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U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year ended December 31, 2003 Commission File Number: 0-50106 LEGENDS FINANCIAL HOLDINGS, INC. 
  Tennessee
    
    32-0008963(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)310 North First Street, Clarksville, Tennessee
    
    37040(Address of principal executive offices)
    
    (Zip Code)
 (931) 503-1234 
  Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $1.00 par value per share 
  Check whether the issuer (1) 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 [  ] Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB [X] The issuers revenues for the fiscal year ended December 31, 2003 were
$7,952,000. The aggregate market value of the issuers voting stock held by
non-affiliates, computed by reference to the price at which the stock was sold
as of December 31, 2003, is $21,464,370 for 1,192,465 shares, at an estimated
$18.00 per share. As of December 31, 2003, 1,381,749 shares of the issuers common stock
were outstanding.




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DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrants definitive proxy statement, which were filed
with the Securities and Exchange Commission on March 17, 2004, are incorporated
by reference into Part III of this annual report on Form 10-KSB.




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CROSS REFERENCE INDEX
TO
FORM 10-KSB Certain information required by Form 10-KSB is incorporated by reference
from the annual report to shareholders as indicated below. Only that
information expressly incorporated by reference is deemed filed with the
Commission. PART IITEM 1.
    
    DESCRIPTION OF BUSINESS
    
    *ITEM 2.
    
    DESCRIPTION OF PROPERTY
    
    *ITEM 3.
    
    LEGAL PROCEEDINGS
    
    *ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    NonePART IIITEM 5.
    
    MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
    
    *ITEM 6.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
    
    *ITEM 7.
    
    FINANCIAL STATEMENTS
    
    *ITEM 8.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    NoneITEM 8A.
    
    CONTROLS AND PROCEDURES
    
    *PART IIIITEM 9.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    **ITEM 10.
    
    EXECUTIVE COMPENSATION
    
    **ITEM 11.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    **ITEM 12.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    **ITEM 13.
    
    EXHIBITS AND REPORTS ON FORM 8-K
    
    *ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    **EX-31.1  SECTION 302 CEO CERTIFICATIONEX-31.2  SECTION 302 CFO CERTIFICATIONEX-32.1  SECTION 906 CEO CERTIFICATIONEX-32.2  SECTION 906 CFO CERTIFICATION
     *This information is included in this annual report on Form 10-KSB and is not
incorporated by reference from Legends Financials definitive proxy statement. ** The material required by Items 9 through 12 is incorporated by reference
from Legends Financials definitive proxy statement pursuant to Instruction
E(3) of Form 10-KSB. Legends Financial filed a definitive proxy statement with
the Securities and Exchange Commission on March 17, 2004.




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CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION This Annual Report on Form 10-KSB of Legends Financial Holdings, Inc., a
Tennessee corporation (Legends Financial or the Company), contains or
incorporates by reference certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
Securities Act), and Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act), which are intended to be covered by the safe
harbors created thereby. Those statements include, but may not be limited to,
the discussions of Legends Financials expectations concerning its future
profitability, operating performance, growth strategy and its assumptions
regarding other matters. Also, when any of the words believes, expects,
anticipates, intends, estimates, plans, or similar terms or
expressions, are used in this Annual Report on Form 10-KSB, forward-looking
statements are being made. You should be aware that, while Legends Financial believes the
expectations reflected in those forward-looking statements are reasonable, they
are inherently subject to risks and uncertainties which could cause Legends
Financials future results and stockholder values to differ materially from
Legends Financials expectations. These factors are disclosed in Managements
Discussion and Analysis of Financial Condition and Results of Operation set
forth herein. Because of these factors, there can be no assurance that the
forward-looking statements included or incorporated by reference herein will
prove to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included or incorporated by reference herein, you
should not regard the inclusion of such information as a representation by
Legends Financial or any other person that the objectives and plans of Legends
Financial will be achieved. In addition, Legends Financial does not intend to,
and is not obligated to, update these forward-looking statements after the date
of this Annual Report on Form 10-KSB, even if new information, future events or
other circumstances have made them incorrect or misleading as of any future
date. 
 PART I 
 ITEM 1. DESCRIPTION OF BUSINESS General Legends Financial is a corporation formed on February 27, 2002 under the
laws of the State of Tennessee for the purpose of acquiring Legends Bank, a
Tennessee banking corporation (Legends Bank), by means of a share exchange
and becoming a registered bank holding company under the Federal Reserve Act.
On April 16, 2002, the shareholders of Legends Bank approved a Plan of Share
Exchange (the Plan of Share Exchange) between Legends Financial and Legends
Bank whereby the common shares of Legends Bank were exchanged, on a one for one
basis, for common shares of Legends Financial. The exchange became effective on
July 1, 2002. Legends Bank is a banking corporation incorporated under the laws of
Tennessee in 1998. Legends Banks deposit accounts are insured under the
Federal Deposit Insurance Act (FDIA), up to the maximum applicable limits
thereof. Legends Bank has its main office at 310 North First Street,
Clarksville, Tennessee, and branch locations at 2250-O Wilma Rudolph Boulevard,
1950 Madison Street, 140 Dover Crossing Road, each in Clarksville, and 300
Donelson Parkway in Dover, Tennessee. Legends Bank considers its primary market for loans and deposits to be
individuals, small-to-medium size businesses, and professionals within Legends
Banks primary trade area. Legends Bank offers a full range of depository
products, including checking accounts; savings accounts; money market deposit
accounts; various types of time deposits; individual retirement accounts;
mobile branch services; 1




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lockbox services and safe deposit services. Legends Bank also offers its
customers loans for consumer, commercial, and real estate purposes, and credit
services. Legends Banks principal source of income is from interest earned on
personal, commercial and real estate loans of various types. Legends Bank has
correspondent banking relationships with a variety of banks, including certain
regional banks. Legends Bank is subject to the regulatory authority of the Tennessee
Department of Financial Institutions (TDFI) and the Federal Deposit Insurance
Corporation (FDIC). Legends Financial is regulated by the Board of Governors
of the Federal Reserve System (the Federal Reserve Board). During 2002, Legends Bank formed a wholly owned subsidiary, Legends
Financial Services, Inc. The subsidiary is affiliated with Linsco/Private
Ledger and offers customers a wide array of financial products. Through its
subsidiary, Legends Bank is able to offer annuities, stock, bonds, mutual funds
as well as other investment products. These investment products are not
federally insured and there is possibility of principal loss. Market Area Legends Banks primary service area encompasses Clarksville, Montgomery
County, Tennessee and the surrounding counties in Tennessee and Kentucky.
Clarksville is situated on the Tennessee-Kentucky border approximately 40 miles
northwest of Nashville, Tennessee. Clarksvilles population is over 100,000,
with the county totaling 135,000 people. Clarksville is home to Austin Peay
State University, which is part of the Tennessee Regents higher education
system with an enrollment of 7,000. A factor effecting Clarksvilles growth is
the proximity to Fort Campbell, Kentucky, home of the 101st Airborne Division
as well as other special forces outfits. There are over 23,000 soldiers and
40,000 family members that reside at Fort Campbell. Based on comparable data
available on a statewide and national level, the local economy appears to be in
better relative health than both Tennessee and the United States. The local
retail, real estate and construction sectors are all showing positive growth.
The data indicates the local economy is experiencing overall modest but stable
growth. Today, Clarksville is Tennessees fifth largest and third fastest
growth city. Employees As of December 31, 2003, Legends Bank had 53 full-time employees, of which
23 were Bank officers, and 5 people employed on a part-time basis. Legends
Banks employees are not represented by any union or other collective
bargaining agreement and Legends Bank believes its employee relations are
satisfactory. Investment Policy The objective of Legends Banks investment policy is to invest funds not
otherwise needed to meet the loan demand of its market area to earn the maximum
return for Legends Bank, yet still maintain sufficient liquidity to meet
fluctuations in Legends Banks loan demand and deposit structure. In doing so,
Legends Bank balances the market and credit risks against the potential
investment return, makes investments compatible with the pledge requirements of
Legends Banks deposits of public funds, maintains compliance with regulatory
investment requirements, and assists the various public entities with their
financing needs. Thomas Bates, Jr. and Lee Pedigo are authorized to execute
security transactions for the investment portfolio based on the decisions of
the investment committee. All the investment transactions occurring since the
previous board of directors meeting are reviewed by the board at its next
monthly meeting, and the entire portfolio is reviewed on a semi-annual basis.
The investment policy allows portfolio holdings to include short-term
securities purchased to provide Legends Banks needed liquidity and longer term
securities purchased to generate level income for Legends Bank over periods of
interest rate fluctuations. 2




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Loan Portfolio Legends Bank had a total of $105 million in loans at December 31, 2003. As
the loan portfolio is concentrated in Montgomery County, there is a risk that
the ability of borrowers to repay the loans could be affected by changes in
local economic conditions. The loan portfolio consists primarily of real
estate, commercial, farming and installment loans. Commercial loans consist of
real estate loans, term loans, or lines of credit. Maturity of term loans is
normally limited to three to five years. Conventional real estate loans may be
made up to 89% of the appraised value or purchase cost of the real estate, with
maturities generally 5 years or less and amortization not to exceed 30 years.
Installment loans are based on the earning capacity and vocational stability of
the borrower. Loan Policy All lending activities of Legends Bank are under the direct supervision
and control of Legends Banks credit approval committee and the credit review
committee. The credit approval and review committees enforce loan
authorizations for each officer, decide on loans exceeding such limits, service
all requests for officer credits to the extent allowable under current laws and
regulations, administer all problem credits, and determine the allocation of
funds for each lending division. The Executive Loan Committee approves loans over $750,000 while the Board
of Directors approves loans of $2,000,000 or more and reviews all new loans
made the preceding month. Loans which are 30 days or more past due are
reviewed monthly. Real Estate Loans. Commercial real estate loans are secured primarily by
office, industrial and retail properties located in Clarksville. Included in
this category are loans secured by farmland. These types of loans amounted to
$42.9 million or 41% of the total loan portfolio as of December 31, 2003.
Commercial real estate loans typically may be amortized up to 20 years, but
frequently have maturities at five years or less. Commercial real estate loans
are originated with a loan-to-value ratio generally not exceeding 75%.
Commercial real estate loans are generally larger and involve a greater degree
of risk than mortgage loans. Construction/Land development loans total $13.4 million or 13% of the
total portfolio on December 31, 2003. These loans are primarily used to fund
residential construction. Loans typically are set up for one to two years with
adjustable rates and are repaid with the sale of collateral. Construction loans
for residential construction are originated with a loan-to-value ratio
originally not exceeding 80%, and construction loans for non-residential
construction and land development are originated with a loan-to-value ratio
generally not exceeding 75%. The Clarksville area continues to prosper in the
residential home market. Residential real estate loans representing loans secured by 1-4 family
mortgages. These loans, as of December 31, 2003, including junior loans and
home equity lines, total $23.6 million or 22% of the total loan portfolio.
Single family residence loans are originated for terms up to 30-year
amortization. Advances are typically limited to the lessor of 80% of appraised
value or purchased price. While amortization schedules may be for 30 years,
interest rates on real estate loans are generally not set for a period longer
than three to five years. Residential real estate loans are originated with a
loan-to-value ratio generally not exceeding 89.9%. Commercial Business Loans. Commercial business loans are business loans
that are not secured by real estate and are dependent on business cash flows
for repayment. At December 31, 2003, commercial loans amounted to $20.2 million
or 19% of the total loan portfolio. Half of the outstanding commercial loans
are term loans, and half are commercial lines of credit. 3




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Consumer Loans. Consumer loans are made to provide a wide range of
financial services to customers and to create stronger ties to customers.
Consumer loans are typically five years or shorter and tend to carry higher
yields, helping maintain a profitable spread between average loan yields and
our cost of funds. Underwriting standards for consumer loans include assessment
of the applicants repayment ability. Consumer loan repayment are dependent on
the borrowers continuing financial stability and are likely to be adversely
affected by job loss, divorce and illness. As of December 31, 2003, consumer
loans amounted to $4.9 million or 5% of the total loan portfolio. Management of Legends Bank periodically reviews the loan portfolio,
particularly non-accrual and renegotiated loans. The review may result in a
determination that a loan should be placed on a non-accrual status for income
recognition. In addition, to the extent that management identifies potential
losses in the loan portfolio, it reduces the book value of such loans, through
charge-offs, to their estimated collectible value. Legends Banks policy is to
classify as non-accrual any loan on which payment of principal or interest is
90 days or more past due except where there is adequate collateral to cover
principal and accrued interest and the loan is in the process of collection.
Management defines in the process of collection as that point where the
customer has agreed to an accelerated repayment plan to bring the loan current,
which definition is in accordance with generally accepted accounting principles
(GAAP) but is not in accordance with definition as contained in Banking
Bulletin 91-19. No concessions are granted and late fees are collected. In
addition, a loan will be classified as non-accrual if, in the opinion of the
management, based upon a review of the borrowers or guarantors financial
condition, collateral value or other factors, payment is questionable, even
though payments are not 90 days or more past due. When a loan is classified as non-accrual, any unpaid interest is reversed
against current income. Interest is included in income thereafter only to the
extent received in cash. The loan remains in a non-accrual classification
until such time as the loan is brought current, when it may be returned to
accrual classification. When principal or interest on a non-accrual loan is
brought current, if in managements opinion future payments are questionable,
the loan would remain classified as non-accrual. After a non-accrual or
renegotiated loan is charged off, any subsequent payments of either interest or
principal are applied first to any remaining balance outstanding, then to
recoveries and lastly to income. The large number of consumer installment loans and the relatively small
dollar amount of each makes an individual review impracticable. It is Legends
Banks policy to charge off any consumer installment loan, which is past due
120 days or more. In addition, mortgage loans secured by real estate are placed on
non-accrual status when the mortgagor is in bankruptcy, or foreclosure
proceedings are instituted. Any accrued interest receivable remains an
obligation of the borrower. Legends Banks underwriting guidelines are applied to four major
categories of loans, commercial and industrial, consumer, agricultural and real
estate which includes residential, construction and development and certain
other real estate loans. Legends Bank requires its loan officers and loan
committee to consider the borrowers character, the borrowers industry and the
economic environment in which the loan will be repaid. Before approving a
loan, the loan officer or committee must determine that the borrower is
basically honest and creditworthy, determine that the borrower is a capable
manager, understand the specific purpose of the loans, understand the source
and plan of repayment, determine that the purpose, plan and source of repayment
as well as collateral are acceptable, reasonable and practical given the normal
framework within which the borrower operates. The accrual of interest income is discontinued when it is determined that
the collection of interest is less probable or the collection of any amount of
principal is doubtful. The decision to place a loan on a non-accrual status is
based on an evaluation of the borrowers financial condition, collateral
liquidation 4




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value, economic and business conditions and other factors that affect the
borrowers ability to pay. At the time a loan is placed on a non-accrual
status, the accrued but unpaid interest is also evaluated as to collectability.
If collectability is doubtful, the unpaid interest is charged off.
Thereafter, interest on non-accrual loans is recognized only as received.
Legends Bank had $305,000 loans on non-accrual status at December 31, 2003. At December 31, 2003, there were loans totaling $1,832,000, which were
included in Legends Banks internal classified loans list. Loans are listed as
classified when information obtained about possible credit problems of the
borrower has prompted management to question the ability of the borrower to
comply with the repayment terms of the loan agreement. The loan
classifications do not represent or result from trends or uncertainties which
management expects will be materially impacted by economic or other conditions. At December 31, 2003, there were no loan concentrations that exceeded ten
percent of total loans. Loan concentrations are amounts loaned to a multiple
number of borrowers engaged in similar activities which would cause them to be
similarly impacted by economic or other conditions. There were no material amounts of other interest-bearing assets
(interest-bearing deposits with other banks, municipal bonds, etc.) at December
31, 2003 which would be required to be disclosed as past due, non-accrual,
restructured or potential problem loans, if such interest-bearing assets were
loans. Credit Risk Management and Reserve for Loan Losses Credit risks and exposure to loss are inherent parts of Legends Banking
business. Management seeks to manage and minimize these risks through its loan
and investment policies and loan review procedures. Management establishes and
continually reviews lending and investment criteria and approval procedures
that it believes reflect the risk sensitive nature of Legends Bank. The loan
review procedures are set to monitor adherence to the established criteria and
to ensure that on a continuing basis such standards are endorsed and
maintained. The allowance for possible loan losses is an amount that management
believes will be adequate to absorb possible losses on existing loans that may
become uncollectible. The provision for possible loan losses charged to
operating expense is based on past loan loss experience and other factors,
which, in managements judgment, deserve current recognition in estimating
possible loan losses. Such other factors considered by management include
growth and composition of the loan portfolio, review of specific loan problems,
the relationship of the allowance for possible loan losses to outstanding
loans, adverse situations that may affect the borrowers ability to repay, the
estimated value of any underlying collateral and current economic conditions
that may affect the borrowers ability to pay. Management conducts a continuous review of all loans that are delinquent,
previously charged down or loans which are determined to be potentially
uncollectible. Loan classifications are reviewed periodically by a person
independent of the lending function. The Board of Directors periodically
reviews the adequacy of the allowance for possible loan loss. The loan portfolio is regularly reviewed and management determines the
amount of loans to be charged off. In addition, such factors as Legends Banks
previous loan loss experience, prevailing and anticipated economic conditions,
industry concentrations and the overall quality of the loan portfolio are
considered. While management uses available information to recognize losses on
loans and real estate owned, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the allowances for losses on loans and real estate owned. Such agencies may
require Legends Bank to recognize additions to the allowances based on their
judgments about information available at the time of 5




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their examination. In addition, any loan or portion thereof which is
classified as a loss by regulatory examiners is charged off. The reserve for loan losses is increased by provisions charged to
operating expense. The reserve is reduced by charging off loans or portions of
loans at the time that are deemed by management to be uncollectible and
increased when loans previously charged off are recovered. The resulting
reserve for loan losses is viewed by management as a single, unallocated
reserve available for all loans and, in managements opinion, is adequate to
provide for reasonably foreseeable potential loan losses. Rules and formulas
relative to the adequacy of the reserve, although useful as guidelines to
management, are not rigidly applied. The reserve for loan losses was $1.225
million at year-end 2003 or 1.2% of loans outstanding, net of unearned income. Competition Legends Bank encounters strong competition in making loans, acquiring
deposits and offering other services. Competition among financial institutions
is based upon interest rates offered on deposit accounts, interest rates
charged on loans, other credit and service charges relating to loans, the
quality and scope of the services rendered, the convenience of banking
facilities and, in the case of loans to commercial borrowers, relative lending
limits. Legends Bank competes with other commercial banks, savings and loan
associations, credit unions and finance companies, mutual funds, insurance
companies, brokerage and investment banking companies, and other financial
intermediaries. Many of these competitors, some of which are affiliated with
large bank holding companies, have substantially greater resources and lending
limits, and may offer certain services that Legends Bank does not currently
provide. In addition, many of Legends Banks non-bank competitors are not
subject to the same extensive federal regulations that govern bank holding
companies and federally insured banks. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(Riegle-Neal) authorized bank holding companies to acquire banks and other
bank holding companies without geographic limitations beginning September 30,
1995. The arrival of interstate banking has further increased the
competitiveness of Legends Banking industry. In addition, beginning June 1, 1997, Riegle-Neal authorized interstate
mergers and consolidations of existing banks, provided that neither banks home
state had opted out of interstate branching by May 31, 1997. Tennessee did not
opt out of interstate branching. Interstate branching provides that once a
bank has established branches in a state through an interstate merger, Legends
Bank may establish and acquire additional branches at any location in the state
where any bank involved in the interstate merger could have established or
acquired branches under applicable federal or state law. The continued deregulation of the financial services industry may have a
detrimental effect on Legends Banks long-term growth and profitability. Supervision and Regulation Legends Bank is regulated primarily by the TDFI and FDIC. Legends Bank is
also subject to various requirements and restrictions under federal and state
law, including requirements to maintain reserves against deposits, restrictions
on the types and amounts of loans that may be granted and the interest that may
be charged thereon and limitations on the types of investment securities that
may be purchased. Various consumer laws and regulations also affect the
operations of Legends Bank. In addition to the impact of regulation, commercial
banks are also affected significantly by the actions of the Federal Open Market
Committee (FOMC) of the Federal Reserve as a differentiating factor. The
FOMCs actions on interest rates significantly impacts the net interest margin
and interest rate risk management activities of Legends Bank. 6




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Legends Financial is regulated by the Federal Reserve Board under the Bank
Holding Company Act of 1956, which requires every bank holding company to
obtain the prior approval of the Federal Reserve Board before: 2001     acquiring more than 5% of the voting shares of any bank, or 2001     acquiring all or substantially all of the assets of a bank, and 2001     before merging or consolidating with another bank holding company. The Federal Reserve Board has maintained that a bank holding company must
serve as a source of financial strength to its subsidiary banks. In adhering to
the Federal Reserve Board policy, Legends Financial may be required to provide
financial support for a subsidiary bank, such as Legends Bank, at a time when,
in the absence of such Federal Reserve Board policy, Legends Financial may not
deem it advisable to provide such assistance. A bank holding company is generally prohibited from acquiring control of
any company which is not a bank and from engaging in any business other than
the business of banking or managing and controlling banks. However, there are
certain activities which have been identified by the Federal Reserve Board to
be so closely related to banking as to be a proper incident thereto and thus
permissible for bank holding companies. As a bank holding company, Legends Financial is required to file with the
Federal Reserve Board an annual report of its operations at the end of each
fiscal year and such additional information as the Federal Reserve Board may
require pursuant to Bank Holding Company Act. The Federal Reserve Board may
also make examinations of Legends Financial and each of its subsidiaries. From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial services providers. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and
other financial service providers are frequently made in Congress, before the
Tennessee legislature and the other various bank regulatory agencies. The
likelihood of these changes occurring and the effect they may have on Legends
Banks and Legends Financials operations are difficult to predict. Financial Modernization Legislation The Gramm-Leach-Bliley Act (GLBA) authorizes affiliations between
banking, securities and insurance firms and authorizes bank holding companies
and national banks to engage in a variety of new financial activities. Among
the new activities that are permitted to bank holding companies are securities
and insurance brokerage, securities underwriting, insurance underwriting and
merchant banking. The GLBA imposes new requirements on financial institutions
with respect to customer privacy. The GLBA generally prohibits disclosure of
customer information to non-affiliated third parties unless the customer has
been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies
to customers annually. The GLBA contains significant revisions to the FHLB System. In addition to
other provisions, the GLBA expands the permissible uses of FHLB advances by
community financial institutions (under $500 million in assets) to include
funding loans to small businesses, small farms and small agri-businesses. The
GLBA contains a variety of other provisions including a prohibition against ATM
surcharges unless the customer has first been provided notice of the imposition
and amount of the fee. Legends Bank does not anticipate a material impact on
its operation from this legislation at this time. 7




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State Regulation of Legends Bank Legends Bank, as a Tennessee state chartered bank, is subject to primary
supervision, periodic examination and regulation by the TDFI and the FDIC. If
as a result of an examination of a bank, the FDIC should determine the
financial condition, capital resources, asset quality, earnings prospects,
management, liquidity or other aspects of Legends Banks operations are
unsatisfactory or that Legends Bank or its management is violating or has
violated any law or regulation, various remedies are available to the FDIC.
Such remedies include the power to enjoin unsafe or unsound practices, to
require affirmative action to correct any conditions resulting from any
violation or practice, to issue an administrative order that can be judicially
enforced, to direct an increase in capital, to restrict the growth of Legends
Bank, to assess civil money penalties, to remove officers and directors and
ultimately to terminate a banks deposit insurance. The Commissioner of the
TDFI has many of the same remedial powers, including the power to take
possession of a bank whose capital becomes impaired. As of December 31, 2003,
Legends Bank is not the subject of any such action by the FDIC or the TDFI. The deposits of Legends Bank are insured by the FDIC in the manner and
extent provided by law. For this protection, Legends Bank pays a semi-annual
statutory assessment. Although Legends Bank is not currently a member of the
Federal Reserve System, it is subject to certain regulations of the Federal
Reserve Board. Various requirements and restrictions under the laws of the State of
Tennessee and the United States affect the operations of Legends Bank. State
and federal statutes and regulations relate to many aspects of Legends Banks
operations, including reserves against deposits, interest rates payable on
deposits, loans, investments, mergers and acquisitions, borrowings, dividends,
locations of branch offices and capital requirements. Further, Legends Bank is
required to maintain certain levels of capital. Capital Adequacy Under the Federal Reserve Boards risk-based capital guidelines applicable
to Legends Bank, the minimum ratio of capital to risk-weighted assets
(including certain off-balance sheet items, such as standby letters of credit)
is 8%. To be considered a well-capitalized bank under the guidelines, a bank
must have a total risk-based capital ratio in excess of 10%. Under these
guidelines, at least half of the total capital is to be comprised of common
equity, retained earnings and a limited amount of perpetual preferred stock,
after subtracting certain intangibles, and certain other adjustments (Tier 1
capital). The remainder may consist of perpetual debt, mandatory convertible
debt securities, a limited amount of subordinated debt, other preferred stock,
after subtracting certain intangibles, and certain amount of loan loss reserve
(Tier 2 capital). Banks are subject to similar capital requirements adopted
by the FDIC. In addition, the Federal Reserve Board, the FDIC and the Office
of the Comptroller of the Currency have adopted a minimum leverage ratio (Tier
1 capital to adjusted quarter average assets) of 4%. Generally, banking
organizations are expected to operate well above the minimum required capital
level of 4% unless they meet certain specified criteria, including that they
have the highest regulatory ratings. Most banking organizations are required
to maintain leverage ratio of 4% plus an additional cushion of at least 1% to
2%. The guidelines also provide that banking organizations experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels without
significant reliance upon intangible assets. Failure to meet capital
guidelines could subject a banking institution to a variety of enforcement
remedies available to federal regulatory authorities, including the termination
of deposit insurance by the FDIC, issuance of a capital directive, prohibition
on brokered deposits and certain other restrictions. On December 31, 2003, Legends Bank had a Tier 1 capital ratio of 12.5%, a
total risk-based capital ratio of 13.6% and a leverage ratio of 9.9%. 8




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##### Table of Contents



Payment of Dividends The payment of dividends by Legends Financial depends to a great extent on
the ability of Legends Bank to pay dividends to Legends Financial. Legends
Bank is subject to the Tennessee Banking Act, which provides that Legends Bank
may not declare dividends in any calendar year that exceeds the total of its
net income of that year combined with its retained net income of the preceding
two years without the approval of the TDFI. Thereafter, 10% of net profits
must be transferred to capital surplus prior to payment of dividends until
capital surplus equals capital stock. Legends Bank is also subject to the
minimum capital requirements of the FDIC which impact Legends Banks ability to
pay dividends. If Legends Bank fails to meet these standards, it may not be
able to pay dividends or to accept additional deposits because of regulatory
requirements. If, in the opinion of the applicable federal bank regulatory authority, a
depository institution is engaged in or is about to engage in an unsafe or
unsound practice (which, depending on the financial condition of the depository
institution, could include the payment of dividends), such authority may
require that such institution cease and desist from such practice. The federal
banking agencies have indicated that paying dividends that deplete a depository
institutions capital base to an inadequate level would be such an unsafe and
unsound banking practice. Moreover, the Federal Reserve Board, the Comptroller
of the Currency and the FDIC have issued policy statements which provide that
bank holding companies and insured depository institutions generally should
only pay dividends out of current earnings. The payment of dividends by Legends Financial may also be affected or
limited by other factors, such as the requirement of Legends Bank to maintain
adequate capital above regulatory guidelines. On April 15, 2003, Legends
Financials board of directors declared a $0.15 per share dividend on the
outstanding shares of its common stock. Management believes that the circumstances related to these loans is an
isolated occurrence and does not believe that this represents a trend or
pattern of poor lending performance or monitoring that would adversely affect
the consolidated financial statements. 
 ITEM 2. DESCRIPTION OF PROPERTY Legends Banks main banking office was completed and opened for full
operations in January 2000. This facility also serves as the principal office
of Legends Financial and of Legends Bank. The 14,000 square foot facility is
located at 310 North First Street in the central business district of
Clarksville. Legends Bank owns the property on which Legends Financials
principal office is located. Legends Bank currently operates five full service banking locations at 310
North First Street, 1950 Madison Street, 2250-O Wilma Rudolph Blvd. And 140
Dover Crossing Road in Clarksville, Tennessee and 300 Donelson Parkway in
Dover, Tennessee. Legends Bank leases the property for the offices located on
Madison Street and Wilma Rudolph Blvd. Legends Bank owns its mobile branch. 
 ITEM 3. LEGAL PROCEEDINGS From time to time Legends Bank is named as a defendant in suits arising
from the ordinary conduct of its affairs. In the opinion of management, the
ultimate outcome of the litigation to which Legends Bank is a party as of the
date of this Form 10-KSB will not adversely affect its financial condition. 9




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##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS No matter was submitted to a vote of security holders during the fourth
quarter of Legends Financials fiscal year ending December 31, 2003. 10




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##### Table of Contents



PART II 
 ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Market for Common Stock The common stock of Legends Financial is not traded through an organized
exchange nor is there a known active trading market. At December 31, 2003, the
number of shareholders of record was 1,009 and there was also outstanding
options to purchase 254,334 shares of common stock, 196,073 of which are
currently exercisable. The following table shows the quarterly range of high and low sale prices
for Legends Financials stock during the fiscal years 2003, 2002 and 2001. All
sale prices have been retroactively adjusted to reflect the effects of a
1-for-5 stock split in September 2002. These sale prices represent known
transactions and do not necessarily represent all trading transactions for the
periods. Year
    
    
    
    High
    
    Low2001:
    
    
    First Quarter
    
    $
    18.75
    
    
    $
    16.67Second Quarter
    
    $
    18.75
    
    
    $
    18.75Third Quarter
    
    $
    18.75
    
    
    $
    16.67Fourth Quarter
    
    $
    18.75
    
    
    $
    16.672002:
    
    
    First Quarter
    
    $
    18.75
    
    
    $
    15.00Second Quarter
    
    $
    18.75
    
    
    $
    15.83Third Quarter
    
    $
    17.50
    
    
    $
    15.83Fourth Quarter
    
    $
    18.33
    
    
    $
    17.002003:
    
    
    First Quarter
    
    $
    17.00
    
    
    $
    17.00Second Quarter
    
    $
    17.00
    
    
    $
    17.00Third Quarter
    
    $
    17.00
    
    
    $
    17.00Fourth Quarter
    
    $
    18.00
    
    
    $
    17.00
 Dividends The payment of dividends is subject to the discretion of Legends
Financials board of directors. Legends Financials ability to pay dividends is
dependent on cash dividends paid to it by Legends Bank. The ability of Legends
Bank to pay dividends to Legends Financial is restricted by applicable
regulatory requirements. For more information on these restrictions, please see
PART I, ITEM 1 DESCRIPTION OF BUSINESS  Payment of Dividends. On September
17, 2002, Legends Financials board of directors declared a stock-split
effected in the form of a dividend of one share of Legends Financials common
stock for every five of its shares issued and outstanding. On April 15, 2003,
Legends Financials board of directors declared a $0.15 per share dividend on
the outstanding shares. No assurances can be given that any dividend will be
declared or, if declared, what the amount of such dividend would be or whether
such dividends would continue in future periods. Securities Authorized for Issuance Under Equity Compensation Plans In December 1998, the board of directors of Legends Bank approved the
Legends Bank 1998 Stock Option Arrangement (the 1998 Arrangement). In April
2001, the board of directors of Legends Bank approved the 2001 Stock Option
Plan (the 2001 Plan). Legends Financials stockholders have 11




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##### Table of Contents



also approved Legends Bank 1998 Stock Option Arrangement and 2001 Stock
Option Plan. Legends Financial exchanged its options with the holders of
Legends Bank stock options under the 1998 Arrangement and the 2001 Plan on an
option-for-option basis. Thus, options that were outstanding under the 1998
Arrangement and the 2001 Plan have been exchanged for options under Legends
Financials Stock Option Plan. The following table reflects the number of shares to be issued upon the
exercise of options granted under the 1998 Arrangement and the 2001 Plan, the
weighted-average exercise price of all such options, and the total number of
shares of common stock reserved for issuance upon the exercise of authorized,
not-yet-granted options as of December 31, 2003: Weighted-average
    
    # of Equity Securities# of Securities to be Issued
    
    Exercise
    
    Remaining Available forUpon Exercise of
    
    Price of Outstanding
    
    Future Issuance UnderOutstanding Options,
    
    Options, Warrants, and
    
    Equity CompensationPlan Category
    
    Warrants and Rights
    
    Rights
    
    PlansEquity Compensation
Plans Approved by
Security Holders1998 Arrangement
    
    
    108,000
    
    
    $
    8.33
    
    
    
    02001 Plan
    
    
    215,998
    
    
    $
    18.75
    
    
    
    39,478Equity Compensation
Plans Not Approved
by Security Holders
    
    
    - - -
    
    
    
    - - -
    
    
    
    - - -TOTAL
    
    
    323,998
    
    
    $
    15.42
    
    
    
    39,478
 Recent Sales of Unregistered Securities Since April, 2002, when holders of stock of Legends Bank exchanged their
shares for common stock of Legends Financial, Legends Financial has not sold
any securities without registration under the Securities Act of 1933, except
for:  
    
    On March 1, 2004, Director Dwight Dickson exercised the option to
purchase 700 shares of common stock at an exercise price of $8.33 per
share. The Company relied on the exemption provided by Section 4(2) of
the Securities Act of 1933.  
    
    On March 1, 2004, Director Billy Atkins exercised the option to
purchase 2,500 shares of common stock at an exercise price of $8.33 per
share. The Company relied on the exemption provided by Section 4(2) of
the Securities Act of 1933.  
    
    On January 26, 2004, Director Ronnie Goad exercised the option to
purchase 1,220 shares of common stock at an exercise price of $8.33 per
share. The Company relied on the exemption provided by Section 4(2) of
the Securities Act of 1933. 12




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##### Table of Contents




    
    On December 29, 2003, Director Jimmy Terry exercised the option to
purchase 600 shares of common stock at an exercise price of $8.33 per
share. The Company relied on the exemption provided by Section 4(2) of
the Securities Act of 1933.  
    
    On July 24, 2003, Director Jimmy Terry exercised the option to
purchase 1,220 shares of common stock at an exercise price of $8.33 per
share. The Company relied on the exemption provided by Section 4(2) of
the Securities Act of 1933.  
    
    On October 18, 2002, Director Jim Amos exercised the option to
purchase 2880 shares of common stock at an exercise price of $8.33 per
share. The Company relied on the exemption provided by Section 4(2) of
the Securities Act of 1933.  
    
    On September 18, 2002, Director Pravin Patel exercised the option
to purchase 700 shares of common stock at an exercise price of $10.00
per share. The Company relied on the exemption provided by Section
4(2) of the Securities Act of 1933.  
    
    On September 5, 2002, Director Ronnie Goad exercised the option to
purchase 1,500 shares of common stock at an exercise price of $10.00
per share. The Company relied on the exemption provided by Section
4(2) of the Securities Act of 1933.  
    
    On August 2, 2002, Director Jimmy Terry exercised the option to
purchase 1,000 shares of common stock at an exercise price of $10.00
per share. The Company relied on the exemption provided by Section
4(2) of the Securities Act of 1933. 
 ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS General On February 27, 2002, the stockholders of Legends Bank (the Bank) voted to
exchange their stock for stock in Legends Financial Holdings, Inc. (Legends
Financial or the Company). Effective July 1, 2002, Legends Financial
Holdings, Inc. became a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended. The transaction has been treated as a
reorganization for accounting purposes. For comparative purposes all financial
information of the Bank prior to the reorganization has been presented or
included in the financial information of Legends Financial. Management
believes that the holding company structure will permit greater flexibility in
the expansion of Legends Financials present business and will allow Legends
Financial to be more responsive to its customers broadening and changing
financial needs. Legends Bank is a state chartered bank which began operations on November
12, 1998. Legends Financial offers a wide range of banking services, including
checking, savings, and money market deposit accounts, certificates of deposit,
individual retirement accounts and loans for consumer, commercial and real
estate purposes and investment products through its wholly-owned subsidiary,
Legends Financial Services, Inc. The area served by Legends Financial is
Montgomery County, Tennessee and surrounding counties of Middle Tennessee.
Services are provided at the main office, three branches in Clarksville,
Tennessee and a branch in Dover, Tennessee. Legends Financial serves as a
financial intermediary whereby its profitability is determined to a large
degree by the interest spread it achieves and the successful measurement of
risks. Legends Financials management believes that its market area offers an
environment for continued growth and Legends Financials target market is local
consumers, professionals and small businesses. 13




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##### Table of Contents



The following discussion and analysis is designed to assist readers in
their analysis of Legends Financials financial statements and should be read
in conjunction with such financial statements. Financial Condition Balance Sheet Summary:Legends Financials total assets were $150,035,000
and $114,534,000 at December 31, 2003 and 2002, respectively, an increase of
31.0%. Loans, net of allowance for possible loan losses, totaled $103,794,000
and $76,901,000 at December 31, 2003 and 2002, respectively, an increase of
35.0% and investment securities totaled $31,944,000 and $24,198,000,
respectively, an increase of 32.0%. The increase in loans and securities was
primarily funded by an increase in deposits and advances from the Federal Home
Loan Bank. Federal funds sold increased 160.8% to $3,195,000 as of December
31, 2003 from $1,225,000 as of December 31, 2002. Total liabilities were $135,895,000 and $100,687,000 at December 31, 2003
and 2002, respectively, an increase of 35.0%. Stockholders equity was
$14,140,000 and $13,847,000 at December 31, 2003 and 2002, respectively, an
increase of 2.1%. The increase in liabilities was primarily funded by an
increase in deposits of $34,845,000 or 36.7% from December 31, 2002 to December
31, 2003 and an increase in advances from the Federal Home Loan Bank of
$3,491,000 or 232.7% for the same period. A more detailed discussion of
assets, liabilities and capital follows. Loans Loan categories are as follows: DECEMBER 31,2003
    
    2002Amount
    
    Percentage
    
    Amount
    
    Percentage(In Thousands)
    
    
    
    
    
    (In Thousands)Commercial, financial and
agricultural
    
    $
    20,256
    
    
    
    19.3
    %
    
    $
    15,947
    
    
    
    20.5
    %Installment
    
    
    4,870
    
    
    
    4.6
    
    
    
    4,090
    
    
    
    5.3Real estate  mortgage
    
    
    66,500
    
    
    
    63.3
    
    
    
    43,022
    
    
    
    55.3Real estate  construction
    
    
    13,393
    
    
    
    12.8
    
    
    
    14,721
    
    
    
    18.9Total
    
    $
    105,019
    
    
    
    100.0
    %
    
    $
    77,780
    
    
    
    100.0
    %
 Loans are a large component of Legends Financials assets and are a
primary source of income. The loan portfolio is composed of four primary loan
categories: commercial, financial and agricultural; installment; real estate -
mortgage; and real estate  construction. The table above sets forth the loan
categories and the percentage of such loans in the portfolio at December 31,
2003 and 2002. As represented in the table, primary loan growth was in real estate
mortgage and commercial loans. Management is increasing loans in an orderly
fashion to maintain quality. Banking regulators define highly leveraged transactions to include
leveraged buy-outs, acquisition loans, and recapitalization loans of an
existing business. Under the regulatory definition, at December 31, 2003 and
2002, Legends Financial had no highly leveraged transactions, and there were no
foreign loans outstanding. In a continuing effort to grow market share in the Clarksville, Tennessee
market, management acquired certain assets and assumed certain liabilities of
NBC Banks Clarksville operations. The acquisition was accounted for as a
purchase summarized as follows: 14




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##### Table of Contents



(In Thousands)Loans (including overdrafts) purchased
    
    $
    1,243Deposits assumed
    
    
    (2,718
    )Accrued interest payable
    
    
    (6
    )Cash received from NBC
    
    
    1,328Goodwill
    
    
    153
 Legends Financial follows the provisions of Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment
of a Loan and SFAS No. 118, Accounting by Creditors for Impairment of a Loan
- Income Recognition and Disclosures. These pronouncements apply to impaired
loans except for large groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment including credit card, residential
mortgage, and consumer installment loans. A loan is impaired when it is probable that Legends Financial will be
unable to collect the scheduled payments of principal and interest due under
the contractual terms of the loan agreement. Impaired loans are measured at
the present value of expected future cash flows discounted at the loans
effective interest rate, at the loans observable market price, or the fair
value of the collateral if the loan is collateral dependent. If the measure of
the impaired loan is less than the recorded investment in the loan, Legends
Financial shall recognize an impairment by creating a valuation allowance with
a corresponding charge to the provision for loan losses or by adjusting an
existing valuation allowance for the impaired loan with a corresponding charge
or credit to the provision for loan losses. Legends Financials first mortgage single family residential and
installment loans which total approximately $23,589,000 and $14,598,000 and
$4,634,000 and $4,090,000, respectively at December 31, 2003 and 2002, are
divided into various groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment and thus are not subject to the
provisions of SFAS Nos. 114 and 118. Substantially all other loans of Legends
Financial are evaluated for impairment under the provisions of SFAS Nos. 114
and 118. Legends Financial considers all loans subject to the provisions of SFAS
Nos. 114 and 118 that are on nonaccrual status to be impaired. Loans are
placed on nonaccrual status when doubt as to timely collection of principal or
interest exists, or when principal or interest is past due 90 days or more
unless such loans are well-secured and in the process of collection. Delays or
shortfalls in loan payments are evaluated with various other factors to
determine if a loan is impaired. Generally, delinquencies under 90 days are
considered insignificant unless certain other factors are present which
indicate impairment is probable. The decision to place a loan on nonaccrual
status is also based on an evaluation of the borrowers financial condition,
collateral, liquidation value, and other factors that affect the borrowers
ability to pay. Generally, at the time a loan is placed on nonaccrual status, all interest
accrued on the loan in the current fiscal year is reversed from income, and all
interest accrued and uncollected from the prior year is charged off against the
allowance for loan losses. Thereafter, interest on nonaccrual loans is
recognized as interest income only to the extent that cash is received and
future collection of principal is not in doubt. If the collectibility of
outstanding principal is doubtful, such interest received is applied as a
reduction of principal. A nonaccrual loan may be restored to accruing status
when principal and interest are no longer past due and unpaid and future
collection of principal and interest on a timely basis is not in doubt. At
December 31, 2003 and 2002 the Bank had $305,000 and $268,000, respectively, of
loans on nonaccrual status. 15




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##### Table of Contents



Loans not on nonaccrual status are classified as impaired in certain cases
where there is inadequate protection by the current net worth and financial
capacity of the borrower or of the collateral pledged, if any. In those cases,
such loans have a well-defined weakness or weaknesses that jeopardize the
liquidation of the debt, and if such deficiencies are not corrected, there is a
probability that Legends Financial will sustain some loss. In such cases,
interest income continues to accrue as long as the loan does not meet Legends
Financials criteria for nonaccrual status. Generally Legends Financial also classifies as impaired any loans the
terms of which have been modified in a troubled debt restructuring. Interest
is accrued on such loans that continue to meet the modified terms of their loan
agreements. At December 31, 2003 and 2002, Legends Financial had no loans that
have had the terms modified in a troubled debt restructuring. Legends Financials charge-off policy for impaired loans is similar to its
charge-off policy for all loans in that loans are charged-off in the month when
they are considered uncollectible. As of December 31, 2003 Legends Financial had impaired loans totaling
$1,832,000. A specific reserve of $163,000 has been established by management
related to these loans. The total amount of interest recognized on impaired
loans was $105,000 in 2003. As of December 31, 2002 Legends Financial had
impaired loans totaling $2,013,000. A specific reserve of $244,000 has been
established by management related to these loans. The total amount of interest
recognized during 2002 on impaired loans was $143,000. The impaired loans are
generally commercial loans and have been classified as substandard by
managements internal grading system. The total value of the collateral
securing these loans is approximately $2,044,000 and $2,114,000 for December
31, 2003 and December 31, 2002, respectively. Non-performing loans, which include non-accrual loans and loans 90 days
past due, at December 31, 2003, totaled $305,000. There were $446,000 of
non-performing loans at December 31, 2002. 16




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##### Table of Contents



The following schedule details selected information as to non-performing
loans of the Bank at December 31, 2003 and 2002: 2003
    
    2002Past Due
    
    
    
    
    
    Past Due90 Days
    
    Non-Accrual
    
    90 Days
    
    Non-Accrual(In Thousands)
    
    (In Thousands)Real estate loans
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    61Consumer loans
    
    
    
    
    
    
    39
    
    
    
    
    
    
    
    130Commercial
    
    
    
    
    
    
    266
    
    
    
    178
    
    
    
    77$
    
    
    
    $
    305
    
    
    $
    178
    
    
    $
    268Renegotiated loans
    
    $
    
    
    
    
    
    
    
    $
    
 The allowance for possible loan losses is discussed under Provision for
Possible Loan Losses. Legends Financial maintains its allowance for possible
loan losses at an amount considered by management to be adequate to provide for
the possibility of loan losses in the loan portfolio. Management has in place
a system of quality controls to identify and monitor problem loans. Management
believes the allowance for possible loan losses at December 31, 2003 to be
adequate. Essentially all of Legends Financials loans originate from Montgomery and
adjacent Tennessee counties. Legends Financial seeks to exercise prudent risk
management in lending, including diversification by loan category and industry
segment, as well as by identification of credit risks. Legends Financials management believes there is a significant opportunity
to continue to increase the loan portfolio in Legends Financials primary
market area. Legends Financial has targeted commercial business lending,
commercial and residential real estate lending and consumer lending. Legends
Financial seeks to build a loan portfolio which is capable of adjusting to
swings in the interest rate market, and it is Legends Financials policy to
maintain a diverse loan portfolio not dependent on any particular market or
industrial segment. Management has set a goal for loans to approximate 80% of
deposits. Securities Securities increased 32.0% from $24,198,000 at December 31, 2002 to
$31,944,000 at December 31, 2003 and was a primary component of Legends
Financials earning assets. At December 31, 2003, the market value of Legends
Financials securities portfolio was less than its amortized cost by $315,000
or 1.0%. At December 31, 2002, the market value of Legends Financials
securities was greater than its amortized cost by $255,000 or 1.1%. The
weighted average yield (stated on a tax-equivalent basis, assuming a Federal
income tax rate of 34%) of the securities at December 31, 2003 was 5.24% as
compared to an average yield of 4.42% at December 31, 2002. Legends Financial has adopted the provisions of Statement of Financial
Accounting Standards No. 115 (SFAS No. 115), Accounting for Certain
Investments in Debt and Equity Securities. Under the provisions of the
Statement, securities are to be classified in three categories and accounted
for as follows:  
    
    Debt securities that the enterprise has the positive intent
and ability to hold to maturity are classified as held-to-maturity
securities and reported at amortized costs. 17




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##### Table of Contents




    
    Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings.  
    
    Debt and equity securities not classified as either
held-to-maturity securities or trading securities are classified as
available-for-sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and reported in a
separate component of stockholders equity. Legends Financials classification of securities as of December 31, 2003
and 2002 is as follows: Available-For-Sale2003
    
    2002Estimated
    
    
    
    
    
    EstimatedAmortized
    
    Market
    
    Amortized
    
    MarketCost
    
    Value
    
    Cost
    
    Value(In Thousands)U.S. Treasury and other U.S. Government
agencies and corporations
    
    $
    1,796
    
    
    $
    1,755
    
    
    $
    507
    
    
    $
    521Obligations of states and political
subdivisions
    
    
    8,237
    
    
    
    8,091
    
    
    
    974
    
    
    
    967Domestic corporate bonds
    
    
    3,250
    
    
    
    3,175
    
    
    
    3,250
    
    
    
    3,215Mortgage-backed securities
    
    
    18,976
    
    
    
    18,923
    
    
    
    19,212
    
    
    
    19,495$
    32,259
    
    
    $
    31,944
    
    
    $
    23,943
    
    
    $
    24,198
 No securities have been classified as trading or held-to-maturity
securities. Deposits Total deposits, which in the future are expected to be the principal
source of funds for Legends Financial, totaled $129,816,000 and $94,971,000 at
December 31, 2003 and 2002, respectively, representing an increase of
$34,845,000 or 36.7%. Demand deposits increased 66.7% from $16,524,000 at
December 31, 2002 to $27,552,000 at December 31, 2003. Negotiable order of
withdrawal, savings deposits and money market demand accounts increased
$9,004,000 or 22.2%. Certificates of deposit and individual retirement
accounts increased $14,813,000 or 39.1%. Legends Financial has targeted local
consumers, professionals, local governments and commercial businesses as its
central clientele; therefore, deposit instruments in the form of demand
deposits, savings accounts, money market demand accounts, certificates of
deposits and individual retirement accounts are offered to customers. Management believes the Montgomery County area is a growing economic
market offering growth opportunities for Legends Financial; however, Legends
Financial competes with several of the larger bank holding companies that have
branch offices in this area; and therefore, no assurances of market growth can
be given. Even though Legends Financial is in a very competitive market,
management currently believes that its market share will be expanded.
Management firmly believes that its position as a locally owned financial
institution that offers personalized service will contribute significantly to
quality loan and deposit growth and profitability. Liquidity and Asset Management Legends Financials management seeks to maximize net interest income by
managing Legends Financials assets and liabilities within appropriate
constraints on capital, liquidity and interest rate risk. 18




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##### Table of Contents



Liquidity is the ability to maintain sufficient cash levels necessary to
fund operations, meet the requirements of depositors and borrowers and fund
attractive investment opportunities. A company has liquidity potential when it
has the ability to obtain sufficient funds in a timely manner at a reasonable
cost. Legends Financials primary source of liquidity is expected to be a
stable core deposit base. In addition, short-term investments, loan payments,
investment security maturities and Federal Home Loan Bank advances provide a
secondary source. Legends Financials loan to deposit ratio was approximately
80.9% and 81.9% at December 31, 2003 and December 31, 2002, respectively. Legends Financials investment portfolio, as represented above, consists
of earning assets that provide interest income. Funds management decisions must reflect managements intent to maintain
profitability in both the immediate and long-term earnings. Legends
Financials rate sensitivity position has an important impact on earnings.
Senior management of Legends Financial meets monthly to analyze the rate
sensitivity position of Legends Financial. These meetings focus on the spread
between the subsidiary banks cost of funds and interest yields generated
primarily through loans and investments. Legends Financial presently maintains a liability sensitive position over
the 2004 year or a negative gap. Liability sensitivity means that more of
Legends Financial liabilities are capable of repricing over certain time
frames than assets. The interest rates associated with these liabilities may
not actually change over this period but are capable of changing. Interest-rate sensitivity gaps: 0-30
    
    31-90
    
    91-180
    
    181-365
    
    One Year and(In Thousands)
    
    Days
    
    Days
    
    Days
    
    Days
    
    Longer
    
    TotalInterest-earning assets
    
    $
    18,043
    
    
    
    33,242
    
    
    
    3,460
    
    
    
    9,297
    
    
    
    76,870
    
    
    
    140,912Interest-bearing liabilities
    
    
    62,121
    
    
    
    6,657
    
    
    
    11,043
    
    
    
    10,440
    
    
    
    17,645
    
    
    
    107,906Interest rate sensitivity
    
    $
    (44,078
    )
    
    
    26,585
    
    
    
    (7,583
    )
    
    
    (1,143
    )
    
    
    59,225
    
    
    
    33,006Cumulative gap
    
    $
    (44,078
    )
    
    
    (17,493
    )
    
    
    (25,076
    )
    
    
    (26,219
    )
    
    
    33,006Interest rate sensitivity
gap as a % of total
Assets
    
    
    (29.38
    )%
    
    
    17.72
    %
    
    
    (5.05
    )%
    
    
    (0.76
    )%
    
    
    39.47
    %Cumulative gap as a
% of total assets
    
    
    (29.38
    )%
    
    
    (11.66
    )%
    
    
    (16.71
    )%
    
    
    (17.48
    )%
    
    
    22.00
    %
 Historically, there has been no significant reduction in immediately
withdrawable accounts such as negotiable order of withdrawal, money market
demand, demand deposit and regular savings accounts. Management does not
anticipate that there will be significant withdrawals from these accounts in
the future. Legends Financial completed and opened its main office and first branch in
2000, a second branch was opened in 2002, and a third and fourth branch was
opened in 2003. Capital investments can be detrimental to a banks earnings
thus management evaluates the potential growth and profitability at making such
expenditures before proceeding. As previously discussed certain assets and
liabilities of an NBC Bank branch were acquired in 2003 but other than the ATM,
the branch location, which was inside a grocery store, was not maintained.
There are no known trends or any known commitments, demands, 19




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##### Table of Contents



events or uncertainties that will result in or that are reasonably likely
to result in Legends Financials liquidity changing in any material way. It is
anticipated that with present maturities, the anticipated growth in deposit
base, and the efforts of management in its asset/liability management program,
liquidity will not pose a problem in the foreseeable future. Capital Position and Dividends At December 31, 2003 and 2002, total stockholders equity was $14,140,000
and $13,847,000 or 9.4% and 12.1% of total assets. The increase in
stockholders equity results from net earnings of $829,000, a net decrease in
unrealized gains on available-for-sale securities of $353,000 and proceeds from
sales of common stock totaling $23,000 issued in connection with Legends
Financials stock option plan which was offset by a dividend paid of $206,000. Legends Financials principal regulators have established minimum
risk-based capital requirements and leverage capital requirements for Legends
Financial. These guidelines classify capital into two categories of Tier I and
Total risk-based capital. Total risk-based capital consists of Tier I (or
core) capital (essentially common equity less intangible assets) and Tier II
capital (essentially qualifying long-term debt, of which Legends Financial has
none, and a part of the allowance for possible loan losses). In determining
risk-based capital requirements, assets are assigned risk-weights of 0% to
100%, depending on regulatory assigned levels of credit risk associated with
such assets. The risk-based capital guidelines require Legends Financial to
have a total risk-based capital ratio of 8.0% and a Tier I risk-based capital
ratio of 4.0%. At December 31, 2003 and 2002, Legends Financials total
risk-based capital ratio was 13.6% and 16.6%, respectively, and its Tier I
risk-based capital ratio was 12.5% and 15.6%, respectively. At December 31,
2003 and 2002, Legends Financial had a leverage ratio of 9.9% and 12.1%,
respectively. It is managements objective to leverage Legends Financial to
approximately a 10% capital ratio. The emphasis will be on asset quality and
growth in core deposits both of which should be aided by the large stockholder
base and expansion into new markets. There is no established trading market for Legends Financials stock.
From time to time Legends Financial may acquire shares of its stock to provide
some liquidity in the shares. During the year ended December 31, 2003, Legends
Financial did not redeem any shares of its voting common stock and issued
2,666 shares at $8.33 per share in conjunction with its stock option plan. No
shares of Legends Financials common voting stock were redeemed for the year
ending December 31, 2002. Privately negotiated trades may involve Legends
Financial, its directors and officers and, accordingly, may not be reliable
indicators of value. On March 25, 2003, the Board of Directors recommended a dividend be
declared at the Annual Shareholders meeting on April 15, 2003. The
recommendation was to set the dividend rate for 2003 at 35% of 2002 earnings.
On May 15, 2003, the dividends were paid in the amount of $206,000 or $.15 per
share of voting common stock. Results of Operations Net earnings for the year ended December 31, 2003 were $829,000 and
increase of $235,000 or 39.6% from net earnings of $594,000 for the year ended
December 31, 2002. Net earnings for the year ended December 31, 2002 increased
by $95,000 or 19.0% from net earnings of $499,000 in 2001. The earnings in
2003, 2002 and 2001 are a result of net interest income increasing as a result
of Companys growth which offset the overhead costs required to facilitate
growth. Basic and diluted earnings per common shares were $0.60 and $0.59,
respectively in 2003, $0.43 in 2002 and $0.36 in 2001. 20




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##### Table of Contents



Net Interest Income Net interest income represents the amount by which interest earned on
various earning assets exceeds interest paid on deposits and other
interest-bearing liabilities and is the most significant component of Legends
Financials earnings. Total interest income was $6,954,000, $6,083,000 and
$5,843,000 for the years ended December 31, 2003, 2002 and 2001, respectively,
and total interest expense was $1,748,000, $2,035,000 and $2,784,000,
respectively. Net interest income for the same periods netted $5,206,000,
$4,048,000 and $3,059,000, respectively. Interest rates fell during 2003 but
are expected to remain relatively stable or increase slightly in 2004. The
continued growth in interest income and expense are a direct result of growth
in earning assets and deposits consistent with the growth of Legends Financial
and the opening of additional branches. The increases in interest income and
interest expense related to increases in volume in 2003 were offset by falling
interest rates. Management believes that a satisfactory level of loans and
deposits can be recorded in 2004 to maintain a stable net interest margin. Provision for Possible Loan Losses The provision for loan losses represents a charge to earnings necessary to
establish an allowance for possible loan losses that, in managements
evaluation, is adequate to provide coverage for estimated losses on outstanding
loans and to provide for uncertainties in the economy. The provision for loan
losses for the years ended December 31, 2003, 2002 and 2001 were $361,000,
$703,000 and $307,000, respectively. The allowance for possible loan losses
were $1,225,000 and $879,000 at December 31, 2003 and 2002, respectively. The
level of the allowance and the amount of the provision involve evaluation of
uncertainties and matters of judgment. Management believes the allowance for
possible loan losses at December 31, 2003 and 2002 to be adequate. The
allowance for loan losses was 1.17% and 1.13% of loans at December 31, 2003 and
2002, respectively. The increase in the provision for loan loss in 2002 is the result of the
charge off of two loans totaling $628,000. Management believes that the
circumstances related to these loans is an isolated occurrence and does not
believe that this represents a trend or pattern of poor lending performance or
monitoring that would adversely affect the consolidated financial statements. Non-Interest Income Legends Financials non-interest income consists of other fees and
commissions. Total non-interest income for the year ended 2003 was $998,000
and $757,000 for the year ended December 31, 2002, an increase of $241,000 or
31.8%. Included in the year ended December 31, 2002 non-interest income are
security gains of $140,000. Total non-interest income for 2001 was $593,000
and included security gains of $115,000. Management projects that other fees
and commissions and service charges on deposit accounts will increase in 2004
due to growth of Legends Financial. Non-Interest Expense Non-interest expenses consist primarily of employee costs, occupancy
expenses, furniture and equipment expenses, and other operating expenses.
Total non-interest expense for the year ended December 31, 2003 was $4,605,000
and was $3,557,000 for the year ended December 31, 2002, an increase of
$1,048,000 or 29.5%. Total non-interest expense for 2001 was $2,846,000. The
increases in non-interest expense from 2001 to 2002 primarily resulted from
increased occupancy expenses resulting from the opening of a new branch early
in 2002, expenses related to implementation of a lock box service and increases
in employment costs resulting from Company growth. The increases in 2003 were
primarily the result of increases in salaries and benefits due to the addition
of personnel to facilitate bank 21




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##### Table of Contents



growth, and an increase in other costs associated with opening new
branches and services such as armored car expenses. Monetary Policy Legends Financial is affected by commercial bank credit policies of
regulatory authorities, including the Board. An important function of the
Board is to regulate the national supply of bank credit in order to attempt to
combat recessionary and curb inflationary pressures. Among the instruments of
monetary policy used by the Board to implement these objectives are: open
market operations in U.S. government securities, changes in discount rates on
member borrowings, changes in reserve requirements against bank deposits and
limitations on interest rates which member banks may pay on time and savings
deposits. These means are used in varying combinations to influence overall
growth of bank loans, investments and deposits, and may also affect interest
rates charged on loans or paid on deposits. The monetary policies of the Board
have had a significant effect on the operating results of commercial banks,
including nonmembers as well as members, in the past and are expected to
continue to do so in the future. Impact of Inflation The primary impact which inflation has on the results of Legends
Financials operations is evidenced by its effects on interest rates. Interest
rates tend to reflect, in part, the financial markets expectations of the
level of inflation and, therefore, will generally rise or fall as the level of
expected inflation fluctuates. To the extent interest rates paid on deposits
and other sources of funds rise or fall at a faster rate than the interest
income earned on funds, loans or investments, net interest income will vary.
Inflation also impacts on non-interest expenses as goods and services are
purchased, although this has not had a significant effect on net earnings. If
the inflation rate stays flat or increases slightly, management believes that
the effect on earnings will not be significant. Impact of New Accounting Standards In June 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities (SFAS 149). SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under FASB Statement No.
133, Accounting for Derivative Instruments and Hedging Activities. Under SFAS
149 loan commitments that relate to the origination of mortgage loans that will
be held for sale, commonly referred to as interest rate lock commitments, must
be accounted for as derivatives by the issuer of the commitment. Commitments
to originate mortgage loans that will be held for investment purposes and
commitments to originate other types of loans are not considered derivatives.
The guidance applies to commitments entered into after June 30, 2003 and is not
expected to have any impact on Legends Financials financial position or
results of operations. In June 2003, the American Institute of Certified Public Accountants
issued an exposure draft on a Proposed Statement of Position (SOP) on Allowance
for Credit Losses. If approved the Proposed SOP would significantly change the
way the allowance for possible loan losses is calculated. Under the Proposed
SOP, any loans determined to be impaired, as defined in FASB Statement No. 114,
would be assigned a specific reserve based on facts and circumstances
surrounding the particular loan and no loss percentage would be assigned. If a
loan is determined not to be impaired, it would be assigned to a pool of
similar homogeneous loans. A loss percentage would then be assigned to the
pool based on historical charge-offs adjusted for internal or external factors
such as the economy, changes in underwriting standards, etc. Management has
not yet determined the impact this Proposed SOP would have on their
consolidated financial statements, but anticipates that it could result in a
significant reduction in the 22




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##### Table of Contents



allowance for loan loss. Under the Proposal, any changes resulting from
the initial application of this Proposed SOP would be treated as a change in
accounting estimate. Quantitative and Qualitative Disclosures About Market Risk Legends Financials primary component of market risk is interest rate
volatility. Fluctuations in interest rates will ultimately impact both the
level of income and expense recorded on a large portion of the Banks assets
and liabilities, and the market value of all interest-earning assets and
interest-bearing liabilities, other than those which possess a short term to
maturity. Based upon the nature of Legends Financials operations, Legends
Financial is not subject to foreign currency exchange or commodity price risk. Interest rate risk (sensitivity) management focuses on the earnings risk
associated with changing interest rates. Management seeks to maintain
profitability in both immediate and long term earnings through funds
management/interest rate risk management. Legends Financials rate sensitivity
position has an important impact on earnings. Senior management of Legends
Financial meets monthly to analyze the rate sensitivity position. These
meetings focus on the spread between the cost of funds and interest yields
generated primarily through loans and investments. 23




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##### Table of Contents



I.
    
    Distribution of Assets, Liabilities and Stockholders Equity:Interest Rate and Interest DifferentialThe Schedule which follows indicates the average balances for each major
balance sheet item, an analysis of net interest income and the change in
interest income and interest expense attributable to changes in volume
and changes in rates.The difference between interest income on interest-earning assets and
interest expense on interest-bearing liabilities is net interest income,
which is Legends Financials gross margin. Analysis of net interest
income is more meaningful when income from tax-exempt earning assets is
adjusted to a tax equivalent basis. Accordingly, the following schedule
includes a tax equivalent adjustment of tax-exempt earning assets,
assuming a weighted average Federal income tax rate of 34%.In the following Schedule change due to volume is the change in volume
multiplied by the interest rate for the prior year. Change due to rate
is the change in interest rate multiplied by the volume for the current
year. Changes in interest income and expense not due solely to volume or
rate changes are included in the change due to rate category.Non-accrual loans have been included in the loan category. Loan fees of
$318,000, $188,000 and $241,000 for 2003, 2002 and 2001, respectively,
are included in loan income and represent an adjustment of the yield on
these loans. 24




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##### Table of Contents



In Thousands, Except Interest Rates2003
    
    2002
    
    2003/2002 ChangeAverage
    
    Interest
    
    Income/
    
    Average
    
    Interest
    
    Income/
    
    Due to
    
    Due toBalance
    
    Rate
    
    Expense
    
    Balance
    
    Rate
    
    Expense
    
    Volume
    
    Rate
    
    TotalLoans, net of unearned interest
    
    $
    85,872
    
    
    
    6.76
    %
    
    
    5,803
    
    
    
    70,171
    
    
    
    7.05
    %
    
    
    4,925
    
    
    
    1,107
    
    
    
    (229
    )
    
    
    878Investment
securities - taxable
    
    
    25,829
    
    
    
    3.51
    
    
    
    907
    
    
    
    22,358
    
    
    
    4.85
    
    
    
    1,084
    
    
    
    168
    
    
    
    (345
    )
    
    
    (177
    )Investment securities -
tax-exempt
    
    
    5,572
    
    
    
    3.66
    
    
    
    204
    
    
    
    632
    
    
    
    2.69
    
    
    
    17
    
    
    
    133
    
    
    
    54
    
    
    
    187Taxable equivalent adjustment
    
    
    
    
    
    
    1.89
    
    
    
    105
    
    
    
    
    
    
    
    1.39
    
    
    
    9
    
    
    
    
    
    
    
    96
    
    
    
    96Total tax-exempt
investment securities
    
    
    5,572
    
    
    
    5.55
    
    
    
    309
    
    
    
    632
    
    
    
    4.08
    
    
    
    26
    
    
    
    201
    
    
    
    82
    
    
    
    283Loans held for sale
    
    
    288
    
    
    
    5.21
    
    
    
    15
    
    
    
    400
    
    
    
    5.25
    
    
    
    21
    
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )Federal funds sold
    
    
    2,316
    
    
    
    1.08
    
    
    
    25
    
    
    
    2,290
    
    
    
    1.57
    
    
    
    36
    
    
    
    
    
    
    
    (11
    )
    
    
    (11
    )Total earning assets
    
    
    119,877
    
    
    
    5.89
    %
    
    
    7,059
    
    
    
    95,851
    
    
    
    6.36
    %
    
    
    6,092
    
    
    
    1,528
    
    
    
    (561
    )
    
    
    967Cash and due from banks
    
    
    5,043
    
    
    
    
    
    
    
    
    
    
    
    3,859Allowance for possible loan
losses
    
    
    (1,019
    )
    
    
    
    
    
    
    
    
    
    
    (797
    )Bank premises and equipment
    
    
    4,602
    
    
    
    
    
    
    
    
    
    
    
    3,506Other assets
    
    
    2,083
    
    
    
    
    
    
    
    
    
    
    
    989Total assets
    
    $
    130,586
    
    
    
    
    
    
    
    
    
    
    
    103,408
 25




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##### Table of Contents



In Thousands, Except Interest Rates2003
    
    2002
    
    2003/2002 ChangeAverage
    
    Interest
    
    Income/
    
    Average
    
    Interest
    
    Income/
    
    Due to
    
    Due toBalance
    
    Rate
    
    Expense
    
    Balance
    
    Rate
    
    Expense
    
    Volume
    
    Rate
    
    TotalDeposits:Negotiable order of
withdrawal accounts
    
    $
    28,982
    
    
    
    1.05
    %
    
    
    304
    
    
    
    19,033
    
    
    
    1.43
    %
    
    
    273
    
    
    
    142
    
    
    
    (111
    )
    
    
    31Money market demand
accounts
    
    
    20,663
    
    
    
    1.12
    
    
    
    231
    
    
    
    15,938
    
    
    
    1.81
    
    
    
    288
    
    
    
    86
    
    
    
    (143
    )
    
    
    (57
    )Individual retirement accounts
    
    
    1,977
    
    
    
    3.14
    
    
    
    62
    
    
    
    1,387
    
    
    
    4.18
    
    
    
    58
    
    
    
    25
    
    
    
    (21
    )
    
    
    4Other savings deposits
    
    
    2,220
    
    
    
    0.90
    
    
    
    20
    
    
    
    1,340
    
    
    
    1.49
    
    
    
    20
    
    
    
    13
    
    
    
    (13
    )
    
    
    Certificates of deposit,
$100,000 and over
    
    
    26,324
    
    
    
    2.49
    
    
    
    655
    
    
    
    21,823
    
    
    
    3.40
    
    
    
    742
    
    
    
    153
    
    
    
    (240
    )
    
    
    (87
    )Certificates of deposit
under $100,000
    
    
    14,367
    
    
    
    2.71
    
    
    
    390
    
    
    
    14,215
    
    
    
    3.93
    
    
    
    559
    
    
    
    6
    
    
    
    (175
    )
    
    
    (169
    )Total interest-bearing
deposits
    
    
    94,533
    
    
    
    1.76
    
    
    
    1,662
    
    
    
    73,736
    
    
    
    2.63
    
    
    
    1,940
    
    
    
    547
    
    
    
    (825
    )
    
    
    (278
    )Demand
    
    
    15,438
    
    
    
    
    
    
    
    
    
    
    
    11,455
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total deposits
    
    
    109,971
    
    
    
    1.51
    
    
    
    1,662
    
    
    
    85,191
    
    
    
    2.28
    
    
    
    1,940
    
    
    
    565
    
    
    
    (843
    )
    
    
    (278
    )Federal funds purchased
    
    
    1,022
    
    
    
    1.57
    
    
    
    16
    
    
    
    465
    
    
    
    2.58
    
    
    
    12
    
    
    
    14
    
    
    
    (10
    )
    
    
    4Securities sold under
repurchase agreements
    
    
    1,444
    
    
    
    0.90
    
    
    
    13
    
    
    
    684
    
    
    
    1.17
    
    
    
    8
    
    
    
    9
    
    
    
    (4
    )
    
    
    5Advances from Federal Home
Loan Bank
    
    
    3,751
    
    
    
    1.52
    
    
    
    57
    
    
    
    3,138
    
    
    
    2.39
    
    
    
    75
    
    
    
    15
    
    
    
    (33
    )
    
    
    (18
    )Total deposits and
borrowed funds
    
    
    116,188
    
    
    
    1.50
    
    
    
    1,748
    
    
    
    89,478
    
    
    
    2.27
    
    
    
    2,035
    
    
    
    606
    
    
    
    (893
    )
    
    
    (287
    )Other liabilities
    
    
    503
    
    
    
    
    
    
    
    
    
    
    
    605
    
    
    
    
    
    
    
    Stockholders equity
    
    
    13,895
    
    
    
    
    
    
    
    
    
    
    
    13,325
    
    
    
    
    
    
    
    Total liabilities and
stockholders equity
    
    $
    130,586
    
    
    
    
    
    
    
    1,748
    
    
    
    103,408
    
    
    
    
    
    
    
    2,035Net interest income
    
    
    
    
    
    
    
    
    
    
    5,311
    
    
    
    
    
    
    
    
    
    
    
    4,057Net yield on earning assets
    
    
    
    
    
    
    4.43
    %
    
    
    
    
    
    
    
    
    
    
    4.23
    %Net interest spread
    
    
    
    
    
    
    4.39
    %
    
    
    
    
    
    
    
    
    
    
    4.09
    %
 26




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##### Table of Contents



In Thousands, Except Interest Rates2002
    
    2001
    
    2002/2001 ChangeAverage
    
    Interest
    
    Income/
    
    Average
    
    Interest
    
    Income/
    
    Due to
    
    Due toBalance
    
    Rate
    
    Expense
    
    Balance
    
    Rate
    
    Expense
    
    Volume
    
    Rate
    
    TotalLoans, net of unearned interest
    
    $
    70,171
    
    
    
    7.05
    %
    
    
    4,925
    
    
    
    51,983
    
    
    
    8.59
    %
    
    
    4,461
    
    
    
    1,562
    
    
    
    (1,098
    )
    
    
    464Investment
securities - taxable
    
    
    22,358
    
    
    
    4.85
    
    
    
    1,084
    
    
    
    20,659
    
    
    
    6.41
    
    
    
    1,324
    
    
    
    109
    
    
    
    (349
    )
    
    
    (240
    )Investment securities -
tax-exempt
    
    
    632
    
    
    
    2.69
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    17Taxable equivalent adjustment
    
    
    
    
    
    
    1.39
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9Total tax-exempt
investment securities
    
    
    632
    
    
    
    4.08
    
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    26Loans held for sale
    
    
    400
    
    
    
    5.25
    %
    
    
    21
    
    
    
    91
    
    
    
    6.59
    
    
    
    6
    
    
    
    20
    
    
    
    (5
    )
    
    
    15Federal funds sold
    
    
    2,290
    
    
    
    1.57
    
    
    
    36
    
    
    
    1,134
    
    
    
    4.59
    
    
    
    52
    
    
    
    53
    
    
    
    (69
    )
    
    
    (16
    )Total earning assets
    
    
    95,851
    
    
    
    6.36
    %
    
    
    6,092
    
    
    
    73,867
    
    
    
    7.92
    %
    
    
    5,843
    
    
    
    1,717
    
    
    
    (12,468
    )
    
    
    249Cash and due from banks
    
    
    3,859
    
    
    
    
    
    
    
    
    
    
    
    2,838Allowance for possible loan
losses
    
    
    (797
    )
    
    
    
    
    
    
    
    
    
    
    (657
    )Bank premises and equipment
    
    
    3,506
    
    
    
    
    
    
    
    
    
    
    
    3,409Other assets
    
    
    989
    
    
    
    
    
    
    
    
    
    
    
    721Total assets
    
    $
    103,408
    
    
    
    
    
    
    
    
    
    
    
    80,178
 27




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##### Table of Contents



In Thousands, Except Interest Rates2002
    
    2001
    
    2002/2001 ChangeAverage
    
    Interest
    
    Income/
    
    Average
    
    Interest
    
    Income/
    
    Due to
    
    Due toBalance
    
    Rate
    
    Expense
    
    Balance
    
    Rate
    
    Expense
    
    Volume
    
    Rate
    
    TotalDeposits:Negotiable order of
withdrawal accounts
    
    $
    19,033
    
    
    
    1.43
    %
    
    
    273
    
    
    
    9,918
    
    
    
    3.11
    %
    
    
    308
    
    
    
    283
    
    
    
    (318
    )
    
    
    (35
    )Money market demand
accounts
    
    
    15,938
    
    
    
    1.81
    
    
    
    288
    
    
    
    12,016
    
    
    
    3.35
    
    
    
    403
    
    
    
    131
    
    
    
    (246
    )
    
    
    (115
    )Individual retirement accounts
    
    
    1,387
    
    
    
    4.18
    
    
    
    58
    
    
    
    1,192
    
    
    
    5.87
    
    
    
    70
    
    
    
    11
    
    
    
    (23
    )
    
    
    (12
    )Other savings deposits
    
    
    1,340
    
    
    
    1.49
    
    
    
    20
    
    
    
    785
    
    
    
    2.04
    
    
    
    16
    
    
    
    11
    
    
    
    (7
    )
    
    
    4Certificates of deposit,
$100,000 and over
    
    
    21,823
    
    
    
    3.40
    
    
    
    742
    
    
    
    18,712
    
    
    
    5.67
    
    
    
    1,061
    
    
    
    176
    
    
    
    (495
    )
    
    
    (319
    )Certificates of deposit
under $100,000
    
    
    14,215
    
    
    
    3.93
    
    
    
    559
    
    
    
    13,649
    
    
    
    5.80
    
    
    
    792
    
    
    
    33
    
    
    
    (266
    )
    
    
    (233
    )Total interest-bearing
deposits
    
    
    73,736
    
    
    
    2.63
    
    
    
    1,940
    
    
    
    56,272
    
    
    
    4.71
    
    
    
    2,650
    
    
    
    822
    
    
    
    (1,532
    )
    
    
    (710
    )Demand
    
    
    11,455
    
    
    
    
    
    
    
    
    
    
    
    7,727
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total deposits
    
    
    85,191
    
    
    
    2.28
    
    
    
    1,940
    
    
    
    63,999
    
    
    
    4.14
    
    
    
    2,650
    
    
    
    878
    
    
    
    (1,588
    )
    
    
    (710
    )Federal funds purchased
    
    
    465
    
    
    
    2.58
    
    
    
    12
    
    
    
    357
    
    
    
    3.36
    
    
    
    12
    
    
    
    4
    
    
    
    (4
    )
    
    
    Securities sold under
repurchase agreements
    
    
    684
    
    
    
    1.17
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    8Advances from Federal Home
Loan Bank
    
    
    3,138
    
    
    
    2.39
    
    
    
    75
    
    
    
    2,451
    
    
    
    4.98
    
    
    
    122
    
    
    
    34
    
    
    
    (81
    )
    
    
    (47
    )Total deposits and
borrowed funds
    
    
    89,478
    
    
    
    2.27
    
    
    
    2,035
    
    
    
    66,807
    
    
    
    4.17
    
    
    
    2,784
    
    
    
    918
    
    
    
    (1,667
    )
    
    
    (749
    )Other liabilities
    
    
    605
    
    
    
    
    
    
    
    
    
    
    
    651
    
    
    
    
    
    
    
    Stockholders equity
    
    
    13,325
    
    
    
    
    
    
    
    
    
    
    
    12,720
    
    
    
    
    
    
    
    Total liabilities and
stockholders equity
    
    $
    103,408
    
    
    
    
    
    
    
    2,035
    
    
    
    80,178
    
    
    
    
    
    
    
    2,784Net interest income
    
    
    
    
    
    
    
    
    
    
    4,057
    
    
    
    
    
    
    
    
    
    
    
    3,059Net yield on earning assets
    
    
    
    
    
    
    4.23
    %
    
    
    
    
    
    
    
    
    
    
    4.15
    %Net interest spread
    
    
    
    
    
    
    4.09
    %
    
    
    
    
    
    
    
    
    
    
    3.75
    %
 28




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##### Table of Contents



II.
    
    Investment Portfolio:  A.
    
    Securities at December 31, 2003 consist of the following: Securities Available-For-Sale(In Thousands)Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    MarketCost
    
    Gains
    
    Losses
    
    ValueU.S. Treasury and other U.S.
Government agencies and
corporations
    
    $
    1,796
    
    
    
    
    
    
    
    41
    
    
    
    1,755Obligations of states and
political subdivisions
    
    
    8,237
    
    
    
    
    
    
    
    146
    
    
    
    8,091Domestic corporate bonds
    
    
    3,250
    
    
    
    
    
    
    
    75
    
    
    
    3,175Mortgage-backed securities
    
    
    18,976
    
    
    
    
    
    
    
    53
    
    
    
    18,923$
    32,259
    
    
    
    
    
    
    
    315
    
    
    
    31,944
  Securities at December 31, 2002 consist of the following: Securities Available-For-Sale(In Thousands)Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    MarketCost
    
    Gains
    
    Losses
    
    ValueU.S. Treasury and other U.S.
Government agencies and
corporations
    
    $
    507
    
    
    
    14
    
    
    
    
    
    
    
    521Obligations of states and
political subdivision
    
    
    974
    
    
    
    
    
    
    
    7
    
    
    
    967Domestic corporate bonds
    
    
    3,250
    
    
    
    
    
    
    
    35
    
    
    
    3,215Mortgage-backed securities
    
    
    19,212
    
    
    
    283
    
    
    
    
    
    
    
    19,495$
    23,943
    
    
    
    297
    
    
    
    42
    
    
    
    24,198
 29




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##### Table of Contents



II.
    
    Investment Portfolio, Continued:  B.
    
    The following schedule details the estimated maturities and
weighted average yields of investment securities of Legends
Financial at December 31, 2003. Estimated
    
    WeightedAmortized
    
    Market
    
    AverageAvailable-For-Sale Securities
    
    Cost
    
    Value
    
    Yields(In Thousands)Obligations of U.S. Treasury and other
U.S. Government agencies and
corporations:Less than one year
    
    $
    
    
    
    
    
    
    
    
    
    %One to five years
    
    
    
    
    
    
    
    
    
    
    Five to ten years
    
    
    504
    
    
    
    505
    
    
    
    4.873More than ten years
    
    
    1,292
    
    
    
    1,250
    
    
    
    4.100Total securities of U.S. Treasury
and other U.S. Government
agencies and corporations
    
    
    1,796
    
    
    
    1,755
    
    
    
    4.318Obligations of states and political
subdivisions (tax-exempt)*:Less than one year
    
    
    
    
    
    
    
    
    
    
    One to five years
    
    
    
    
    
    
    
    
    
    
    Five to ten years
    
    
    490
    
    
    
    495
    
    
    
    6.253More than ten years
    
    
    7,747
    
    
    
    7,596
    
    
    
    7.159Total obligations of states and
political subdivisions
    
    
    8,237
    
    
    
    8,091
    
    
    
    7.106Domestic corporate bonds:Less than one year
    
    
    
    
    
    
    
    
    
    
    One to five years
    
    
    
    
    
    
    
    
    
    
    Five to ten years
    
    
    
    
    
    
    
    
    
    
    More than ten years
    
    
    3,250
    
    
    
    3,175
    
    
    
    4.4823,250
    
    
    
    3,175
    
    
    
    4.482Other:Mortgage backed securities
    
    
    18,976
    
    
    
    18,923
    
    
    
    4.647Total investment securities
    
    $
    32,259
    
    
    
    31,944
    
    
    
    5.240
    %
  *
    
    Weighted average yield is stated on a tax-equivalent basis assuming a weighted average Federal
income tax rate of 34%. 30




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##### Table of Contents



III.
    
    Loan Portfolio:  A.
    
    Loan TypesThe following schedule details the loans of Legends Financial at
December 31, 2003 and 2002. In Thousands2003
    
    2002Commercial, financial and agricultural
    
    $
    20,256
    
    
    
    15,947Real estate - construction
    
    
    13,393
    
    
    
    14,721Real estate - mortgage
    
    
    66,500
    
    
    
    43,022Installment
    
    
    4,870
    
    
    
    4,090Total loans
    
    
    105,019
    
    
    
    77,780Less allowance for possible loan losses
    
    
    (1,225
    )
    
    
    (879
    )Net loans
    
    $
    103,794
    
    
    
    76,901
  B.
    
    Maturities and Sensitivities of Loans to Changes in Interest Rates The following schedule details maturities and sensitivity to
interest rate changes for commercial and real estate construction loans
of Legends Financial at December 31, 2003. (In Thousands)1 Year toLess Than
    
    Less Than
    
    After 51 Year
    
    5 Years
    
    Years
    
    TotalMaturity Distribution:Commercial, financial
and agricultural*
    
    $
    10,075
    
    
    
    8,312
    
    
    
    1,869
    
    
    
    20,256Real estate  construction
    
    
    10,219
    
    
    
    3,174
    
    
    
    
    
    
    
    13,393$
    20,294
    
    
    
    11,486
    
    
    
    1,869
    
    
    
    33,649Interest-Rate Sensitivity:Fixed interest rates
    
    $
    9,448
    
    
    
    11,486
    
    
    
    1,869
    
    
    
    22,803Floating or adjustable
interest rates
    
    
    10,846
    
    
    
    
    
    
    
    
    
    
    
    10,846Total commercial,
financial and
agricultural loans
plus real estate -
construction loans
    
    $
    20,294
    
    
    
    11,486
    
    
    
    1,869
    
    
    
    33,649
  *
    
    Includes demand loans, bankers acceptances, commercial paper and deposit
notes. 31




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##### Table of Contents



III.
    
    Loan Portfolio, Continued:  C.
    
    Risk Elements The following schedule details selected information as to
non-performing loans of Legends Financial at December 31, 2003 and 2002. In Thousandsexcept percentages2003
    
    2002Non accrual loans:Commercial, financial and agricultural
    
    $
    266
    
    
    
    77Real estate  construction
    
    
    
    
    
    
    61Real estate  mortgage
    
    
    
    
    
    
    Installment
    
    
    39
    
    
    
    130Lease financing receivable
    
    
    
    
    
    
    Total non-accrual
    
    $
    305
    
    
    
    268Loans 90 days past due:Commercial, financial and agricultural
    
    $
    
    
    
    
    178Real estate  construction
    
    
    
    
    
    
    Real estate  mortgage
    
    
    
    
    
    
    Installment
    
    
    
    
    
    
    Lease financing receivable
    
    
    
    
    
    
    Total loans 90 days past due
    
    $
    
    
    
    
    178Renegotiated loans:Commercial, financial and agricultural
    
    $
    
    
    
    
    Real estate  construction
    
    
    
    
    
    
    Real estate  mortgage
    
    
    
    
    
    
    Installment
    
    
    
    
    
    
    Lease financing receivable
    
    
    
    
    
    
    Total renegotiated loans past due
    
    $
    
    
    
    
    Loans
current - considered uncollectible
    
    $
    
    
    
    
    Total non-performing loans
    
    $
    305
    
    
    
    446Total loans, net of unearned interest
    
    $
    105,019
    
    
    
    77,780Percent of
total loans outstanding, net of unearned interest
    
    
    0.29
    %
    
    
    0.57
    %Other real estate
    
    $
    92
    
    
    
    
 32




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##### Table of Contents



III.
    
    Loan Portfolio, Continued:  C.
    
    Risk Elements, Continued The accrual of interest income is discontinued when it is determined
that collection of interest is less than probable or the collection of
any amount of principal is doubtful. The decision to place a loan on
non-accrual status is based on an evaluation of the borrowers financial
condition, collateral liquidation value, economic and business conditions
and other factors that affect the borrowers ability to pay. At the time
a loan is placed on a non-accrual status, the accrued but unpaid interest
is also evaluated as to collectibility. If collectibility is doubtful,
the unpaid interest is charged off. Thereafter, interest on non-accrual
loans is recognized only as received. Non-accrual loans totaled $305,000
at December 31, 2003 and $268,000 at December 31, 2002. At December 31, 2003 loans totaling $1,832,000 were included in
Legends Financials internal classified loan list. Of these loans
$1,537,000 are commercial and $298,000 are installment. The collateral
value related to these loans approximated $2,044,000 ($1,670,000 related
to commercial and $374,000 related to installment). At December 31, 2002
loans totaling $2,013,000 were included in Legends Financials internal
classified loan list. Of these loans $1,447,000 are commercial and
$566,000 are installment. The collateral value related to these loans
approximated $2,114,000 ($1,373,000 related to commercial and $741,000
related to installment). Loans are listed as classified when information
obtained about possible credit problems of the borrower has prompted
management to question the ability of the borrower to comply with the
repayment terms of the loan agreement. The loan classifications do not
represent or result from trends or uncertainties which management expects
will materially impact future operating results, liquidity or capital
resources. At December 31, 2003 and 2002 there were no loan concentrations that
exceeded ten percent of total loans other than as included in the
preceding table of types of loans. Loan concentrations are amounts
loaned to a multiple number of borrowers engaged in similar activities
which would cause them to be similarly impacted by economic or other
conditions. At December 31, 2003 other real estate totaled $92,000. There was
no other real estate at December 31, 2002. There were no material amounts of other interest-bearing assets
(interest-bearing deposits with other banks, municipal bonds, etc.) at
December 31, 2003 which would be required to be disclosed as past due,
non-accrual, restructured or potential problem loans, if such
interest-bearing assets were loans. 33




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##### Table of Contents



IV.
    
    Summary of Loan Loss Experience:The following schedule details selected information related to the
allowance for possible loan loss account of Legends Financial at
December 31, 2003 and 2002. In Thousands,Except Percentages2003
    
    2002Allowance for loan losses at beginning of year
    
    $
    879
    
    
    
    755Less net loan charge offs:Charge-offs:Commercial, financial and agricultural
    
    
    (30
    )
    
    
    (555
    )Real estate construction
    
    
    
    
    
    
    Real estate  mortgage
    
    
    
    
    
    
    Installment
    
    
    (19
    )
    
    
    (73
    )Lease financing
    
    
    
    
    
    
    (49
    )
    
    
    (628
    )Recoveries:Commercial, financial and agricultural
    
    
    
    
    
    
    45Real estate construction
    
    
    
    
    
    
    Real estate  mortgage
    
    
    
    
    
    
    Installment
    
    
    5
    
    
    
    4Lease financing
    
    
    29
    
    
    
    34
    
    
    
    49Net loan charge offs
    
    
    (15
    )
    
    
    (579
    )Provision for loan losses charged to expense
    
    
    361
    
    
    
    703Allowance for loan losses at end of year
    
    $
    1,225
    
    
    
    879Total loans at end of year
    
    $
    105,019
    
    
    
    77,780Average total loans outstanding during year
    
    $
    86,160
    
    
    
    70,171Net charge-offs as a percentage of average total loans
outstanding during year
    
    
    .02
    %
    
    
    .83Ending allowance for loan losses as a percentage of
total loans outstanding at end of year
    
    
    1.17
    %
    
    
    1.13
 34




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##### Table of Contents



IV.
    
    Summary of Loan Loss Experience, Continued:The following detail provides a breakdown of the allocation of the
allowance for possible loan losses: December 31, 2003
    
    December 31, 2002Percent of
    
    
    
    
    
    Percent ofLoans in
    
    
    
    
    
    Loans inEach
    
    
    
    
    
    EachCategory
    
    
    
    
    
    Categoryto Total
    
    
    
    
    
    to TotalIn Thousands
    
    Loans
    
    In Thousands
    
    LoansCommercial, financial and
agricultural
    
    $
    475
    
    
    
    19.3
    %
    
    $
    220
    
    
    
    20.5
    %Real estate  construction
    
    
    117
    
    
    
    12.8
    
    
    
    102
    
    
    
    18.9Real estate  mortgage
    
    
    567
    
    
    
    63.3
    
    
    
    516
    
    
    
    55.3Installment
    
    
    66
    
    
    
    4.6
    
    
    
    41
    
    
    
    5.3$
    1,225
    
    
    
    100.0
    %
    
    $
    879
    
    
    
    100.0
    %
  The allowance for possible loan losses is an amount that management
believes will be adequate to absorb possible losses on existing loans
that may become uncollectible. The provision for possible loan losses
charged to operating expense is based on past loan loss experience and
other factors which, in managements judgment, deserve current
recognition in estimating possible loan losses. Such other factors
considered by management include growth and composition of the loan
portfolio, review of specific loan problems, the relationship of the
allowance for possible loan losses to outstanding loans, adverse
situations that may affect the borrowers ability to repay, the estimated
value of any underlying collateral and current economic conditions that
may affect the borrowers ability to pay.Management conducts a continuous review of all loans that are delinquent,
previously charged down or loans which are determined to be potentially
uncollectible. Loan classifications are reviewed periodically by a
person independent of the lending function. The Board of Directors
periodically reviews the adequacy of the allowance for possible loan
losses.Legends Financial maintains its allowance for possible loan losses at an
amount considered by management to be adequate to provide for the
possibility of loan losses in the loan portfolio. 35




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##### Table of Contents



V.
    
    Deposits:The average amounts and average interest rates for deposits for 2003 and
2002 are detailed in the following schedule: 2003
    
    2002Average
    
    
    
    
    
    AverageBalance
    
    Average
    
    Balance
    
    AverageIn Thousands
    
    Rate
    
    In Thousands
    
    RateNon-interest bearing deposits
    
    $
    15,438
    
    
    
    
    %
    
    $
    11,455
    
    
    
    
    %Negotiable order of withdrawal
accounts
    
    
    28,982
    
    
    
    1.05
    %
    
    
    19,033
    
    
    
    1.43
    %Money market demand accounts
    
    
    20,663
    
    
    
    1.12
    %
    
    
    15,938
    
    
    
    1.81
    %Individual retirement accounts
    
    
    1,977
    
    
    
    3.14
    %
    
    
    1,387
    
    
    
    4.18
    %Other savings
    
    
    2,220
    
    
    
    0.90
    %
    
    
    1,340
    
    
    
    1.49
    %Certificates of deposit
$100,000
and over
    
    
    26,324
    
    
    
    2.49
    %
    
    
    21,823
    
    
    
    3.40
    %Certificates of deposit under
$100,000
    
    
    14,367
    
    
    
    2.71
    %
    
    
    14,215
    
    
    
    3.93
    %$
    109,971
    
    
    
    1.51
    %
    
    $
    85,191
    
    
    
    2.28
    %
  The following schedule details the maturities of certificates of deposit
and individual retirement accounts of $100,000 and over at December 31,
2003. In ThousandsCertificates
    
    Individualof
    
    RetirementDeposit
    
    Accounts
    
    TotalLess than three months
    
    $
    11,665
    
    
    
    110
    
    
    
    11,775Three to six months
    
    
    6,002
    
    
    
    219
    
    
    
    6,221Six to twelve months
    
    
    4,766
    
    
    
    200
    
    
    
    4,966More than twelve months
    
    
    11,523
    
    
    
    344
    
    
    
    11,867$
    33,956
    
    
    
    873
    
    
    
    34,829
 36




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##### Table of Contents



VI.
    
    Return on Equity and Assets:The following schedule details selected key ratios of Legends
Financial at December 31, 2003 and 2002. 2003
    
    2002Return on assets 
(Net income divided by average total assets)
    
    
    0.6
    %
    
    
    0.57
    %Return on equity
(Net income divided by average equity)
    
    
    5.97
    %
    
    
    4.46
    %Dividend payout ratio 
(Dividends declared per share divided by net earnings per share)
    
    
    25.00
    %
    
    
    0.00
    %Equity to asset ratio 
(Average equity divided by average total assets)
    
    
    10.64
    %
    
    
    12.88
    %Leverage capital ratio 
(Equity divided by fourth quarter average total
assets, excluding the net unrealized gain on
available-for-sale securities)
    
    
    9.94
    %
    
    
    12.10
    %
  The minimum leverage capital ratio required by the regulatory agencies is
4%.Beginning January 1, 1991, new risk-based capital guidelines were adopted
by regulatory agencies. Under these guidelines, a credit risk is
assigned to various categories of assets and commitments ranging from 0%
to 100% based on the risk associated with the asset. 37




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##### Table of Contents



VI.
    
    Return on Equity and Assets, Continued:  The following schedule details Legends Financials risk-based capital at
December 31, 2003 excluding the net unrealized gain on available-for-sale
securities which is shown as an increase in stockholders equity in the
consolidated financial statements: In Thousandsexceptpercentages2003Tier I capital:Stockholders equity, excluding the net unrealized gain/
loss on available-for-sale securities
    
    $
    14,335Total capital:Allowable allowance for loan losses (limited to 1.25%
of risk-weighted assets)
    
    
    1,225Total capital
    
    $
    15,560Risk-weighted assets
    
    $
    114,581Risk-based capital ratios:Tier I capital ratio
    
    
    12.51
    %Total risk-based capital ratio
    
    
    13.58
    %
  Legends Financial is required to maintain a Total capital to
risk-weighted asset ratio of 8% and a Tier I capital to risk-weighted
asset ratio of 4%. At December 31, 2003, Legends Financial was in
compliance with these requirements. 38




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##### Table of Contents



VI.
    
    Return on Equity and Assets, Continued:The following schedule details Legends Financials interest rate
sensitivity at December 31, 2003: Repricing Within(In Thousands)
    
    Total
    
    0-30 Days
    
    31-90 Days
    
    91-180 Days
    
    181-365 Days
    
    Over 1 YearEarning assets:Loans, net of
unearned interest
    
    $
    105,019
    
    
    
    13,626
    
    
    
    31,796
    
    
    
    2,819
    
    
    
    5,934
    
    
    
    50,844Securities
    
    
    31,944
    
    
    
    468
    
    
    
    1,446
    
    
    
    641
    
    
    
    3,363
    
    
    
    26,026Restricted equity
securities
    
    
    480
    
    
    
    480
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loans held for sale
    
    
    274
    
    
    
    274
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Federal funds sold
    
    
    3,195
    
    
    
    3,195
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total earning
assets
    
    
    140,912
    
    
    
    18,043
    
    
    
    33,242
    
    
    
    3,460
    
    
    
    9,297
    
    
    
    76,870Interest-bearing
liabilities:Negotiable order
of withdrawal
accounts
    
    
    24,579
    
    
    
    24,579
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Money market demand
accounts
    
    
    22,460
    
    
    
    22,460
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Savings deposits
    
    
    2,569
    
    
    
    2,569
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Certificates of deposit,
$100,000 and over
    
    
    33,956
    
    
    
    6,730
    
    
    
    4,935
    
    
    
    6,002
    
    
    
    4,766
    
    
    
    11,523Certificates of deposit,
under $100,000
    
    
    16,270
    
    
    
    1,995
    
    
    
    1,518
    
    
    
    4,562
    
    
    
    5,083
    
    
    
    3,112Individual retirement
accounts
    
    
    2,430
    
    
    
    137
    
    
    
    204
    
    
    
    479
    
    
    
    591
    
    
    
    1,019Securities sold under
under repurchase
agreements
    
    
    651
    
    
    
    651
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Advances from FHLB
    
    
    4,991
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,991Total interest
bearing
liabilities
    
    
    107,906
    
    
    
    62,121
    
    
    
    6,657
    
    
    
    11,043
    
    
    
    10,440
    
    
    
    17,645Interest-sensitivity gap
    
    $
    33,006
    
    
    
    (44,078
    )
    
    
    26,585
    
    
    
    (7,583
    )
    
    
    (1,143
    )
    
    
    59,225Cumulative gap
    
    
    
    
    
    
    (44,078
    )
    
    
    (17,493
    )
    
    
    (25,076
    )
    
    
    (26,219
    )
    
    
    33,006Interest-sensitivity gap
as % of total assets
    
    
    
    
    
    
    (29.38
    )%
    
    
    17.72
    
    
    
    (5.05
    )
    
    
    (0.76
    )
    
    
    39.47Cumulative gap as %
of total assets
    
    
    
    
    
    
    (29.38
    )%
    
    
    (11.66
    )
    
    
    (16.71
    )
    
    
    (17.48
    )
    
    
    22.00
  Legends Financial presently maintains a liability sensitive position over
the next twelve months. Management expects that liabilities of a demand
nature will renew and that it will not be necessary to replace them with
significantly higher cost funds. 39




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##### Table of Contents



VI.
    
    Return on Equity and Assets, Continued:Legends Financials primary component of market risk is interest rate
volatility. Fluctuations in interest rates will ultimately impact both
the level of income and expense recorded on a large portion of Legends
Financials assets and liabilities, and the market value of all
interest-earning assets and interest-bearing liabilities, other than
those which possess a short term to maturity. Based upon the nature of
Legends Financials operations, Legends Financial is not subject to
foreign currency exchange or commodity price risk.Interest rate risk (sensitivity) management focuses on the earnings risk
associated with changing interest rates. Management seeks to maintain
profitability in both immediate and long term earnings through funds
management/interest rate risk management. Legends Financials rate
sensitivity position has an important impact on earnings. Senior
management of the Bank meets monthly to analyze the rate sensitivity
position. These meetings focus on the spread between the cost of funds
and interest yields generated primarily through loans and investments. 40




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ITEM 7. FINANCIAL STATEMENTS LEGENDS FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS TABLE OF CONTENTS Report of Independent Public Accountants
    
    
    42Consolidated Financial Statements:Consolidated balance sheets
    
    
    43Consolidated statements of earnings
    
    
    44Consolidated statements of comprehensive earnings
    
    
    45Consolidated statements of changes in stockholders equity
    
    
    46Consolidated statements of cash flows
    
    
    47Notes to consolidated financial statements
    
    
    49
 41




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##### Table of Contents



INDEPENDENT AUDITORS REPORT The Board of Directors
Legends Financial Holdings, Inc. We have audited the accompanying consolidated balance sheets of Legends
Financial Holdings, Inc. and Subsidiaries as of December 31, 2003 and 2002 and
the related consolidated statements of earnings, comprehensive earnings,
changes in stockholders equity and cash flows for each of the three years
ended December 31, 2003. These financial statements are the responsibility of
Legends Financials management. Our responsibility is to express an opinion on
these financial statements based on our audit. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Legends Financial Holdings,
Inc. and Subsidiaries as of December 31, 2003 and 2002, and the results of its
operations and its cash flows for each of the three years ended December 31,
2003, in conformity with accounting principles generally accepted in the United
States of America. /s/ Maggart & Associates, P.C.  
 42




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LEGENDS FINANCIAL HOLDINGS, INC. 
 Consolidated Balance Sheets December 31, 2003 and 2002 In Thousands2003
    
    2002ASSETSLoans, less allowance for possible loan losses of
$1,225,000 and $879,000, respectively
    
    $
    103,794
    
    
    
    76,901Securities available-for-sale, at market (amortized cost of
$32,259,000 and $23,943,000, respectively)
    
    
    31,944
    
    
    
    24,198Restricted equity securities
    
    
    480
    
    
    
    395Loans held for sale
    
    
    274
    
    
    
    1,687Federal funds sold
    
    
    3,195
    
    
    
    1,225Total earning assets
    
    
    139,687
    
    
    
    104,406Cash and due from banks
    
    
    3,401
    
    
    
    5,287Bank premises and equipment, net
    
    
    5,488
    
    
    
    4,079Accrued interest receivable
    
    
    632
    
    
    
    511Other real estate owned
    
    
    92
    
    
    
    Deferred tax asset, net
    
    
    306
    
    
    
    133Goodwill
    
    
    153
    
    
    
    Other assets
    
    
    276
    
    
    
    118Total assets
    
    $
    150,035
    
    
    
    114,534LIABILITIES AND STOCKHOLDERS EQUITYDeposits
    
    $
    129,816
    
    
    
    94,971Securities sold under repurchase agreement
    
    
    651
    
    
    
    3,682Accrued interest payable
    
    
    316
    
    
    
    366Accounts payable and other liabilities
    
    
    121
    
    
    
    168Advances from Federal Home Loan Bank
    
    
    4,991
    
    
    
    1,500Total liabilities
    
    
    135,895
    
    
    
    100,687Stockholders equity:Preferred stock, no par value, authorized 1,000,000 shares,
no shares issued
    
    
    
    
    
    
    Common stock, par value $1 per share, authorized 2,000,000 shares,
1,381,749 and 1,379,083 shares issued and outstanding,
respectively
    
    
    1,382
    
    
    
    1,379Additional paid-in capital
    
    
    12,287
    
    
    
    12,267Retained earnings
    
    
    666
    
    
    
    43Net unrealized gains (losses) on available-for-sale securities, net
of income taxes of $120,000 and $97,000 in 2003 and 2002,
respectively
    
    
    (195
    )
    
    
    158Total stockholders equity
    
    
    14,140
    
    
    
    13,847COMMITMENTS AND CONTINGENCIESTotal liabilities and stockholders equity
    
    $
    150,035
    
    
    
    114,534
 See accompanying notes to consolidated financial statements. 43




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##### Table of Contents



LEGENDS FINANCIAL HOLDINGS, INC. 
 Consolidated Statements of Earnings For the Years Ended December 31, 2003, 2002 and 2001 In Thousands(except per share amounts)2003
    
    2002
    
    2001Interest income:Interest and fees on loans
    
    $
    5,803
    
    
    
    4,925
    
    
    
    4,461Interest and dividends on taxable securities
    
    
    907
    
    
    
    1,084
    
    
    
    1,324Interest and dividends on securities exempt from
Federal income taxes
    
    
    204
    
    
    
    17
    
    
    
    Interest on loans held for sale
    
    
    15
    
    
    
    21
    
    
    
    6Interest on Federal funds sold
    
    
    25
    
    
    
    36
    
    
    
    52Total interest income
    
    
    6,954
    
    
    
    6,083
    
    
    
    5,843Interest expense:Interest on negotiable order of withdrawal accounts
    
    
    304
    
    
    
    273
    
    
    
    308Interest on money market and savings accounts
    
    
    251
    
    
    
    308
    
    
    
    419Interest on certificates of deposits over $100,000
    
    
    670
    
    
    
    758
    
    
    
    1,088Interest on
certificates of deposits - other
    
    
    437
    
    
    
    601
    
    
    
    835Interest on Federal funds purchased
    
    
    16
    
    
    
    12
    
    
    
    12Interest on advances from Federal Home Loan Bank
    
    
    57
    
    
    
    75
    
    
    
    122Interest on securities sold under repurchase
agreements and short-term debt
    
    
    13
    
    
    
    8
    
    
    
    Total interest expense
    
    
    1,748
    
    
    
    2,035
    
    
    
    2,784Net interest income before provision for possible
loan losses
    
    
    5,206
    
    
    
    4,048
    
    
    
    3,059Provision for possible loan losses
    
    
    361
    
    
    
    703
    
    
    
    307Net interest income after provision for possible
loan losses
    
    
    4,845
    
    
    
    3,345
    
    
    
    2,752Non-interest income:Other fees and commissions
    
    
    752
    
    
    
    470
    
    
    
    304Gain on sale of loans
    
    
    246
    
    
    
    147
    
    
    
    114Gain on sale of securities
    
    
    
    
    
    
    140
    
    
    
    115Total non-interest income
    
    
    998
    
    
    
    757
    
    
    
    593Non-interest expense:Employee salaries and benefits
    
    
    2,220
    
    
    
    1,732
    
    
    
    1,407Occupancy expenses
    
    
    282
    
    
    
    250
    
    
    
    242Furniture and equipment expense
    
    
    450
    
    
    
    373
    
    
    
    337Loss on sale of securities
    
    
    21
    
    
    
    
    
    
    
    Other operating expenses
    
    
    1,632
    
    
    
    1,202
    
    
    
    860Total non-interest expense
    
    
    4,605
    
    
    
    3,557
    
    
    
    2,846Earnings before income taxes
    
    
    1,238
    
    
    
    545
    
    
    
    499Income tax benefit (expense)
    
    
    (409
    )
    
    
    49
    
    
    
    Net earnings
    
    $
    829
    
    
    
    594
    
    
    
    499Basic earnings per common share
    
    $
    .60
    
    
    
    .43
    
    
    
    .36Diluted earnings per common share
    
    $
    .59
    
    
    
    .43
    
    
    
    .36
 See accompanying notes to consolidated financial statements. 44




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##### Table of Contents



LEGENDS FINANCIAL HOLDINGS, INC. 
 Consolidated Statements of Comprehensive Earnings For the Years Ended December 31, 2003, 2002 and 2001 In Thousands2003
    
    2002
    
    2001Net earnings
    
    $
    829
    
    
    
    594
    
    
    
    499Other comprehensive earnings (loss):Unrealized gains (losses) on available-for-sale
securities arising during year, net of taxes of
$231,000 and $123,000 in 2003 and 2002,
respectively
    
    
    (374
    )
    
    
    199
    
    
    
    204Reclassification adjustment for (gains) losses
included in net earnings, net of taxes of $14,000
and $54,000 in 2003 and 2002, respectively
    
    
    21
    
    
    
    (86
    )
    
    
    (115
    )Other comprehensive earnings (loss)
    
    
    (353
    )
    
    
    113
    
    
    
    89Comprehensive earnings
    
    $
    476
    
    
    
    707
    
    
    
    588
 See accompanying notes to consolidated financial statements. 45




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##### Table of Contents



LEGENDS FINANCIAL HOLDINGS, INC. 
 Statements of Changes in Stockholders Equity For the Years Ended December 31, 2003, 2002 and 2001 In ThousandsNetUnrealizedGain(Loss)Additional
    
    Retained
    
    On Available-Common
    
    Paid-In
    
    Earnings
    
    For-SaleStock
    
    Capital
    
    (Deficit)
    
    Securities
    
    TotalBalance December 31, 2000
    
    $
    1,141
    
    
    
    12,426
    
    
    
    (1,050
    )
    
    
    (44
    )
    
    
    12,473Issuance of 1,020 shares of
$1 par value common stock
    
    
    1
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    9Net change in unrealized gain
(loss) on available-for-sale
securities during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89
    
    
    
    89Net earnings for the year
    
    
    
    
    
    
    
    
    
    
    499
    
    
    
    
    
    
    
    499Balance December 31, 2001
    
    
    1,142
    
    
    
    12,434
    
    
    
    (551
    )
    
    
    45
    
    
    
    13,070Issuance of 8,400 shares of
$1 par value common stock
    
    
    8
    
    
    
    62
    
    
    
    
    
    
    
    
    
    
    
    70Stock-split effected in the form
of a stock dividend declared
1 share for every 5 outstanding
    
    
    229
    
    
    
    (229
    )
    
    
    
    
    
    
    
    
    
    
    Net change in unrealized gain
on available-for-sale securities
during the year, net of taxes
of $97,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113
    
    
    
    113Net earnings for the year
    
    
    
    
    
    
    
    
    
    
    594
    
    
    
    
    
    
    
    594Balance December 31, 2002
    
    
    1,379
    
    
    
    12,267
    
    
    
    43
    
    
    
    158
    
    
    
    13,847Issuance of 2,666 shares of
$1 par value common stock
    
    
    3
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    23Cash dividends declared
($.15 per share)
    
    
    
    
    
    
    
    
    
    
    (206
    )
    
    
    
    
    
    
    (206
    )Net change in unrealized gain
(loss) on available-for-sales
securities during the year, net
of taxes of $217,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (353
    )
    
    
    (353
    )Net earnings for the year
    
    
    
    
    
    
    
    
    
    
    829
    
    
    
    
    
    
    
    829Balance December 31, 2003
    
    $
    1,382
    
    
    
    12,287
    
    
    
    666
    
    
    
    (195
    )
    
    
    14,140
 See accompanying notes to consolidated financial statements. 46




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##### Table of Contents



LEGENDS FINANCIAL HOLDINGS, INC. 
 Consolidated Statements of Cash Flows For the Years Ended December 31, 2003, 2002 and 2001 Increase (Decrease) in Cash and Cash Equivalents In Thousands2003
    
    2002
    
    2001Cash flows from operating activities:Interest received
    
    $
    6,813
    
    
    
    6,005
    
    
    
    5,874Fees and commissions received
    
    
    977
    
    
    
    473
    
    
    
    414Proceeds from sales of loans
    
    
    13,014
    
    
    
    9,375
    
    
    
    6,778Origination of loans held for sale
    
    
    (11,601
    )
    
    
    (10,676
    )
    
    
    (6,750
    )Interest paid
    
    
    (1,481
    )
    
    
    (1,989
    )
    
    
    (2,821
    )Cash paid to suppliers and employees
    
    
    (4,251
    )
    
    
    (3,277
    )
    
    
    (2,574
    )Income taxes paid
    
    
    (539
    )
    
    
    (69
    )
    
    
    (59
    )Net cash provided by (used in) operating
activities
    
    
    2,932
    
    
    
    (158
    )
    
    
    862Cash flows from investing activities:Purchase of available-for-sale securities
    
    
    (32,846
    )
    
    
    (23,395
    )
    
    
    (11,232
    )Purchase of restricted equity securities
    
    
    (85
    )
    
    
    (32
    )
    
    
    (72
    )Proceeds from maturities, calls and principal
payments of available-for-sale securities
    
    
    14,521
    
    
    
    7,874
    
    
    
    6,536Proceeds from sale of available-for-sale securities
    
    
    9,685
    
    
    
    10,927
    
    
    
    6,388Loans made to customers, net of repayments
    
    
    (26,109
    )
    
    
    (15,548
    )
    
    
    (20,353
    )Purchase of bank premises and equipment, net
    
    
    (1,784
    )
    
    
    (958
    )
    
    
    (309
    )Proceeds from disposal of premises and equipment
    
    
    32
    
    
    
    
    
    
    
    Proceeds from sale of other real estate
    
    
    
    
    
    
    174
    
    
    
    (174
    )Proceeds from acquisition of NBC, net
    
    
    1,334
    
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (35,252
    )
    
    
    (20,958
    )
    
    
    (19,216
    )Cash flows from financing activities:Net increase in non-interest bearing, savings and
NOW deposit accounts
    
    
    36,599
    
    
    
    4,094
    
    
    
    3,035Net increase (decrease) in time deposits
    
    
    (4,472
    )
    
    
    17,439
    
    
    
    12,906Proceeds from sale of common stock
    
    
    23
    
    
    
    70
    
    
    
    9Proceeds from (repayment of) short-term borrowings
    
    
    
    
    
    
    (483
    )
    
    
    483Advances from (repayment of) advances from
Federal Home Loan Bank
    
    
    3,491
    
    
    
    (1,000
    )
    
    
    1,000Advances from (repayment of) repurchase agreements
    
    
    (3,031
    )
    
    
    3,682
    
    
    
    Dividends paid
    
    
    (206
    )
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    32,404
    
    
    
    23,802
    
    
    
    17,433Net increase (decrease) in cash and cash equivalents
    
    
    84
    
    
    
    2,686
    
    
    
    (921
    )Cash and cash equivalents at beginning of year
    
    
    6,512
    
    
    
    3,826
    
    
    
    4,747Cash and cash equivalents at end of year
    
    $
    6,596
    
    
    $
    6,512
    
    
    
    3,826
 See accompanying notes to consolidated financial statements. 47




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LEGENDS FINANCIAL HOLDINGS, INC. Consolidated Statements of Cash Flows, Continued For the Years Ended December 31, 2003, 2002 and 2001 Increase (Decrease) in Cash and Cash Equivalents In Thousands2003
    
    2002
    
    2001Reconciliation of net earnings to net cash provided by
(used in) operating activities:Net earnings
    
    $
    829
    
    
    
    594
    
    
    
    499Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:Depreciation
    
    
    343
    
    
    
    297
    
    
    
    284Amortization and accretion
    
    
    303
    
    
    
    124
    
    
    
    90Loss (gain) on sale of securities, net
    
    
    21
    
    
    
    (140
    )
    
    
    (115
    )Provision for possible loan losses
    
    
    361
    
    
    
    703
    
    
    
    307Decrease (increase) in loans held for sale
    
    
    1,413
    
    
    
    (1,448
    )
    
    
    (86
    )Increase in accrued interest receivable
    
    
    (121
    )
    
    
    (66
    )
    
    
    (9
    )Increase in other assets
    
    
    (37
    )
    
    
    (51
    )
    
    
    (15
    )Increase in income tax receivable
    
    
    (121
    )
    
    
    
    
    
    
    Decrease in interest payable
    
    
    (56
    )
    
    
    (87
    )
    
    
    (37
    )Increase in other liabilities
    
    
    7
    
    
    
    14
    
    
    
    3Increase (decrease) in income taxes payable
    
    
    (54
    )
    
    
    52
    
    
    
    2Decrease (increase) in deferred taxes
    
    
    44
    
    
    
    (150
    )
    
    
    (61
    )Total adjustments
    
    
    2,103
    
    
    
    (752
    )
    
    
    363Net cash provided by (used in)
operating activities
    
    $
    2,932
    
    
    $
    (158
    )
    
    
    862Supplemental Schedule of Non-Cash Activities:Non-cash transfers from loans to other real
estate, net
    
    $
    92
    
    
    
    
    
    
    
    Increase in unrealized gain (loss) on
available-for-sale
securities, net of income taxes of $217,000 in 2003
and $97,000 in 2003 and 2002, respectively
    
    $
    (353
    )
    
    
    113
    
    
    
    89
 See accompanying notes to consolidated financial statements. 48




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LEGENDS FINANCIAL HOLDINGS, INC. 
 Notes to Consolidated Financial Statements December 31, 2003, 2002 and 2001  (1)
    
    Summary of Significant Accounting PoliciesThe consolidated financial statements include the accounts of Legends
Financial Holdings, Inc. (the Company), Legends Bank (the Bank), its
wholly-owned subsidiary, and Legends Financial Services, Inc., a
wholly-owned subsidiary of Legends Bank. On February 27, 2002, the
stockholders of Legends Bank voted to exchange their stock for stock in
Legends Financial Holdings, Inc. Effective July 1, 2002, Legends
Financial Holdings, Inc. became a bank holding company within the meaning
of the Bank Holding Company Act of 1956, as amended. The transaction has
been treated as a reorganization for accounting purposes. For
comparative purposes all financial information of Legends Bank prior to
the reorganization has been presented or included in the financial
information of Legends Financial.The accounting and reporting policies of Legends Financial Holdings, Inc.
are in accordance with accounting principles generally accepted in the
United States of America and conform to general practices within the
banking industry. The following is a brief summary of the more
significant policies.  (a)
    
    Principles of ConsolidationThe consolidated financial statements include the accounts of
Legends Financial, its wholly-owned subsidiary, Legends Bank and
the Banks wholly-owned subsidiary, Legends Financial Services,
Inc. All significant intercompany accounts and transactions have
been eliminated in consolidation.(b)
    
    Nature of OperationsLegends Financial is registered as a one bank holding company under
the Bank Holding Company Act of 1956. Legends Bank operates under
a state bank charter and provides full banking services. As a
state bank, the Bank is subject to regulations of the Tennessee
Department of Financial Institutions and the Federal Deposit
Insurance Corporation. The area served by Legends Bank is
Montgomery County, Tennessee and surrounding counties of Middle
Tennessee. Services are provided at the main office, three
branches in Clarksville, Tennessee and a branch in Dover,
Tennessee. Legends Financial Services, Inc. was formed in 2002 to
offer a wide array of financial products such as annuities, stocks,
bonds, mutual funds and other investment products.(c)
    
    EstimatesThe preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change in the near term relate to determination of the allowance
for possible loan losses and the valuation of debt and equity
securities and the related deferred taxes. 49




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated
Financial Statements, Continued December 31, 2003, 2002 and 2001  (1)
    
    Summary of Significant Accounting Policies, Continued  (d)
    
    LoansLoans are stated at the principal amount outstanding. Unearned
discount, deferred loan fees net of loan acquisition costs, and the
allowance for possible loan losses are shown as reductions of
loans. Loan origination and commitment fees and certain
loan-related costs are being deferred and the net amount amortized
as an adjustment of the related loans yield over the contractual
life of the loan. Unearned discount represents the unamortized
amount of finance charges, principally related to certain
installment loans. Interest income on most loans is accrued based
on the principal amount outstanding.Legends Financial follows the provisions of Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by Creditors for
Impairment of a Loan and SFAS No. 118, Accounting by Creditors
for Impairment of a Loan  Income Recognition and Disclosures.
These pronouncements apply to impaired loans except for large
groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment including residential mortgage and
installment loans.A loan is impaired when it is probable that Legends Financial will
be unable to collect the scheduled payments of principal and
interest due under the contractual terms of the loan agreement.
Impaired loans are measured at the present value of expected future
cash flows discounted at the loans effective interest rate, at the
loans observable market price, or the fair value of the collateral
if the loan is collateral dependent. If the measure of the
impaired loan is less than the recorded investment in the loan,
Legends Financial shall recognize an impairment by creating a
valuation allowance with a corresponding charge to the provision
for possible loan losses or by adjusting an existing valuation
allowance for the impaired loan with a corresponding charge or
credit to the provision for possible loan losses.Legends Financials residential mortgage and installment loans are
divided into various groups of smaller-balance, homogeneous loans
that are collectively evaluated for impairment and, thus, are not
subject to the provisions of SFAS Nos. 114 and 118. Substantially
all other loans of Legends Financial are evaluated for impairment
under the provisions of SFAS Nos. 114 and 118.Legends Financial considers all loans subject to the provisions of
SFAS Nos. 114 and 118 that are on a nonaccrual status to be
impaired. Loans are placed on nonaccrual status when doubt as to
timely collection of principal or interest exists, or when
principal or interest is past due 90 days or more unless such loans
are well-secured and in the process of collection. Delays or
shortfalls in loan payments are evaluated along with various other
factors to determine if a loan is impaired. Generally,
delinquencies under 90 days are considered insignificant unless
certain other factors are present which indicate impairment is
probable. The decision to place a loan on nonaccrual status is
also based on an evaluation of the borrowers financial condition,
collateral, liquidation value, and other factors that affect the
borrowers ability to pay. 50




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (1)
    
    Summary of Significant Accounting Policies, Continued  (d)
    
    Loans, ContinuedGenerally, at the time a loan is placed on nonaccrual status, all
interest accrued and uncollected on the loan in the current fiscal
year is reversed from income, and all interest accrued and
uncollected from the prior year is charged off against the
allowance for possible loan losses. Thereafter, interest on
nonaccrual loans is recognized as interest income only to the
extent that cash is received and future collection of principal is
not in doubt. If the collectibility of outstanding principal is
doubtful, such cash received is applied as a reduction of
principal. A nonaccrual loan may be restored to an accruing status
when principal and interest are no longer past due and unpaid and
future collection of principal and interest on a timely basis is
not in doubt.Loans not on nonaccrual status are classified as impaired in
certain cases when there is inadequate protection by the current
net worth and financial capacity of the borrower or of the
collateral pledged, if any. In those cases, such loans have a
well-defined weakness or weaknesses that jeopardize the liquidation
of the debt, and if such deficiencies are not corrected, there is a
probability that Legends Financial will sustain some loss. In such
cases, interest income continues to accrue as long as the loan does
not meet Legends Financials criteria for nonaccrual status.Generally, Legends Financial also classifies as impaired any loans
the terms of which have been modified in a troubled debt
restructuring. Interest is generally accrued on such loans that
continue to meet the modified terms of their loan agreements.Legends Financials charge-off policy for impaired loans is similar
to its charge-off policy for all loans in that loans are charged
off in the month when they are considered uncollectible.(e)
    
    Allowance for Possible Loan LossesThe provision for possible loan losses represents a charge to
earnings necessary, after loan charge-offs and recoveries, to
maintain the allowance for possible loan losses at an appropriate
level which is adequate to absorb estimated losses inherent in the
loan portfolio. Such estimated losses arise primarily from the
loan portfolio but may also be derived from other sources,
including commitments to extend credit and standby letters of
credit. The level of the allowance is determined on a quarterly
basis using procedures which include: (1) categorizing commercial
and commercial real estate loans into risk categories to estimate
loss probabilities based primarily on the historical loss
experience of those risk categories and current economic
conditions; (2) analyzing significant commercial and commercial
real estate credits and calculating specific reserves as necessary;
(3) assessing various homogeneous consumer loan categories to
estimate loss probabilities based primarily on historical loss
experience; (4) reviewing unfunded commitments (included in other
liabilities); and (5) considering various other factors, such as
changes in credit concentrations, loan mix, and economic conditions
which may not be specifically quantified in the loan analysis
process. 51




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (1)
    
    Summary of Significant Accounting Policies, Continued  (e)
    
    Allowance for Possible Loan Losses, ContinuedThe allowance for possible loan losses consists of an allocated
portion and an unallocated, or general portion. The allocated
portion is maintained to cover estimated losses applicable to
specific segments of the loan portfolio. The unallocated portion
is maintained to absorb losses which probably exist as of the
evaluation date but are not identified by the more objective
processes used for the allocated portion of the allowance due to
risk of errors or imprecision. While the total allowance consists
of an allocated portion and an unallocated portion, these terms are
primarily used to describe a process. Both portions of the
allowance are available to provide for inherent loss in the entire
portfolio.The allowance for possible loan losses is increased by provisions
for possible loan losses charged to expense and is reduced by loans
charged off net of recoveries on loans previously charged off. The
provision is based on managements determination of the amount of
the allowance necessary to provide for estimated loan losses based
on its evaluation of the loan portfolio. Determining the
appropriate level of the allowance and the amount of the provision
involves uncertainties and matters of judgment and therefore cannot
be determined with precision.(f)
    
    SecuritiesLegends Financial accounts for securities under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
Under the provisions of the Statement, securities are to be
classified in three categories and accounted for as follows:  
    
    Securities Held-to-MaturityDebt securities that the enterprise has the positive intent
and ability to hold to maturity are classified as
held-to-maturity securities and reported at amortized cost.
No securities have been classified as securities
held-to-maturity.
    
    Trading SecuritiesDebt and equity securities that are bought and held
principally for the purpose of selling them in the near term
are classified as trading securities and reported at fair
value, with unrealized gains and losses included in earnings.
No securities have been classified as trading securities.
    
    Securities Available-for-SaleDebt and equity securities not classified as either
held-to-maturity securities or trading securities are
classified as available-for-sale securities and reported at
fair value, with unrealized gains and losses excluded from
earnings and reported in a separate component of
stockholders equity. 52




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated
Financial Statements, Continued December 31, 2003, 2002 and 2001  (1)
    
    Summary of Significant Accounting Policies, Continued  (f)
    
    Securities, ContinuedLegends Financial has classified all its securities as securities
available-for-sale.Realized gains or losses from the sale of securities are recognized
upon realization based upon the specific identification method.(g)
    
    Premises and EquipmentPremises and equipment are stated at cost. Depreciation is
computed by the straight-line method over the estimated useful
lives of the related assets. Gain or loss on items retired and
otherwise disposed of is credited or charged to operations and cost
and related accumulated depreciation are removed from the asset and
accumulated depreciation accounts.Expenditures for major renewals and improvements of premises and
equipment are capitalized and those for maintenance and repairs are
charged to earnings as incurred.(h)
    
    Intangible AssetsStatement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets (SFAS No. 142) requires that management
determine the allocation of intangible assets into identifiable
groups at the date of acquisition and appropriate amortization
periods be established. Under the provisions of SFAS No. 142
goodwill is not to be amortized rather it is to be monitored for
impairment and written down to the impairment value at the time
impairment occurs. Legends Financial has determined that no
impairment loss needs to be recognized related to the goodwill.(i)
    
    Stock OptionsLegends Financial uses the fair value method to calculate the
compensation reported in the proforma earnings in note 17 to the
consolidated financial statements.(j)
    
    Other Real EstateReal estate acquired in settlement of loans is initially recorded
at the lower of cost (loan value of real estate acquired in
settlement of loans plus incidental expense) or estimated fair
value, less estimated cost of disposal. Based on periodic
evaluations by management, the carrying values are reduced by a
direct charge to earnings when they exceed net realizable value.
Costs relating to the development and improvement of the property
are capitalized, while holding costs of the property are charged to
expense in the period incurred. 53




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (1)
    
    Summary of Significant Accounting Policies, Continued  (k)
    
    Cash and Cash EquivalentsFor purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, and Federal funds
sold. Generally, Federal funds sold are purchased and sold for
one-day periods. Legends Financial maintains deposits in excess of
the Federal insurance amounts with other financial institutions.
Management makes deposits only with financial institutions it
considers to be financially sound.(l)
    
    Income TaxesProvisions for income taxes are based on taxes payable or
refundable for the current year (after exclusion of non-taxable
income such as interest on state and municipal securities) and
deferred taxes on temporary differences between the amount of
taxable and pretax financial income and between the tax bases of
assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are included in
the financial statements at currently enacted income tax rates
applicable to the period in which the deferred tax asset and
liabilities are expected to be realized or settled as prescribed in
Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. As changes in tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through
the provision for income taxes.Legends Financial and its subsidiaries file a consolidated Federal
income tax return. Each corporation provides for income taxes on a
separate return basis.(m)
    
    Advertising CostsAdvertising costs are expensed when incurred.(n)
    
    Off-Balance-Sheet Financial InstrumentsIn the ordinary course of business Legends Financial has entered
into off balance sheet financial instruments consisting of
commitments to extend credit, commitments under credit card
arrangements, commercial letters of credit and standby letters of
credit. Such financial instruments are recorded in the financial
statements when they are funded or related fees are incurred or
received.(o)
    
    ReclassificationsCertain reclassifications have been made to the 2002 and 2001
figures to conform to the presentation for 2003. 54




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (2)
    
    Loans and Allowance for Possible Loan LossesThe detail of loans at December 31, 2003 and 2002 is as follows: In Thousands2003
    
    2002Commercial, financial and agricultural
    
    $
    20,256
    
    
    
    15,947Installment
    
    
    4,870
    
    
    
    4,090Real estate - mortgage
    
    
    66,500
    
    
    
    43,022Real estate - construction
    
    
    13,393
    
    
    
    14,721105,019
    
    
    
    77,780Allowance for possible loan losses
    
    
    (1,225
    )
    
    
    (879
    )$
    103,794
    
    
    
    76,901
  At December 31, 2003, variable rate and fixed rate loans totaled
$23,806,000 and $81,213,000, respectively. At December 31, 2002,
variable rate and fixed rate loans totaled $20,326,000 and $57,454,000
respectively.The principal maturities on loans at December 31, 2003 are as follows: In ThousandsCommercial,Financialand
    
    
    
    
    
    Real estate -
    
    Real estate -Agricultural
    
    Installment
    
    Mortgage
    
    Construction
    
    Total3 months or less
    
    $
    7,314
    
    
    
    620
    
    
    
    11,273
    
    
    
    5,248
    
    
    
    24,4553 to 12 months
    
    
    2,761
    
    
    
    1,206
    
    
    
    3,492
    
    
    
    4,971
    
    
    
    12,4301 to 5 years
    
    
    8,312
    
    
    
    3,044
    
    
    
    47,461
    
    
    
    3,174
    
    
    
    61,991over 5 years
    
    
    1,869
    
    
    
    
    
    
    
    4,274
    
    
    
    
    
    
    
    6,143$
    20,256
    
    
    
    4,870
    
    
    
    66,500
    
    
    
    13,393
    
    
    
    105,019
  In the normal course of business, Legends Financial has made loans at
prevailing interest rates and terms to its executive officers, directors
and their affiliates aggregating $2,097,000 and $2,398,000 at December
31, 2003 and 2002, respectively. As of December 31, 2003 and 2002, none
of these loans were restructured, nor were any related party loans
charged off in 2003 or 2002.An analysis of the activity with respect to such loans to related parties
is as follows: In Thousands2003
    
    2002Balance, January 1
    
    $
    2,398
    
    
    
    2,460New loans during the year
    
    
    2,251
    
    
    
    1,456Repayments during the year
    
    
    (2,552
    )
    
    
    (1,518
    )Balance, December 31
    
    $
    2,097
    
    
    
    2,398
 55




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (2)
    
    Loans and Allowance for Possible Loan Losses, ContinuedTransactions in the allowance for possible loan losses of Legends
Financial for the years ended December 31, 2003 and 2002 are summarized
as follows: In Thousands2003
    
    2002Balance - beginning of year
    
    $
    879
    
    
    
    755Provision charged to operating expense
    
    
    361
    
    
    
    703Loans charged off
    
    
    (49
    )
    
    
    (628
    )Recoveries
    
    
    34
    
    
    
    49Net charge-offs
    
    
    (15
    )
    
    
    (579
    )Balance - end of year
    
    $
    1,225
    
    
    
    879
  Legends Financials principal customers are basically in the Middle
Tennessee area with a concentration in Montgomery County. Credit is
extended to businesses and individuals and is evidenced by promissory
notes. The terms and conditions of the loans including collateral varies
depending upon the purpose of the credit and the borrowers financial
condition.There were no restructured loans outstanding at December 31, 2003 and
2002. Legends Financial had $305,000 and $268,000, respectively, of
nonaccrual loans outstanding as of December 31, 2003 and 2002,
respectively. Had interest income been recognized on non-accrual loans
in 2003 net earnings would have increased by approximately $28,000. The
impact on interest income in 2002 and 2001 was not significant.  Impaired loans and related loan loss reserve amounts at December 2003 and
2002 were as follows: In Thousands2003
    
    
    
    2002Recorded investment
    
    $
    1,832
    
    
    
    
    
    
    
    2,013Loan loss allocation
    
    $
    163
    
    
    
    
    
    
    
    244
  The average recorded investment in impaired loans for the years ended
December 31, 2003 and December 31, 2002 was $1,529,000 and $2,034,000,
respectively.The related total amount of interest income recognized on the accrual
basis for the period that such loans were impaired was $105,000 for 2003,
$143,000 in 2002 and $120,000 in 2001.  In 2003, 2002 and 2001, Legends Financial originated loans for sale in
the secondary market of $11,601,000, $10,676,000 and $6,750,000. At
December 31, 2003, the wholly-owned subsidiary Bank had not been required
to repurchase any of the loans originated by the Bank and sold in the
secondary market. The gain on sale of these loans totaled $246,000,
$147,000 and $114,000 in 2003, 2002 and 2001, respectively. 56




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (2)
    
    Loans and Allowance for Possible Loan Losses, ContinuedOf the loans sold in the secondary market, the recourse to the
wholly-owned subsidiary Bank is limited. Nearly all other loans sold in
the secondary market provide the purchaser recourse to the Bank for a
period of 60 to 90 days from the date of purchaser and only in the event
of a default by the borrower pursuant to the terms of the individual loan
agreement. At December 31, 2003, total loans sold with recourse to the
Bank aggregated $4,075,000. Management expects no loss to result from
these recourse provisions.(3)
    
    Debt and Equity SecuritiesDebt and equity securities have been classified in the balance sheet
according to managements intent. Legends Financials classification of
securities at December 31, 2003 was as follows: In ThousandsSecurities Available-For-Sale2003Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    MarketCost
    
    Gains
    
    Losses
    
    ValueU.S. Treasury and other U.S.
government agencies and
corporations
    
    $
    1,796
    
    
    
    
    
    
    
    41
    
    
    
    1,755Obligations of states and
political subdivisions
    
    
    8,237
    
    
    
    
    
    
    
    146
    
    
    
    8,091Domestic corporate bonds
    
    
    3,250
    
    
    
    
    
    
    
    75
    
    
    
    3,175Mortgage-backed securities
    
    
    18,976
    
    
    
    
    
    
    
    53
    
    
    
    18,923$
    32,259
    
    
    
    
    
    
    
    315
    
    
    
    31,944
  Legends Financials classification of securities at December 31, 2002 was
as follows: In ThousandsSecurities Available-For-Sale2002Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    MarketCost
    
    Gains
    
    Losses
    
    ValueU.S. Treasury and other U.S.
government agencies and
corporations
    
    $
    507
    
    
    
    14
    
    
    
    
    
    
    
    521Obligations of states and
political subdivisions
    
    
    974
    
    
    
    
    
    
    
    7
    
    
    
    967Domestic corporate bonds
    
    
    3,250
    
    
    
    
    
    
    
    35
    
    
    
    3,215Mortgage-backed securities
    
    
    19,212
    
    
    
    283
    
    
    
    
    
    
    
    19,495$
    23,943
    
    
    
    297
    
    
    
    42
    
    
    
    24,198
 57




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (3)
    
    Debt and Equity Securities, ContinuedIncluded in mortgage backed securities as of December 31, 2003 and 2002,
are collateralized mortgage obligations with a market value of $1,113,000
(amortized cost of $1,146,000) and $4,759,000 (amortized cost of
$4,767,000), respectively. The effective yield at December 31, 2003 and
2002, on collateralized mortgage obligations was 4.1% and 3.3%,
respectively.The amortized cost and estimated market value of debt and equity
securities at December 31, 2003, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties. In ThousandsEstimatedMarketSecurities Available-For-Sale
    
    Cost
    
    ValueDue in one year or less
    
    $
    
    
    
    
    Due after one year through five years
    
    
    
    
    
    
    Due after five years through ten years
    
    
    994
    
    
    
    1,000Due after ten years
    
    
    12,289
    
    
    
    12,02113,283
    
    
    
    13,021Mortgage-backed securities
    
    
    18,976
    
    
    
    18,923$
    32,259
    
    
    
    31,944
  Results from sales of debt and equity securities are as follows: In Thousands2003
    
    2002
    
    2001Gross proceeds
    
    $
    9,685
    
    
    
    10,927
    
    
    
    6,388Gross realized gains
    
    $
    
    
    
    
    140
    
    
    
    115Gross realized losses
    
    
    (21
    )
    
    
    
    
    
    
    Net realized gains (losses)
    
    $
    (21
    )
    
    
    140
    
    
    
    115
  Investment securities carried in the balance sheet of $20,619,000
(amortized cost of $20,716,000) and $19,480,000 (amortized cost of
$19,184,000) as of December 31, 2003 and 2002, respectively, were pledged
to secure public and trust deposits and for other purposes as required or
permitted by law.(4)
    
    Restricted Equity SecuritiesRestricted equity securities consisted of stock of The Bankers Bank and
the Federal Home Loan Bank amounting to $162,000 and $318,000,
respectively, at December 31, 2003. The stock amounted to $162,000 and
$233,000, respectively, at December 31, 2002. The stock can be sold
back to The Bankers Bank and Federal Home Loan Bank only at par. The
stock are recorded at cost. 58




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (5)
    
    Bank Premises and EquipmentThe detail of premises and equipment at December 31, 2003 and 2002 is as
follows: In Thousands2003
    
    2002Land
    
    $
    1,187
    
    
    
    1,134Buildings
    
    
    2,378
    
    
    
    2,053Leasehold improvements
    
    
    310
    
    
    
    310Furniture and fixtures
    
    
    217
    
    
    
    183Equipment and software
    
    
    1,455
    
    
    
    1,088Construction in process
    
    
    1,149
    
    
    
    2126,696
    
    
    
    4,980Less accumulated depreciation
    
    
    (1,208
    )
    
    
    (901
    )$
    5,488
    
    
    
    4,079
  (6)
    
    GoodwillEffective March 24, 2003, Legends Financial acquired certain assets and
assumed certain liabilities of NBC Bank in the Clarksville, Tennessee
area. The acquisition was accounted for as a purchase summarized as
follows: (In Thousands)Loans including overdrafts purchased
    
    $
    1,243Deposits assumed
    
    
    (2,718
    )Accrued interest payable
    
    
    (6
    )Cash received from NBC
    
    
    1,328Goodwill
    
    
    153
  The change in the carrying value of goodwill during the year follows: (In Thousands)Carrying
value - beginning of year
    
    $
    Goodwill acquired
    
    
    153Goodwill impairment losses
    
    
    Carrying
value - end of year
    
    $
    153
 59




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (7)
    
    DepositsDeposits at December 31, 2003 and 2002 are summarized as follows: In Thousands2003
    
    2002Demand deposits
    
    $
    27,552
    
    
    
    16,524Savings deposits
    
    
    2,569
    
    
    
    1,653Negotiable order of withdrawal
    
    
    24,579
    
    
    
    20,355Money market demand accounts
    
    
    22,460
    
    
    
    18,596Certificates of deposit $100,000 or greater
    
    
    33,956
    
    
    
    23,056Other certificates of deposit
    
    
    16,270
    
    
    
    13,397Individual retirement accounts $100,000 or
greater
    
    
    873
    
    
    
    348Other individual retirement accounts
    
    
    1,557
    
    
    
    1,042$
    129,816
    
    
    
    94,971
  Principal maturities of certificates of deposit and individual retirement
accounts at December 31, 2003 are as follows: In ThousandsSingle Deposits
    
    Single DepositsMaturity
    
    Under $100,000
    
    Over $100,000
    
    Total3 months or less
    
    $
    3,717
    
    
    
    11,775
    
    
    
    15,4923 to 12 months
    
    
    10,512
    
    
    
    11,187
    
    
    
    21,6991 to 5 years
    
    
    3,598
    
    
    
    11,867
    
    
    
    15,465$
    17,827
    
    
    
    34,829
    
    
    
    52,656
  At December 31, 2003 and 2002 certificates of deposit and other deposits
in denominations of $100,000 or more amounted to $83,564,000 and
$63,865,000, respectively.Legends Financial is required to maintain cash balances or balances with
the Federal Reserve Bank or other correspondent banks based on certain
percentages of deposit types. The average required amounts for the years
ended December 31, 2003 and 2002 were approximately $978,000 and
$425,000, respectively.(8)
    
    Securities Sold Under Repurchase AgreementsThe maximum amounts of outstanding repurchase agreements during 2003 and
2002 were $7,379,000 and $3,682,009, respectively. The average daily
balance outstanding during 2003 and 2002 was $1,444,000 and $684,000,
respectively. The underlying securities are typically held by other
financial institutions and are designated as pledged. 60




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (9)
    
    Advances from Federal Home Loan BankAdvances from Federal Home Loan Bank (FHLB) at December 31, 2003 and 2002
consist of the following: In ThousandsRate atOriginal Note Date
    
    Maturity Date
    
    December 31, 2003
    
    2003
    
    2002May 3, 2002
    
    May 3, 2003
    
    
    
    %
    
    $
    
    
    
    
    500July 15,
2002
    
    July 15, 2003
    
    
    
    %
    
    
    
    
    
    
    1,000October 17, 2003
    
    November 5, 2004
    
    
    1.09
    %
    
    
    500
    
    
    
    November 24, 2003
    
    February 20, 2004
    
    
    1.09
    %
    
    
    1,500
    
    
    
    July 17, 2003
    
    July 15, 2005
    
    
    1.28
    %
    
    
    1,000
    
    
    
    July 18, 2003
    
    July 18, 2005
    
    
    1.98
    %
    
    
    500
    
    
    
    July 18, 2003
    
    July 18, 2006
    
    
    2.51
    %
    
    
    500
    
    
    
    July 18, 2003
    
    July 18, 2008
    
    
    3.48
    %
    
    
    500
    
    
    
    July 18, 2003
    
    August 1, 2018
    
    
    3.41
    %
    
    
    491
    
    
    
    $
    4,991
    
    
    
    1,500
  Interest on the $1,000,000 advance is based on the three months LIBOR
(LIBOR plus 12 basis points) and is adjusted quarterly. The 3.41% rate
on the $491,000 advance is fixed. The 1.98%, 2.51% and 3.48% rates on
the $500,000 advances are fixed. The 1.09% rate on the $500,000 and
$1,500,000 advances are adjusted daily.Loans totaling $6,738,000 were pledged to FHLB as collateral at December
31, 2003.(10)
    
    Income TaxesThe components of the net deferred income tax asset at December 31, 2003
and 2002 are as follows: In Thousands2003
    
    2002Deferred tax asset:Federal
    
    $
    430
    
    
    
    242State
    
    
    89
    
    
    
    50519
    
    
    
    292Deferred tax liability:Federal
    
    
    (177
    )
    
    
    (132
    )State
    
    
    (36
    )
    
    
    (27
    )(213
    )
    
    
    (159
    )Net deferred assets
    
    $
    306
    
    
    
    133
 61




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (10)
    
    Income Taxes, ContinuedThe tax effects of each type of significant item that gave rise to
deferred taxes at December 31, 2003 and 2002 are: In Thousands2003
    
    2002Financial statement allowance for loan losses in
excess of the tax allowance
    
    $
    393
    
    
    
    263Excess of depreciation deducted for tax purposes over
the amounts deducted in the financial statements
    
    
    (196
    )
    
    
    (48
    )Pre-opening costs amortized over a five-year period for
tax purposes, expensed for financial statements in
initial year
    
    
    5
    
    
    
    28Excess of estimated market value over amortized cost
related to available-for-sale securities
    
    
    121
    
    
    
    (97
    )Financial statement income on FHLB stock dividends
not recognized for tax purposes
    
    
    (17
    )
    
    
    (13
    )$
    306
    
    
    
    133
  The components of income tax expense (benefit) are summarized as follows: In Thousands2003
    
    2002
    
    2001Current:Federal
    
    $
    285
    
    
    
    81
    
    
    
    52State
    
    
    87
    
    
    
    20
    
    
    
    9372
    
    
    
    101
    
    
    
    61Deferred:Federal
    
    
    31
    
    
    
    49
    
    
    
    (29
    )State
    
    
    6
    
    
    
    10
    
    
    
    (5
    )37
    
    
    
    59
    
    
    
    (34
    )Benefits from utilization of net operating
loss carryforwards:Federal
    
    
    
    
    
    
    
    
    
    
    (52
    )State
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    
    (61
    )Subtotal
    
    
    409
    
    
    
    160
    
    
    
    (34
    )Adjustment of valuation allowance
related to deferred tax assets
    
    
    
    
    
    
    (209
    )
    
    
    34Actual tax expense (benefit)
    
    $
    409
    
    
    
    (49
    )
    
    
    
 62




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (10)
    
    Income Taxes, ContinuedA reconciliation of actual income tax expense (benefit) in the
consolidated financial statements to the expected tax expense (benefit)
(computed by applying the statutory Federal income tax rate of 34% to
earnings before income taxes) is as follows: In Thousands2003
    
    2002
    
    2001Computed expected tax expense
    
    $
    421
    
    
    
    185
    
    
    
    170State income taxes, net of effect of Federal
income taxes
    
    
    53
    
    
    
    18
    
    
    
    2Disallowed expenses
    
    
    5
    
    
    
    5
    
    
    
    1Utilization of book net operating loss
carryovers
    
    
    
    
    
    
    
    
    
    
    (100
    )Benefit of graduated rates
    
    
    
    
    
    
    (1
    )
    
    
    (12
    )Benefit related to nonqualified stock options
    
    
    (5
    )
    
    
    (35
    )
    
    
    Tax exempt interest, net of interest expense
exclusion
    
    
    (75
    )
    
    
    (12
    )
    
    
    Recognition of deferred tax assets
    
    
    
    
    
    
    (209
    )
    
    
    (61
    )Other
    
    
    10
    
    
    
    
    
    
    
    Actual tax expense (benefit)
    
    $
    409
    
    
    
    (49
    )
    
    
    
  (11)
    
    Commitment and ContingenciesLegends Financial currently has two leases related to the operation of
two branches. One lease, entered into in 1998, is for a period of five
years and can be renewed for two consecutive five-year terms. Legends
Financial renewed this lease December 1, 2003. The other lease was
entered into during 2001 and is for a period of three years and can be
renewed for two consecutive three-year terms.Legends Financial also has three leases related to automated teller
machines in Clarksville, Tennessee. The leases commenced in July, 2003
for two years and can be renewed for two consecutive two-year terms.Minimum future rental payments required under the terms of the leases are
as follows: Year EndingDecember 31,
    
    In Thousands2004
    
    $
    722005
    
    
    652006
    
    
    572007
    
    
    372008
    
    
    37
  Total rent expense under the leases amounted to $58,592, $58,008 and
$55,258 during the years ended December 31, 2003, 2002 and 2001,
respectively. 63




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (12)
    
    Financial Instruments with Off-Balance-Sheet RiskLegends Financial is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments consist
primarily of commitments to extend credit. These instruments involve, to
varying degrees, elements of credit risk in excess of the amount
recognized in the consolidated balance sheets. The contract or notional
amounts of those instruments reflect the extent of involvement Legends
Financial has in particular classes of financial instruments.Legends Financials exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual notional
amount of those instruments. Legends Financial uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments. In ThousandsFinancial instruments whose contract
amounts represent credit risk:Commercial loan commitments
    
    $
    14,599Unfunded lines-of-credit
    
    
    3,012Letters of credit
    
    
    637Total
    
    $
    18,248
  Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to be drawn upon, the total commitment amounts generally
represent future cash requirements. Legends Financial evaluates each
customers credit-worthiness on a case-by-case basis. The amount of
collateral, if deemed necessary by Legends Financial upon extension of
credit, is based on managements credit evaluation of the counterparty.
Collateral normally consists of real property. 64




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (13)
    
    Legends Financial Holdings, Inc. - Parent Company Financial Information LEGENDS FINANCIAL HOLDINGS, INC.
(Parent Company Only) Balance Sheets December 31, 2003 and 2002 In Thousands2003
    
    2002ASSETSCash
    
    $
    97
    *
    
    $
    32
    *Deferred tax asset
    
    
    5
    
    
    
    6Investment in commercial bank subsidiary
    
    
    13,989
    *
    
    
    13,802
    *Due from commercial bank subsidiary
    
    
    49
    *
    
    
    7
    *Total assets
    
    $
    14,140
    
    
    $
    13,847LIABILITIES AND STOCKHOLDERS EQUITYStockholders equity:Preferred stock, no par value, authorized 1,000,000 shares,
no shares issued
    
    $
    
    
    
    $
    Common stock, par value $1 per share, authorized 2,000,000
shares, 1,381,749 and 1,379,083 shares issued and
outstanding,
respectively
    
    
    1,382
    
    
    
    1,379Additional paid-in capital
    
    
    12,287
    
    
    
    12,267Retained earnings
    
    
    666
    
    
    
    43Net unrealized gains (losses) on available-for-sale securities,
net of income taxes of $120,000 and $97,000, respectively
    
    
    (195
    )
    
    
    158Total stockholders equity
    
    
    14,140
    
    
    
    13,847Total liabilities and stockholders equity
    
    $
    14,140
    
    
    $
    13,847
 * Eliminated in consolidation. 65




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (13)
    
    Legends Financial Holdings, Inc. - Parent Company Financial Information,
Continued LEGENDS FINANCIAL HOLDINGS, INC.
(Parent Company Only) Statements of Earnings and Comprehensive Earnings For the Year Ended December 31, 2003 and
For the Period July 1, 2002 (Inception) through December 31, 2002 In Thousands2003
    
    2002Income:Dividends from commercial bank subsidiary
    
    $
    349
    *
    
    
    Operating expenses
    
    
    107
    
    
    
    18Earnings (loss) before Federal income tax benefits and
equity in undistributed earnings of commercial
bank subsidiary
    
    
    242
    
    
    
    (18
    )Federal income tax benefit
    
    
    47
    
    
    
    7289
    
    
    
    (11
    )Equity in undistributed earnings of commercial bank
subsidiary
    
    
    540
    *
    
    
    395
    *Net earnings
    
    
    829
    
    
    
    384Other comprehensive earnings (loss), net of tax:Unrealized gains on available-for-sale securities arising
during the year, net of taxes of $231,000 and $24,000 in
2003 and 2002, respectively
    
    
    (374
    )
    
    
    38Reclassification adjustment for (gains) losses included in net
earnings, net of taxes of $14,000 and $3,000 in 2003 and
2002, respectively
    
    
    21
    
    
    
    5Other comprehensive earnings (loss)
    
    
    (353
    )
    
    
    43Comprehensive earnings
    
    $
    476
    
    
    
    427
 * Eliminated in consolidation. 66




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (13)
    
    Legends Financial Holdings, Inc. - Parent Company Financial Information,
Continued LEGENDS FINANCIAL HOLDINGS, INC.
(Parent Company Only) Statements of Stockholders Equity For the Year Ended December 31, 2003 and
For the Period July 1, 2002 (Inception) through December 31, 2002 In ThousandsNet UnrealizedGains OnAdditional
    
    Retained
    
    Available-Common
    
    Paid-In
    
    Earnings
    
    For-SaleStock
    
    Capital
    
    (Deficit)
    
    Securities
    
    TotalAcquisition by share exchange with
Legends Bank, July 1, 2002
    
    $
    1,143
    
    
    
    12,446
    
    
    
    (341
    )
    
    
    115
    
    
    
    13,363Issuance of 6,720 shares of $1 par value
common stock
    
    
    7
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    57Stock-split effected in the form of a stock
dividend declared at 1 share for every 5
outstanding
    
    
    229
    
    
    
    (229
    )
    
    
    
    
    
    
    
    
    
    
    Net change in unrealized gains on available-
for-sale securities during the year, net of
taxes of $97,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    43Net earnings for the period July 1, 2002
(inception) through December 31, 2002
    
    
    
    
    
    
    
    
    
    
    384
    
    
    
    
    
    
    
    384Balance December 31, 2002
    
    
    1,379
    
    
    
    12,267
    
    
    
    43
    
    
    
    158
    
    
    
    13,847Issuance of 2,666 shares of $1 par value
common stock
    
    
    3
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    23Cash dividends declared ($.15 per share)
    
    
    
    
    
    
    
    
    
    
    (206
    )
    
    
    
    
    
    
    (206
    )Net change in unrealized gains (loss) on
available-for-sale securities during the year,
net of taxes of $217,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (353
    )
    
    
    (353
    )Net earnings for the year
    
    
    
    
    
    
    
    
    
    
    829
    
    
    
    
    
    
    
    829Balance December 31, 2003
    
    $
    1,382
    
    
    
    12,287
    
    
    
    666
    
    
    
    (195
    )
    
    
    14,140
 67




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (13)
    
    Legends Financial Holdings, Inc. - Parent Company Financial Information,
Continued LEGENDS FINANCIAL HOLDINGS, INC.
(Parent Company Only) Statements of Cash Flows For the Year Ended December 31, 2003 and
For the Period July 1, 2002 (Inception) through December 31, 2002
Increase (Decrease) in Cash and Cash Equivalents In Thousands2003
    
    2002Cash flows from operating activities:Cash paid to suppliers
    
    $
    (107
    )
    
    
    (18
    )Net cash used in operating activities
    
    
    (107
    )
    
    
    (18
    )Cash flows from investing activities:Repayment of (advance to) subsidiary advance, net
    
    
    6
    
    
    
    (7
    )Dividends received from subsidiary
    
    
    349
    
    
    
    Net cash provided by (used in) investing activities
    
    
    355
    
    
    
    (7
    )Cash flows from financing activities:Dividends paid
    
    
    (206
    )
    
    
    Proceeds from sale of common stock
    
    
    23
    
    
    
    57Net cash provided by (used in) financing activities
    
    
    (183
    )
    
    
    57Net increase in cash and cash equivalents
    
    
    65
    
    
    
    32Cash and cash equivalents at beginning of period
    
    
    32
    
    
    
    Cash and cash equivalents at end of year
    
    $
    97
    
    
    
    32
 68




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (13)
    
    Legends Financial Holdings, Inc. - Parent Company Financial Information,
Continued LEGENDS FINANCIAL HOLDINGS, INC.
(Parent Company Only) Statements of Cash Flows, Continued For the Year Ended December 31, 2003 and
For the Period July 1, 2002 (Inception) through December 31, 2002
Increase (Decrease) in Cash and Cash Equivalents In Thousands2003
    
    2002Reconciliation of net earnings to net cash used in operating
activities:Net earnings
    
    $
    829
    
    
    
    384Adjustments to reconcile net earnings to net cash
used in operating activities:Equity in earnings of commercial bank subsidiary
    
    
    (889
    )
    
    
    (395
    )Increase in assets
    
    
    (47
    )
    
    
    (7
    )Total adjustments
    
    
    (936
    )
    
    
    (402
    )Net cash used in operating activities
    
    $
    (107
    )
    
    
    (18
    )
 69




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (14)
    
    Concentration of Credit RiskPractically all of Legends Financials loans, commitments, and commercial
and standby letters of credit have been granted to customers in Legends
Financials market area. Practically all such customers are depositors
of Legends Financial. The concentrations of credit by type of loan are
set forth in note 2 to the financial statements.(15)
    
    Employee Benefit PlanLegends Financial maintains a 401(K) plan which covers eligible
employees. All full time employees are eligible to participate. The
plan provides for both employee and employer contributions. For the
years ended December 31, 2003, 2002, and 2001 Legends Financial
contributed $64,000, $45,000 and $26,000, respectively.(16)
    
    Regulatory Matters and Restrictions on DividendsLegends Financial and its subsidiary are subject to regulatory capital
requirements administered by the Federal Deposit Insurance Corporation
and the Tennessee Department of Financial Institutions. Failure to meet
capital requirements can initiate certain mandatory  and possibly
additional discretionary-actions by regulators that could, in that event,
have a direct material effect on the institutions financial statements.
The relevant regulations require Legends Financial and its subsidiary to
meet specific capital adequacy guidelines that involve quantitative
measures of Legends Financials assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting
principles. Legends Financials capital classifications are also subject
to qualitative judgments by the Regulators about components, risk
weightings and other factors. Those qualitative judgments could also
affect Legends Financials capital status and the amount of dividends
Legends Financial may distribute.Legends Financial and its subsidiary is required to maintain minimum
amounts of capital to total risk weighted assets, as defined by the
banking regulators. Legends Financial and its subsidiary is required to
have a minimum Tier I and Total Capital ratios of 4.0% and 8.0%,
respectively. The actual ratios were 12.5% and 13.6% at December 31,
2003 and 15.6% and 16.6% at December 31, 2002. The leverage ratios at
December 31, 2003 and 2002 were 9.9% and 12.1%, respectively, and the
minimum requirement was 4.0%.As of December 31, 2003, Legends Financial and its subsidiary are
categorized as well capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events since the
notification that management believes have changed Legends Financials
category.On March 25, 2003, the Board of Directors recommended a dividend be
declared at the Annual Shareholders meeting on April 15, 2003. The
recommendation was to set the dividend rate for 2003 at 35% of 2002
earnings. On May 15, 2003, the dividends were paid in the amount of
$206,000 or $.15 per share of voting common stock.(17)
    
    Stock Option ArrangementIn December, 1998, the Board of Directors of the Bank approved the
Legends Bank 1998 Stock Option Arrangement (the 1998 Arrangement). The
Arrangement provides for the granting of stock options, and authorizes
the issuance of common stock upon the exercise of such options, for up to
74,400 shares of common stock, to officers of the Bank and up to 33,600 shares
of common stock to the Directors of the Bank. 70




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (17)
    
    Stock Option Arrangement, ContinuedUnder the Stock Option Arrangement, stock option awards may be granted in
the form of incentive stock options or nonstatutory stock options, and
are generally exercisable for up to five years following the date such
option awards are granted. Exercise prices of incentive stock options
must be equal to or greater than 100% of the fair market value of the
common stock on the grant date.In April of 2001 the Board of Directors of the Bank approved the 2001
Stock Option Plan (the 2001 Plan). The 2001 Plan provides for the
granting of 215,998 shares of stock available for options. Under the
2001 Plan, stock option awards may be granted in the form of incentive
stock options or nonstatutory stock options and are exercisable over
three to six years.Legends Financials stockholders approved Legends Bank 1998 Stock Option
Arrangement and 2001 Stock Option Plan. Legends Financial exchanged its
options with the holders of Legends Bank stock options under the 1998
Arrangement and the 2001 Plan on an option-for-option basis. Thus
options that were outstanding under the 1998 Arrangement and the 2001
Plan have been exchanged for options under Legends Financials Stock
Option Plan.On September 17, 2002, the Board of Directors of Legends Financial
approved a stock-split effected in the form of a one-for-five stock
dividend. The stock dividend also applied to all option arrangements and
as such the number of options, exercise prices and related earnings per
share disclosures have been retroactively adjusted to reflect the
stock-split effected in the form of a dividend.Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock Based Compensation as amended by SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure sets forth the
methods for recognition of cost of arrangements similar to those of
Legends Financial. As is permitted, management has elected to continue
accounting for the arrangement under APB Opinion 25 and related
Interpretations in accounting for its arrangement. However, under SFAS
No. 123, Legends Financial is required to make proforma disclosures as if
cost had been recognized in accordance with the pronouncement. Had
compensation cost for Legends Financials stock option arrangement been
determined based on the fair value at the grant dates for awards under
the arrangement consistent with the method of SFAS No. 123, Legends
Financials net earnings and basic earnings per common share and diluted
earnings per common share would have been reduced to the proforma amounts
indicated below. In Thousands, Except Per Share Amounts2003
    
    2002
    
    2001Net earnings
    
    As Reported
    
    $
    829
    
    
    $
    594
    
    
    $
    499Proforma
    
    $
    780
    
    
    $
    518
    
    
    $
    310Basic
earnings per common share
    
    As Reported
    
    $
    .60
    
    
    $
    .43
    
    
    $
    .36Proforma
    
    $
    .57
    
    
    $
    .39
    
    
    $
    .23Diluted
earnings per common share
    
    As Reported
    
    $
    .59
    
    
    $
    .43
    
    
    $
    .36Proforma
    
    $
    .55
    
    
    $
    .39
    
    
    $
    .23
 71




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (17)
    
    Stock Option Arrangement, ContinuedA summary of the stock option activity is as follows: 2003
    
    2002
    
    2001Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOutstanding at
beginning of year
    
    
    259,860
    
    
    $
    15.38
    
    
    
    265,740
    
    
    $
    15.13
    
    
    
    93,600
    
    
    $
    8.33Granted
    
    
    6,720
    
    
    
    16.98
    
    
    
    4,200
    
    
    
    18.75
    
    
    
    173,160
    
    
    
    18.75Exercised
    
    
    (2,666
    )
    
    
    8.33
    
    
    
    (8,400
    )
    
    
    8.33
    
    
    
    (1,020
    )
    
    
    8.33Forfeited
    
    
    (5,160
    )
    
    
    18.75
    
    
    
    (1,680
    )
    
    
    18.75
    
    
    
    
    
    
    
    Outstanding at end
of year
    
    
    258,754
    
    
    $
    15.42
    
    
    
    259,860
    
    
    $
    15.38
    
    
    
    265,740
    
    
    $
    15.13Options exercisable
at year end
    
    
    198,952
    
    
    
    
    
    
    
    141,952
    
    
    
    
    
    
    
    89,606
  The following table summarizes information about fixed stock options
outstanding at December 31, 2003: Options Outstanding
    
    Options ExercisableWeightedWeighted
    
    Average
    
    
    
    
    
    WeightedRange of
    
    Number
    
    Average
    
    Remaining
    
    Number
    
    AverageExercise
    
    Outstanding
    
    Exercise
    
    Contractual
    
    Exercisable
    
    ExercisePrices
    
    at 12/31/03
    
    Price
    
    Life
    
    at 12/31/03
    
    Price$
    8.33
    
    
    
    82,234
    
    
    $
    8.33
    
    
    5 years
    
    
    82,234
    
    
    $
    8.33$
    18.75
    
    
    
    176,520
    
    
    $
    18.75
    
    
    7.3 years
    
    
    116,718
    
    
    $
    18.75258,754
    
    
    
    
    
    
    
    
    
    198,952
  Certain forfeited options were reallocated to remaining plan participants
during 2003.The fair value of options granted in 2003, 2002 and 2001 was $1.55, $1.41
and $3.05, respectively, for each option. The fair value was estimated
using the Black-Scholes option-pricing model using the following
assumptions: risk free rate of 4.05%, 4.70% and 5.22%; expected life of
five, five and seven years; volatility of .01%; and dividend yield of
2.88%, 2.88% and 2.67%. The dividend yield was computed assuming an 18%
return on equity with a 30% dividend to earnings payout ratio. 72




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (18)
    
    Earnings Per ShareStatement of Financial Accounting Standards (SFAS) No. 128 Earnings Per
Share establishes uniform standards for computing and presenting
earnings per share. The computation of basic earnings per share is based
on the weighted average number of common shares outstanding during the
period. For Legends Financial, the computation of diluted earnings per
share begins with the basic earnings per share plus the effect of common shares
contingently issuable from stock options and warrants. The
weighted average number of shares used in the computation of earnings per
share have been retroactively adjusted to reflect the effects of a
stock-split effected in the form of a one for five stock dividend
declared on September 17, 2002.The following is a summary of the components comprising basic and diluted
earnings per share (EPS): In Thousands,Except Share and Per Share Amounts2003
    
    2002
    
    2001Basic EPS Computation:Numerator  Net earnings for the year
    
    $
    829
    
    
    $
    594
    
    
    $
    499Denominator - Weighted average number
of common shares outstanding
    
    
    1,379,764
    
    
    
    1,374,200
    
    
    
    1,369,968Basic earnings per common share
    
    $
    .60
    
    
    $
    .43
    
    
    $
    .36Diluted EPS Computation:Numerator  Net earnings for the year
    
    $
    829
    
    
    $
    594
    
    
    $
    499Denominator:Weighted average number of common
shares outstanding
    
    
    1,379,764
    
    
    
    1,374,200
    
    
    
    1,369,968Effect of stock options
    
    
    31,967
    
    
    
    15,376
    
    
    
    16,9301,411,731
    
    
    
    1,389,576
    
    
    
    1,386,898Diluted earnings per common share
    
    $
    .59
    
    
    $
    .43
    
    
    $
    .36
  (19)
    
    Disclosures About Fair Value of Financial InstrumentsStatement of Financial Accounting Standards (SFAS) No. 107, Disclosures
about Fair Value of Financial Instruments requires that Legends
Financial disclose estimated fair values for its financial instruments.
Fair value estimates, methods, and assumptions are set forth below for
Legends Financials financial instruments.Cash and short-term investmentsFor those short-term instruments, the carrying amount is a reasonable
estimate of fair value. 73




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (19)
    
    Disclosures About Fair Value of Financial Instruments, ContinuedFederal Funds SoldFederal funds sold clear on a daily basis. For this reason, the carrying
amount is a reasonable estimate of fair value.Investments and Mortgage-Backed SecuritiesThe carrying amounts for short-term securities approximate fair value
because they mature in 90 days or less and do not present unanticipated
credit concerns. The fair value of longer-term securities and
mortgage-backed securities, except certain state and municipal
securities, is estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. The fair
value of certain state and municipal securities is not readily available
through market sources other than dealer quotations, so fair value
estimates are based on quoted market prices of similar instruments,
adjusted for differences between the quoted instruments and the
instruments being valued.SFAS No. 107 specifies that fair values should be calculated based on the
value of one unit without regard to any premium or discount that may
result from concentrations of ownership of a financial instrument,
possible tax ramifications, or estimated transaction costs. Accordingly,
these considerations have not been incorporated into the fair value
estimates.LoansFair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial,
mortgage, credit card and other consumer. Each loan category is further
segmented into fixed and adjustable rate interest terms.The fair value of the various categories of loans is estimated by
discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and
for the same remaining average estimated maturities.The estimated maturity for mortgages is modified from the contractual
terms to give consideration to managements experience with prepayments.
Management has made estimates of fair value discount rates that it
believes to be reasonable. However, because there is no market for many
of these financial instruments, management has no basis to determine
whether the fair value presented below would be indicative of the value
negotiated in an actual sale.The value of the loan portfolio is also discounted in consideration of
the credit quality of the loan portfolio, as would be the case between
willing buyers and sellers. Particular emphasis has been given to loans
on the subsidiary banks internal watch list. Valuation of these loans
is based upon borrower performance, collateral values (including external
appraisals), etc. 74




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (19)
    
    Disclosures About Fair Value of Financial Instruments, ContinuedDeposit LiabilitiesThe fair value of demand deposits, savings accounts and certain money
market deposits is the amount payable on demand at the reporting date.
The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining
maturities. Under the provision of SFAS No. 107 the fair value estimates
for deposits does not include the benefit that results from the low cost
funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market.Advances from Federal Home Loan BankThe fair value of these advances is estimated by discounting the future
payments using the current rates at which similar advances could be
obtained for the same remaining average maturities.Securities Sold Under Repurchase AgreementsThe securities sold under repurchase agreements are payable upon demand.
For this reason the carrying amount is a reasonable estimate of fair
value.Commitments to Extend Credit, Standby Letters of Credit and FinancialGuarantees WrittenLoan commitments are made to customers generally for a period not to
exceed one year and at the prevailing interest rates in effect at the
time the loan is closed. Commitments to extend credit related to
construction loans are made for a period not to exceed six months with
interest rates at the current market rate at the date of closing. In
addition, standby letters of credit are issued for periods up to three
years with rates to be determined at the date the letter of credit is
funded. Fees are only charged for the construction loans and the standby
letters of credit and the amounts unearned at December 31, 2003 and 2002
are insignificant. Accordingly, these commitments have no carrying value
and management estimates the commitments to have no significant fair
value. 75




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (19)
    
    Disclosures About Fair Value of Financial Instruments, ContinuedCommitments to Extend Credit, Standby Letters of Credit and FinancialGuarantees Written, ContinuedThe carrying value and estimated fair values of Legends Financial
financial instruments at December 31, 2003 and 2002 are as follows: In Thousands2003
    
    2002Carrying
    
    
    
    
    
    CarryingAmount
    
    Fair Value
    
    Amount
    
    Fair ValueFinancial assets:Cash and short-term investments
    
    $
    3,401
    
    
    
    3,401
    
    
    
    6,512
    
    
    
    6,512Securities
    
    
    31,944
    
    
    
    31,944
    
    
    
    24,198
    
    
    
    24,198Restricted equity securities
    
    
    480
    
    
    
    480
    
    
    
    395
    
    
    
    395Federal funds sold
    
    
    3,195
    
    
    
    3,195
    
    
    
    1,225
    
    
    
    1,225Loans
    
    
    105,019
    
    
    
    
    
    
    
    77,780Less: allowance for loan losses
    
    
    (1,225
    )
    
    
    
    
    
    
    (879
    )Loans, net of allowance
    
    
    103,794
    
    
    
    103,047
    
    
    
    76,901
    
    
    
    77,045Loans held for sale
    
    
    274
    
    
    
    274
    
    
    
    1,687
    
    
    
    1,687Financial liabilities:Deposits
    
    
    129,816
    
    
    
    130,213
    
    
    
    94,971
    
    
    
    95,427Securities sold under repurchase
agreements
    
    
    651
    
    
    
    651
    
    
    
    3,682
    
    
    
    3,682Advances from FHLB
    
    
    4,991
    
    
    
    4,991
    
    
    
    1,500
    
    
    
    1,500Unrecognized financial instruments:Commitments to extend credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Standby letters of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  LimitationsFair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instruments. These estimates do not reflect any premium or discount that
could result from offering for sale at one time Legends Financials
entire holdings of a particular financial instrument. Because no market
exists for a significant portion of Legends Financials financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates. 76




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LEGENDS FINANCIAL HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued December 31, 2003, 2002 and 2001  (19)
    
    Disclosures About Fair Value of Financial Instruments, ContinuedLimitations, ContinuedFair value estimates are based on estimating on-and-off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, Legends Financial
has a mortgage department that contributes net fee income annually. The
mortgage department is not considered a financial instrument, and its
value has not been incorporated into the fair value estimates. Other
significant assets and liabilities that are not considered financial
assets or liabilities include deferred tax assets and liabilities and
property, plant and equipment. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered
in the estimates. 77




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ITEM 8.
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE There have been no disagreements with Legends Financials independent
auditors on any matters of accounting principles or practices or financial
statement disclosure. 
 ITEM 8A. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures Legends Financial maintains disclosure controls and procedures, as defined
in Rule 13a-15(a) promulgated under the Securities Exchange Act of 1934 (the
Exchange Act), that are designed to ensure that information required to be
disclosed by it in the reports that it files or submits under the Exchange Act
is recorded, processed, summarized and reported within the time period
specified in the SECs rules and forms and that such information is accumulated
and communicated to Legends Financials management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. Legends Financial carried out an
evaluation, under the supervision and with the participation of its management,
including its Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of its disclosure controls and
procedures as of the end of the period covered by this report. Based on the
evaluation of these disclosure controls and procedures, the Chief Executive
Officer and Chief Financial Officer concluded that Legends Financials
disclosure controls and procedures were effective. Changes in Internal Controls There were no changes in Legends Financials internal control over
financial reporting during Legends Financials fiscal quarter ended December
31, 2003 that have materially affected, or are reasonably likely to materially
affect, its internal control over financial reporting. 
 PART III 
 ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to the directors and executive officers is
incorporated herein by reference to the Proxy Statement relating to the Annual
Meeting of Shareholders to be held April 20, 2004. 
 ITEM 10. EXECUTIVE COMPENSATION Information with respect to executive compensation is incorporated herein
by reference to the Proxy Statement relating to the Annual Meeting of
Shareholders to be held April 20, 2004. 
  ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS Information with respect to the security ownership of certain beneficial
owners and management is incorporated herein by reference to the Proxy
Statement relating to the Annual Meeting of Shareholders to be held April 20,
2004. 78




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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to certain relationships and related transactions
is incorporated herein by reference to the Proxy Statement relating to the
Annual Meeting of Shareholders to be held April 20, 2004. 
 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) List of Exhibits Filed. None. (b) Reports on Form 8-K. No reports on Form 8-K filed during the fourth
quarter of the Registrants last fiscal year. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information with respect to certain relationships and related transactions
is incorporated herein by reference to the Proxy Statement relating to the
Annual Meeting of Shareholders to be held April 20, 2004. 
 INDEX OF EXHIBITS DESCRIPTION OF EXHIBITS
 EXHIBIT NO.3.1
    
    Charter of Legends Financial Holdings, Inc.*3.2
    
    Bylaws for Legends Financial Holdings, Inc.*4
    
    Specimen Stock Certificate for Legends Financial Holdings, Inc.*10.1
    
    2001 Statutory and Non-Statutory Stock Option Plan for Legends Financial
Holdings, Inc., as successor-in-interest to Legends Bank*21
    
    Subsidiaries of Registrant*31.1
    
    Certification pursuant to Rule 13a-14a/15d-14(a)31.2
    
    Certification pursuant to Rule 13a-14a/15d-14(a)32.1
    
    Certification pursuant to Rule 18 USC Section 1350-Sarbanes-Oxley Act of 200232.2
    
    Certification pursuant to Rule 18 USC Section 1350-Sarbanes-Oxley Act of 2002
 * Incorporated by reference to Form 10-SB filed by Legends Financial with the
Commission on November 22, 2002. 79




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SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized. LEGENDS FINANCIAL HOLDINGS, INC.
(Registrant)By:
    
    /s/  Billy P. AtkinsBilly P. Atkins, President and ChiefExecutive OfficerDate:
    
    3-25-04
 80




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In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated. By:
    
    /s/ Billy P. AtkinsBilly P. Atkins, President and ChiefExecutive Officer, DirectorDate:
    
    3-25-04By:
    
    /s/ Thomas E. Bates, Jr.Thomas E. Bates, Jr., Executive VicePresident and Chief Financial Officer, DirectorDate:
    
    3-25-04By:
    
    /s/ James D. AmosJames D. Amos, DirectorDate:
    
    3-25-04By:
    
    /s/ Mark Ray BarnettMark Ray Barnett, DirectorDate:
    
    3-25-04By:
    
    /s/ William D. Dickson, Sr.William D. Dickson, Sr., DirectorDate:
    
    3-25-04By:
    
    /s/ Ronald Alan GoadRonald Alan Goad, DirectorDate:
    
    3-25-04By:
    
    /s/ Dick Wright LittletonDick Wright Littleton, Director
 81




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Date:
    
    3-26-04By:
    
    /s/ David P. NussbaumerDavid P. Nussbaumer, DirectorDate:
    
    3-24-04By:
    
    /s/ Pravin Chhagan PatelPravin Chhagan Patel, DirectorDate:
    
    3-25-04By:
    
    /s/ Jimmy Terry, Sr.Jimmy Terry, Sr., DirectorDate:
    
    3-25-04By:
    
    /s/ Francis Gene WasherFrancis Gene Washer, DirectorDate:
    
    3-25-04By:
    
    /s/ Douglas WeilandRalph D. Weiland, DirectorDate:
    
    3-25-04
 82