terminated, the deposits at the institution at the time of termination, less subsequent withdrawals, will continue to be insured for a period from six months to two years, as determined by the FDIC. The Company is not aware of any existing circumstances that could result in termination of the Bank’s deposit insurance.
Community Reinvestment Act. The Community Reinvestment Act (CRA) requires depository institutions to assist in meeting the credit needs of their market areas, including low and moderate-income areas, consistent with safe and sound banking practice. Under the CRA, each institution is required to adopt a statement for each of its marketing areas describing the depository institution’s efforts to assist in its community’s credit needs. Depository institutions are examined periodically for compliance and are assigned ratings. Banking regulators consider these ratings when considering approval of a proposed transaction by an institution.
USA PATRIOT Act. Title III of the USA PATRIOT Act requires that financial institutions, including the Bank, help prevent, detect and prosecute international money laundering and the financing of terrorism. The Bank has augmented its systems and procedures to accomplish these goals. The Secretary of the Treasury has proposed additional regulations to further accomplish these goals that may result in significant additional compliance costs to the Company.
Effects of Government Monetary Policy
The earnings of the Company are affected by general and local economic conditions and by the policies of various governmental regulatory authorities. In particular, the Federal Reserve Bank Board regulates monetary policy, credit conditions and interest rates that may influence general economic conditions primarily through open market acquisitions or dispositions of United States Government securities, varying the discount rate on member bank borrowings and setting reserve requirements against member and nonmember bank deposits. The Federal Reserve Bank Board’s monetary policies have had a significant effect on the interest income and interest expense of commercial banks, including Ohio Legacy Bank, and are expected to continue to do so in the future.
Future Regulatory Uncertainty
Federal regulation of bank holding companies and financial institutions changes regularly and is the subject of constant legislative debate. For example, further regulations may arise from the events of September 11, 2001, such as the USA PATRIOT Act of 2001, which grants law enforcement officials greater powers over financial institutions to combat terrorism and money laundering. In addition, further regulations may be issued by the SEC pursuant to the Sarbanes-Oxley Act of 2002 that could impact the Company’s profitability. As a result of the continuous changes in legislation related to the financial services industry, the Company cannot forecast how federal regulation of financial institutions may change in the future or its impact on the Company’s operations and profitability.
Forward-Looking Statements. This annual report on Form 10-KSB includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (Exchange Act), as amended, which can be identified by the use of forward-looking terminology, such as may, might, could, would, believe, expect, intend, plan, seek, anticipate, estimate, project or continue or the negative thereof or comparable terminology. All statements other than statements of historical fact included in this annual report on Form 10-KSB regarding our outlook, financial position and results of operation, liquidity, capital resources and interest rate sensitivity are forward-looking statements. These forward-looking statements also include, but are not limited to:
• anticipated changes in industry conditions created by state and federal legislation and regulations;
• anticipated changes in general interest rates and the impact of future interest rate changes on our profitability, capital adequacy and the fair value of our financial assets and liabilities;
• retention of our existing customer base and our ability to attract new customers;
• the development of new products and services and their success in the marketplace;
• the adequacy of the allowance for loan losses; and,
• statements regarding our anticipated loan and deposit account growth, expense levels, liquidity and capital resources and projections of earnings.
These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results to be materially different from any future results expressed or implied by such forward-looking statements. Although we believe the expectations reflected in such forward-looking statements are reasonable, we can give no assurance such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from those in the forward-looking statements included herein include, but are not limited to:
• competition in the industry and markets in which we operate;
• changes in general interest rates;
• rapid changes in technology affecting the financial services industry;
• changes in government regulation; and
general economic and business conditions.
Statistical Disclosures
The following schedules present, for the periods indicated, certain financial and statistical information of the Company as required under the Securities and Exchange Commission’s Industry Guide 3, or a specific reference as to the location of required disclosures included as a part of this Form 10-KSB.
Industry Guide 3 — Item I. Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential
A. & B. Average Balance Sheets and Related Analysis of Net Interest Earnings
The following table sets forth information relating to the Company’s average balance sheet and reflects the average yield on interest-earning assets and the average cost of interest-bearing liabilities for the periods indicated. These yields and costs are derived by dividing income or expense by the average balances of interest-earning assets or interest-bearing liabilities for the periods presented.
More
Summary
Research Report
Description
Level 2 quotes
Charts
News
Profile
Balance Sheet
Income Statement
Cash Flow Statement
Insiders
SEC Filings
Analyst Recommendation
Earnings Report
Historical Prices
Recent Material Events
Key executives
Comments
Research Report
Description
Level 2 quotes
Charts
News
Profile
Balance Sheet
Income Statement
Cash Flow Statement
Insiders
SEC Filings
Analyst Recommendation
Earnings Report
Historical Prices
Recent Material Events
Key executives
Comments
Featured Videos
Newest articles
