**U.S. SECURITIES AND EXCHANGECOMMISSION**

**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, 2004**

 

**Commission File Number:  0-50106**

 
| **LEGENDS FINANCIAL HOLDINGS, INC.**                            |
|-----------------------------------------------------------------|
| (Name of Small Business Issuer in its charter)                  |
| ** **                                                      | ** ** | ** ** |
| **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**                                              |
| (Issuer’s telephone number)                                |
|                                                            |
| Securities registered under Section 12(g) of the Exchange Act:  |
|                                                            |
| **Common Stock, $1.00 par value per share**                     |
| (Title of Class)                                                |

 

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

YES  ý         NOo

 

Check if there is no disclosure of delinquent filersin response to Item 405 of Regulation S-B contained in this form, and nodisclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-KSB or any amendment to this Form 10-KSB  o

 

The issuer’s revenues for the fiscal year endedDecember 31, 2004 were $10,436,000.

 

The aggregate market value of the issuer’s votingcommon stock held by non-affiliates, computed by reference to the price atwhich the stock was sold as of March 1, 2005, is $23,487,640 for 1,174,382shares at an estimated $20.00 per share.

 

As of March 1, 2005, 1,423,151****shares of the issuer’s common stock wereoutstanding.

 

 

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DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s definitive proxystatement, which was filed with the Securities and Exchange Commission on March16, 2005, are incorporated by reference into Part III of this annual report onForm 10-KSB.

 

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# **CROSS REFERENCE INDEXTOFORM 10-KSB**

 

Certain information required by Form 10-KSB isincorporated by reference from the annual report to shareholders as indicatedbelow. Only that information expressly incorporated by reference is deemedfiled with the Commission.

 
|      | PART I                                                                                                           |   |
|-----------|------------------------------------------------------------------------------------------------------------------|--------|
|      |                                                                                                             |   |
| ITEM 1.   | DESCRIPTION OF BUSINESS                                                                                          | 2      |
| ITEM 2.   | DESCRIPTION OF  PROPERTY                                                                                         | 14     |
| ITEM 3.   | LEGAL PROCEEDINGS                                                                                                | 14     |
| ITEM  4.  | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                             | 14     |
|      |                                                                                                             |   |
|      | PART II                                                                                                          |   |
|      |                                                                                                             |   |
| ITEM  5.  | MARKET  FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER  PURCHASES OF EQUITY SECURITIES | 15     |
| ITEM 6.   | MANAGEMENT’S DISCUSSION  AND ANALYSIS OR PLAN OF OPERATION                                                  | 18     |
| ITEM 7.   | FINANCIAL STATEMENTS                                                                                             | 45     |
| ITEM  8.  | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                            | 89     |
| ITEM 8A.  | CONTROLS AND  PROCEDURES                                                                                         | 89     |
| ITEM 8B.  | OTHER INFORMATION                                                                                                | 89     |
|      |                                                                                                             |   |
|      | PART III                                                                                                         |   |
|      |                                                                                                             |   |
| ITEM  9.  | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                              | 89     |
| ITEM 10.  | EXECUTIVE COMPENSATION                                                                                           | 89     |
| ITEM  11. | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS                 | 89     |
| ITEM  12. | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS                                                                  | 90     |
| ITEM 13.  | EXHIBITS                                                                                                         | 90     |
| ITEM  14. | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                                                          | 90     |

 

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*Thisinformation is included in this annual report on Form 10-KSB and is not incorporatedby reference from Legends Financial’s definitive proxy statement.

 

** Thematerial required by Items 9 through 12 and 14 is incorporated by referencefrom Legends Financial Holdings’ definitive proxy statement pursuant toInstruction E(3) of Form 10-KSB. Legends Financial Holdings filed a definitiveproxy statement with the Securities and Exchange Commission on March 16, 2005.

 

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**CAUTIONARY STATEMENT CONCERNING**

**FORWARD-LOOKING INFORMATION**

 

This Annual Report on Form 10-KSB of Legends FinancialHoldings, 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 “safeharbors” created thereby.  Thosestatements include, but may not be limited to, the discussions of LegendsFinancial’s expectations concerning its future profitability, operatingperformance, 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 arebeing made.

 

You should be aware that, while Legends Financialbelieves the expectations reflected in those forward-looking statements arereasonable, they are inherently subject to risks and uncertainties which couldcause Legends Financial’s future results and stockholder values to differmaterially from Legends Financial’s expectations.  These factors are disclosed in “Management’sDiscussion and Analysis of Financial Condition and Results of Operation” setforth herein.  Because of these factors,there can be no assurance that the forward-looking statements included orincorporated by reference herein will prove to be accurate.  In light of the significant uncertaintiesinherent in the forward-looking statements included or incorporated byreference herein, you should not regard the inclusion of such information as arepresentation by Legends Financial or any other person that the objectives andplans of Legends Financial will be achieved. In addition, Legends Financial does not intend to, and is not obligatedto, update these forward-looking statements after the date of this AnnualReport on Form 10-KSB, even if new information, future events or othercircumstances have made them incorrect or misleading as of any future date.

 

# **PARTI**

# ** **

## **ITEM 1**.  DESCRIPTION OFBUSINESS

 

### **General**

 

Legends Financial is a corporation formed on February27, 2002 under the laws of the State of Tennessee for the purpose of acquiringLegends Bank, a Tennessee banking corporation (“Legends Bank”), by means of ashare exchange and becoming a registered bank holding company under the FederalReserve Act. On April 16, 2002, the shareholders of Legends Bank approved aPlan of Share Exchange (the “Plan of Share Exchange”) between Legends Financialand Legends Bank whereby the common shares of Legends Bank were exchanged, on aone for one basis, for shares of common stock of Legends Financial. Theexchange became effective on July 1, 2002.

 

Legends Bank is a banking corporation incorporatedunder the laws of Tennessee in 1998. Legends Bank’s deposit accounts areinsured under the Federal Deposit Insurance Act (“FDIA”), up to the maximumapplicable limits thereof.  Legends Bankhas its main office at 310 North First Street, Clarksville, Tennessee, andbranch locations at 2250-O Wilma Rudolph Boulevard, 1950 Madison Street, 140Dover Crossing Road, each in Clarksville, and 300 Donelson Parkway in Dover,Tennessee.

 

Legends Bank considers its primary market for loansand deposits to be individuals, small-to-medium size businesses, andprofessionals within Legends Bank’s primary trade area.  Legends Bank offers a full range ofdepository products, including checking accounts; savings accounts; moneymarket deposit accounts; various types of time deposits; individual retirementaccounts; mobile branch services; lockbox services and safe deposit services.  Legends Bank also offers its customers loansfor consumer, commercial, and real estate purposes, and credit services.  Legends Bank’s principal source of income isfrom interest earned on personal, commercial and real estate loans of varioustypes.  Legends Bank has correspondentbanking relationships with a variety of banks, including certain regionalbanks.

 

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Legends Bank is subject to the regulatory authority ofthe Tennessee Department of Financial Institutions (“TDFI”) and the FederalDeposit Insurance Corporation (“FDIC”). Legends Financial is regulated by theBoard of Governors of the Federal Reserve System (the “Federal Reserve Board”).

 

During 2002, Legends Bank formed a wholly ownedsubsidiary, Legends Financial Services, Inc. The subsidiary is affiliated withLinsco/Private Ledger and offers customers a wide array of financialproducts.  Through its subsidiary,Legends Bank is able to offer annuities, stock, bonds, mutual funds as well asother investment products.  These investmentproducts are not federally insured and there is possibility of principal loss.

 

### **Market Area**

 

Legends Bank’s primary service area encompassesClarksville, Montgomery County, Tennessee and the surrounding counties inTennessee and Kentucky. Clarksville is situated on the Tennessee-Kentuckyborder approximately 40 miles northwest of Nashville, Tennessee. Clarksville’spopulation is over 100,000, with the county totaling 150,000 people.Clarksville is home to Austin Peay State University, which is part of theTennessee Regents higher education system with an enrollment of 7,000. A factoreffecting 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 FortCampbell. Based on comparable data available on a statewide and national level,the local economy appears to be in better relative health than both Tennesseeand the United States. The local retail, real estate and construction sectorsare all showing positive growth. The data indicates the local economy isexperiencing overall modest but stable growth. Today, Clarksville is Tennessee’sfifth largest city.

 

### **Employees**

 

As of December 31, 2004, Legends Bank had 58 full-timeemployees, of which 25 were Bank officers, and****9 people employed on a part-time basis. Legends Bank’s employees arenot represented by any union or other collective bargaining agreement andLegends Bank believes its employee relations are satisfactory.

 

### **Investment Policy**

 

The objective of Legends Bank’s investment policy isto invest funds not otherwise needed to meet the loan demand of its market areato earn the maximum return for Legends Bank, yet still maintain sufficientliquidity to meet fluctuations in Legends Bank’s loan demand and depositstructure.  In doing so, Legends Bankbalances the market and credit risks against the potential investment return,makes investments compatible with the pledge requirements of Legends Bank’sdeposits 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 areauthorized to execute security transactions for the investment portfolio basedon the decisions of the investment committee. All the investment transactions occurring since the previous board ofdirectors’ meeting are reviewed by the board at its next monthly meeting, andthe entire portfolio is reviewed on a semi-annual basis.  The investment policy allows portfolioholdings to include short-term securities purchased to provide Legends Bank’sneeded liquidity and longer term securities purchased to generate level incomefor Legends Bank over periods of interest rate fluctuations.

 

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### **Loan Portfolio**

 

Legends Bank had a total of $129.8 million in loans atDecember 31, 2004.  As the loan portfoliois concentrated in Montgomery County, there is a risk that the ability ofborrowers to repay the loans could be affected by changes in local economic conditions.  The loan portfolio consists primarily of realestate, commercial and installment loans. Commercial loans consist of real estate loans, term loans, or lines ofcredit.  Maturity of term loans isnormally limited to three to five years. Conventional real estate loans may be made up to 89% of the appraisedvalue or purchase cost of the real estate, with maturities generally 5 years orless and amortization not to exceed 30 years. Installment loans are based on the earning capacity and vocational stabilityof the borrower.

 

### **Loan Policy**

 

All lending activities of Legends Bank are under thedirect supervision and control of the Board of Directors through the ExecutiveCredit Approval Committee.  The ExecutiveCredit Approval Committee enforces loan authorizations for each officer,decides on loans exceeding such limits, services all requests for officercredits to the extent allowable under current laws and regulations, administersall problem credits, and determines the allocation of funds for each lendingdivision.

 

The Executive Credit Approval Committee approves loanrelationships over $750,000 while the full Board of Directors approves loanrelationships of $2,000,000 or more and reviews all new loans made thepreceding month.  Loans which are 30 daysor more past due are reviewed monthly by the Board of Directors.

 

Real Estate Loans. Commercial real estate loans are secured primarily by office, industrialand retail properties located in Clarksville. Included in this category are loans secured by farmland.  These types of loans amounted to $47.1million or 36% of the total loan portfolio as of December 31, 2004.  Commercial real estate loans typically may beamortized up to 20 years, but frequently have maturities at five years orless.  Commercial real estate loans areoriginated with a loan-to-value ratio generally not exceeding 75%.  Commercial real estate loans are generallylarger and involve a greater degree of risk than mortgage loans.

 

Construction/Land development loans total $22.4 millionor 17% of the total portfolio on December 31, 2004.  These loans are primarily used to fundresidential construction.  Loanstypically are set up for one to two years with adjustable rates and are repaidwith the sale of collateral. Construction loans for residential construction are originated with aloan-to-value ratio originally not exceeding 80%, and construction loans fornon-residential construction and land development are originated with aloan-to-value ratio generally not exceeding 75%.  The Clarksville area continues to prosper inthe residential home market.

 

Residential real estate loans representing loanssecured by 1-4 family and multi-family mortgages.  These loans, as of December 31, 2004,including junior loans and home equity lines, total $30.5 million or 24% of thetotal loan portfolio.  Single familyresidence loans are originated for terms up to 30-year amortization.  Advances are typically limited to the lessorof 80% of appraised value or purchase price. While amortization schedules may be for 30 years, interest rates on realestate loans are generally not set for a period longer than three to fiveyears.  Residential real estate loans areoriginated with a loan-to-value ratio generally not exceeding 89.9%.

 

Commercial Business Loans. Commercial business loansare business loans that are not secured by real estate and are dependent onbusiness cash flows for repayment.  AtDecember 31, 2004, commercial loans amounted to $24.5 million or 19% of thetotal loan portfolio.  Half of the outstandingcommercial loans are term loans, and half are commercial lines of credit.

 

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Consumer Loans. Consumer loans are made to provide a wide range of financial services tocustomers and to create stronger ties to customers.  Consumer loans are typically five years orshorter and tend to carry higher yields, helping maintain a profitable spreadbetween average loan yields and our cost of funds. Underwriting standards forconsumer loans include assessment of the applicant’s repayment ability.Consumer loan repayment are dependent on the borrower’s continuing financialstability and are likely to be adversely affected by job loss, divorce andillness. As of December 31, 2004, consumer loans amounted to $5.3 million or 4%of the total loan portfolio.

 

Management of Legends Bank reviews on a monthly basisthe loan portfolio, particularly non-accrual and renegotiated loans.  The review may result in a determination thata loan should be placed on a non-accrual status for income recognition.  In addition, to the extent that managementidentifies potential losses in the loan portfolio, it reduces the book value ofsuch loans, through charge-offs, to their estimated collectible value.  Legends Bank’s policy is to classify asnon-accrual any loan on which payment of principal or interest is 90 days ormore past due except where there is adequate collateral to cover principal andaccrued interest and the loan is in the process of collection.  Management defines “in the process ofcollection” as that point where the customer has agreed to an acceleratedrepayment plan to bring the loan current, which definition is in accordancewith generally accepted accounting principles (“GAAP”) but is not in accordancewith definition as contained in Banking Bulletin 91-19.  No concessions are granted and late fees arecollected.  In addition, a loan will beclassified as non-accrual if, in the opinion of the management, based upon areview of the borrower’s or guarantor’s financial condition, collateral valueor other factors, payment is questionable, even though payments are not 90 daysor more past due.

 

When a loan is classified as non-accrual, any unpaidinterest is reversed against current income. Interest is included in income thereafter only to the extent received incash.  The loan remains in a non-accrualclassification until such time as the loan is brought current, when it may bereturned to accrual classification.  Whenprincipal or interest on a non-accrual loan is brought current, if inmanagement’s opinion future payments are questionable, the loan would remainclassified as non-accrual.  After anon-accrual or renegotiated loan is charged off, any subsequent payments ofeither interest or principal are applied first to any remaining balanceoutstanding, then to recoveries and lastly to income.

 

The large number of consumer installment loans and therelatively small dollar amount of each makes an individual reviewimpracticable.  It is Legends Bank’spolicy to charge off any consumer installment loan, which is past due 120 daysor more.

 

In addition, mortgage loans secured by real estate areplaced on non-accrual status when the mortgagor is in bankruptcy, is 90 daysdelinquent, or foreclosure proceedings are instituted.  Any accrued interest receivable remains anobligation of the borrower.

 

Legends Bank’s underwriting guidelines are applied tofour major categories of loans:  (1)commercial, financial and agricultural; (2) installment; (3) real estate -mortgage; and (4) real estate - construction. Legends Bank requires its loan officers and loan committee to considerthe borrower’s character, the borrower’s industry and the economic environmentin which the loan will be repaid.  Beforeapproving a loan, the loan officer or committee must determine that theborrower is basically honest and creditworthy, determine that the borrower is acapable manager, understand the specific purpose of the loans, understand thesource and plan of repayment, determine that the purpose, plan and source ofrepayment as well as collateral are acceptable, reasonable and practical giventhe normal framework within which the borrower operates.

 

The accrual of interest income is discontinued when itis determined that the collection of interest is less probable or thecollection of any amount of principal is doubtful.  The decision to place a loan on a non-accrualstatus is based on an evaluation of the borrower’s financial condition,collateral liquidation value, economic and business conditions and otherfactors that affect the borrower’s ability to pay.  At the time a loan is placed on a non-accrualstatus, the accrued but unpaid interest is also evaluated as tocollectability.  If collectability isdoubtful, the unpaid interest is charged off. Thereafter, interest on non-accrual loans is recognized only asreceived.  Legends Bank had $420,000loans on non-accrual status at December 31, 2004.

 

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At December 31, 2004, there were loans totaling $3,912,000which were included in Legends Bank’s internal classified loans list.  Loans are listed as classified wheninformation obtained about possible credit problems of the borrower hasprompted management to question the ability of the borrower to comply with therepayment terms of the loan agreement. The loan classifications do not represent or result from trends oruncertainties which management expects will be materially impacted by economicor other conditions.

 

At December 31, 2004 there were no loan concentrationsthat exceeded ten percent of total loans. Loan concentrations are amounts loaned to a multiple number of borrowersengaged in similar activities which would cause them to be similarly impactedby economic or other conditions.

 

There were no material amounts of otherinterest-bearing assets (interest-bearing deposits with other banks, municipalbonds, etc.) at December 31, 2004, which would be required to be disclosed aspast due, non-accrual, restructured or potential problem loans, if such interest-bearingassets were loans.

 

### **Credit Risk Managementand Reserve for Loan Losses**

 

Credit risks and exposure to loss are inherent partsof Legends Bank’s business.  Managementseeks to manage and minimize these risks through its loan and investment policiesand loan review procedures.  Managementestablishes and continually reviews lending and investment criteria andapproval procedures that it believes reflect the risk sensitive nature ofLegends Bank.  The loan review proceduresare set to monitor adherence to the established criteria and to ensure that ona continuing basis such standards are endorsed and maintained.

 

The allowance for possible loan losses is an amountthat management believes will be adequate to absorb possible losses on existingloans that may become uncollectible.  Theprovision for possible loan losses charged to operating expense is based onpast loan loss experience and other factors, which, in management’s judgment,deserve current recognition in estimating possible loan losses.  Such other factors considered by managementinclude growth and composition of the loan portfolio, review of specific loanproblems, the relationship of the allowance for possible loan losses tooutstanding loans, adverse situations that may affect the borrower’s ability torepay, the estimated value of any underlying collateral and current economicconditions that may affect the borrower’s ability to pay.

 

Management conducts a continuous review of all loansthat are delinquent, previously charged down or loans which are determined tobe potentially uncollectible.  Loanclassifications are reviewed periodically by a person independent of thelending function.  The Board of Directorsperiodically reviews the adequacy of the allowance for possible loan loss.

 

The loan portfoliois reviewed on a monthly basis and management determines the amount of loans tobe charged off.  In addition, suchfactors as Legends Bank’s previous loan loss experience, prevailing andanticipated economic conditions, industry concentrations and the overallquality of the loan portfolio are considered. While management uses available information to recognize losses on loansand real estate owned, future additions to the allowance may be necessary basedon changes in economic conditions.  Inaddition, various regulatory agencies, as an integral part of their examinationprocess, periodically review the allowances for losses on loans and real estateowned.  Such agencies may require LegendsBank to recognize additions to the allowances based on their judgments aboutinformation available at the time of their examination.  In addition, any loan or portion thereofwhich is classified as a “loss” by regulatory examiners is charged off.

 

 

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The reserve for loan losses is increased by provisionscharged to operating expense.  Thereserve is reduced by charging off loans or portions of loans at the time thatare deemed by management to be uncollectible and increased when loanspreviously charged off are recovered. The resulting reserve for loan losses is viewed by management as asingle, unallocated reserve available for all loans and, in management’sopinion, is adequate to provide for reasonably foreseeable potential loanlosses.   Rules and formulas relative tothe adequacy of the reserve, although useful as guidelines to management, arenot rigidly applied.  The reserve forloan losses was $1.517 million at year-end 2004 or 1.2% of loans outstanding, netof unearned income.

 

### **Competition**

 

Legends Bank encounters strong competition in makingloans, acquiring deposits and offering other services.  Competition among financial institutions isbased upon interest rates offered on deposit accounts, interest rates chargedon loans, other credit and service charges relating to loans, the quality andscope of the services rendered, the convenience of banking facilities and, inthe case of loans to commercial borrowers, relative lending limits.  Legends Bank competes with other commercialbanks, savings and loan associations, credit unions and finance companies,mutual funds, insurance companies, brokerage and investment banking companies,and other financial intermediaries.  Manyof these competitors, some of which are affiliated with large bank holding companies,have substantially greater resources and lending limits, and may offer certainservices that Legends Bank does not currently provide.  In addition, many of Legends Bank’s non-bankcompetitors are not subject to the same extensive federal regulations thatgovern bank holding companies and federally insured banks.

 

The Riegle-Neal Interstate Banking and BranchingEfficiency Act of 1994 (“Riegle-Neal”) authorized bank holding companies toacquire banks and other bank holding companies without geographic limitationsbeginning September 30, 1995.  Thearrival of interstate banking has further increased the competitiveness ofLegends Banking industry.

 

In addition, beginning June 1, 1997, Riegle-Nealauthorized interstate mergers and consolidations of existing banks, providedthat neither bank’s home state had opted out of interstate branching by May 31,1997.  Tennessee did not opt out ofinterstate branching.  Interstatebranching provides that once a bank has established branches in a state throughan interstate merger, Legends Bank may establish and acquire additionalbranches at any location in the state where any bank involved in the interstatemerger could have established or acquired branches under applicable federal orstate law.

 

The continued deregulation of the financial servicesindustry may have a detrimental effect on Legends Bank’s long-term growth andprofitability.

 

### **Supervision andRegulation**

 

#### Bank Holding CompanyRegulation

 

Legends Financial is a bank holding company within themeaning of the Bank Holding Company Act of 1956, as amended (the “HoldingCompany Act”), and is registered with the Federal Reserve Board.  Its banking subsidiary, Legends Bank, issubject to restrictions under federal law which limit the transfer of funds byit to Legends Financial and nonbanking subsidiaries, whether in the form ofloans, extensions of credit, investments, or asset purchases.  Such transfers by any subsidiary bank to itsholding company or any non-banking subsidiary are limited in amount to 10% ofthe subsidiary bank’s capital and surplus and, with respect to LegendsFinancial and all such nonbanking subsidiaries, to an aggregate of 20% of suchbank’s capital and surplus. Furthermore, such loans and extensions of creditare required to be secured in specified amounts.  The Holding Company Act also prohibits,subject to certain exceptions, a bank holding company from engaging in oracquiring direct or indirect control of more than 5% of the voting stock of anycompany engaged in non banking activities. An exception to this prohibition is for activities expressly found bythe Federal Reserve Board to be so closely related to banking or managing orcontrolling banks as to be a proper incident thereto or financial in nature.

 

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As a bank holding company, Legends Financial isrequired to file with the Federal Reserve Board semi-annual reports and suchadditional information as the Federal Reserve Board may require.  The Federal Reserve Board also makes examinationsof Legends Financial.

 

According to Federal Reserve Board policy, bankholding companies are expected to act as a source of financial strength to eachsubsidiary bank and to commit resources to support each such subsidiary.  This support may be required at times when abank holding company may not be able to provide such support.

 

A bank holding company and its subsidiaries are alsoprohibited from acquiring any voting shares of, or interest in, any bankslocated outside of the state in which the operations of the bank holdingcompany’s subsidiaries are located, unless the acquisition is specificallyauthorized by the statutes of the state in which the target is located.  Further, a bank holding company and itssubsidiaries are prohibited from engaging in certain tie-in arrangements inconnection with the extension of credit or provision of any property orservice.  Thus, an affiliate of a bankholding company may not extend credit, lease or sell property, or furnish anyservices or fix or vary the consideration for these on the condition that (i)the customer must obtain or provide some additional credit, property orservices from or to its bank holding company or subsidiaries thereof or (ii)the customer may not obtain some other credit, property, or services from acompetitor, except to the extent reasonable conditions are imposed to assurethe soundness of the credit extended.

 

In approving acquisitions by bank holding companies ofbanks and companies engaged in the banking-related activities described above,the Federal Reserve Board considers a number of factors, including the expectedbenefits to the public such as greater convenience, increased competition, orgains in efficiency, as weighed against the risks of possible adverse effectssuch as undue concentration of resources, decreased or unfair competition,conflicts of interest, or unsound banking practices.  The Federal Reserve Board is also empoweredto differentiate between new activities and activities commenced through theacquisition of a going concern.

 

The Attorney General of the United States may, within30 days after approval by the Federal Reserve Board of an acquisition, bring anaction challenging such acquisition under the federal antitrust laws, in whichcase the effectiveness of such approval is stayed pending a final ruling by thecourts.  Failure of the Attorney Generalto challenge an acquisition does not, however, exempt the holding company fromcomplying with both state and federal antitrust laws after the acquisition is consummatedor immunize the acquisition from future challenge under the anti-monopolizationprovisions of the Sherman Act.

 

#### Sarbanes-Oxley Act of2002

 

On July 30, 2002, President Bush signed into law theSarbanes-Oxley Act of 2002.  Thislegislation represents a comprehensive revision of laws affecting corporategovernance, accounting obligations and corporate reporting. The Sarbanes-OxleyAct is applicable to all companies with equity securities registered, or thatfile reports under, the Securities Exchange Act of 1934.  In particular, the Sarbanes-Oxley Actestablishes (i) new requirements for audit committees, including independence,expertise and responsibilities; (ii) additional responsibilities regardingfinancial statements for the chief executive officer and chief financialofficer of the reporting company and new requirements for them to certify theaccuracy of periodic reports; (iii) new standards for auditors and regulationof audits; (iv) increased disclosure and reporting obligations for the reportingcompany and its directors and executive officers, including an accelerated timeframe for reporting of insider transactions; and (v) new and increased civiland criminal penalties for violations of the federal securities laws.  The legislation also established a newaccounting oversight board to enforce auditing standards and restrict the scopeof services that accounting firms may provide to their public company auditclients.  Because Legends Financial’scommon stock is registered with the SEC, it is subject to the requirements ofthis legislation.

 

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#### Tennessee Banking Act;Federal Deposit Insurance Act

 

Legends Bank is a Tennessee state-chartered bank andis subject to the regulations of and supervision by the FDIC as well as theTDFI, Tennessee’s state banking authority. Legends Bank is also subject to various requirements and restrictionsunder federal and state law, including requirements to maintain reservesagainst deposits, restrictions on the types and amounts of loans that may begranted and the interest that may be charged thereon and limitations on thetypes of investments that may be made and the types of services that may beoffered.  Various consumer laws andregulations also affect the operations of Legends Bank.  In addition to the impact of regulation,commercial banks are affected significantly by the actions of the FederalReserve Board as it attempts to control the money supply and credit availabilityin order to influence the economy.

 

From time to time, legislation is enacted which hasthe effect of increasing the cost of doing business, limiting or expandingpermissible activities or affecting the competitive balance between banks andother financial institutions.  Proposalsto change the laws and regulations governing the operations and taxation ofbanks, bank holding companies and other financial institutions are frequentlymade in Congress, in the Tennessee legislature and before various bankregulatory and other professional agencies. The likelihood of any major legislative changes and the impact suchchanges might have on Legends Bank are impossible to predict.

 

Legends Bank, as a Tennessee state chartered bank, issubject to primary supervision, periodic examination and regulation by theCommissioner of the TDFI (“Commissioner”) and the FDIC.  If, as a result of an examination of a bank,the FDIC should determine that the financial condition, capital resources,asset quality, earnings prospects, management, liquidity or other aspects ofLegends Bank’s operations are unsatisfactory or that Legends Bank or itsmanagement is violating or has violated any law or regulation, various remediesare available to the FDIC.  Such remediesinclude the power to enjoin “unsafe or unsound” practices, to requireaffirmative action to correct any conditions resulting from any violation orpractice, to issue an administrative order that can be judicially enforced, todirect an increase in capital, to restrict the growth of Legends Bank, to assesscivil monetary penalties, to remove officers and directors and ultimately toterminate Legends Bank’s deposit insurance. The Commissioner has many of the same remedial powers, including thepower to take possession of a bank whose capital becomes impaired.  As of March 1, 2005, Legends Bank is not thesubject of any such action by the FDIC or the Commissioner.

 

The deposits of Legends Bank are insured by the FDICin the manner and to the extent provided by law.  For this protection, Legends Bank pays a semiannualstatutory assessment.  Although LegendsBank is not a member of the Federal Reserve System, it is nevertheless subjectto certain regulations of the Federal Reserve Board.

 

Various requirements and restrictions under the lawsof the State of Tennessee and the United States affect the operations ofLegends Bank.  State and federal statutesand regulations relate to many aspects of Legends Bank’s operations, includingreserves against deposits, interest rates payable on deposits, loans,investments, mergers and acquisitions, borrowings, dividends, locations ofbranch offices and capital requirements. Further, Legends Bank is required to maintain certain levels of capital.

 

9

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Tennessee law contains limitations on the interestrates that may be charged on various types of loans and restrictions on thenature and amount of loans that may be granted and on the types of investmentswhich may be made.  The operations of banksare also affected by various consumer laws and regulations, including thoserelating to equal credit opportunity and regulation of consumer lendingpractices.  All Tennessee banks mustbecome and remain insured banks under the FDIA. (See 12 U.S.C. §1811, et seq.).

 

#### FIRREA

 

Congress enacted the Financial Institutions Reform,Recovery and Enforcement Act of 1989 (“FIRREA”) on August 9, 1989.  FIRREA provides that a depository institutioninsured by the FDIC can be held liable for any loss incurred by, or reasonableexpected to be incurred by, the FDIC in connection with (i) the default of acommonly controlled FDIC insured depository institution or (ii) any assistanceprovided by the FDIC to a commonly controlled FDIC insured depositoryinstitution in danger of default.  FIRREAprovides that certain types of persons affiliated with financial institutionscan be fined by the federal regulatory agency having jurisdiction over adepository institution with federal deposit insurance (such as Legends Bank) upto $1 million per day for each violation of certain regulations related(primarily) to lending to and transactions with executive officers, directors,principal shareholders and the interests of these individuals.  Other violations may result in civil moneypenalties of $5,000 to $30,000 per day or in criminal fines and penalties.  In addition, the FDIC has been grantedenhanced authority to withdraw or to suspend deposit insurance in certaincases.

 

#### FDICIA

 

The Federal Deposit Insurance Corporation ImprovementAct of 1991 (“FDICIA”) which was enacted on December 19, 1991, substantiallyrevised the depository institution regulatory and funding provisions of theFDIA and made revisions to several other federal banking statutes.  Among other things, FDICIA requires thefederal banking regulators to take “prompt corrective action” in respect ofFDIC-insured depository institutions that do not meet minimum capitalrequirements. FDICIA establishes five capital tiers: “well capitalized,” “adequatelycapitalized,” “undercapitalized,” “significantly undercapitalized” and “criticallyundercapitalized.”  Under applicableregulations, a FDIC-insured depository institution is defined to be wellcapitalized if it maintains a Leverage Ratio of at least 5%, a risk adjustedTier 1 Capital Ratio of at least 6% and a Total Capital Ratio of at least 10%and is not subject to a directive, order or written agreement to meet andmaintain specific capital levels.  Aninsured depository institution is defined to be adequately capitalized if itmeets all of its minimum capital requirements as described above.  In addition, an insured depositoryinstitution will be considered undercapitalized if it fails to meet any minimumrequired measure, significantly undercapitalized if it is significantly belowsuch measure and critically undercapitalized if it fails to maintain a level oftangible equity equal to not less than 2% of total assets.  An insured depository institution may bedeemed to be in a capitalization category that is lower than is indicated byits actual capital position if it receives an unsatisfactory examinationrating.

 

The capital-based prompt corrective action provisionof FDICIA and their implementing regulations apply to FDIC-insured depositoryinstitutions and are not directly applicable to holding companies which controlsuch institutions.  However, the FederalReserve Board has indicated that, in regulating bank holding companies, it willtake appropriate action at the holding company level based on an assessment ofthe effectiveness of supervisory actions imposed upon subsidiary depositoryinstitutions pursuant to such provisions and regulations.

 

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FDICIA generally prohibits an FDIC-insured depositoryinstitution from making any capital distribution (including payment ofdividends) or paying any management fee to its holding company if thedepository institution would thereafter be undercapitalized.  Undercapitalized depository institutions aresubject to restrictions on borrowing from the Federal Reserve System.  In addition, undercapitalized depositoryinstitutions are subject to growth limitations and are required to submitcapital restoration plans.  A depositoryinstitution’s holding company must guarantee the capital plan, up to an amountequal to the lesser of 5% of the depository institution’s assets at the time itbecomes undercapitalized or the amount of the capital deficiency when theinstitution fails to comply with the plan. The federal banking agencies may not accept a capital plan withoutdetermining, among other things, that the plan is based on realisticassumptions and is likely to succeed in restoring the depository institution’scapital.  If a depository institutionfails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.

 

Significantly undercapitalized depository institutionsmay be subject to a number of requirements and restrictions, including ordersto sell sufficient voting stock to become adequately capitalized, requirementsto reduce total assets and cessation of receipt of deposits from correspondentbanks.  Critically undercapitalizeddepository institutions are subject to appointment of a receiver or conservatorgenerally within 90 days of the date on which they became criticallyundercapitalized.

 

Legends Bank believes that at March 1, 2005, LegendsBank was well capitalized under the criteria discussed above.

 

FDICIA contains numerous other provisions, includingaccounting, audit and reporting requirements, termination of the “too big tofail” doctrine except in special cases, limitations on the FDIC’s payment ofdeposits at foreign branches, new regulatory standards in such areas as assetquality, earnings and compensation and revised regulatory standards for, amongother things, powers of state banks, real estate lending and capitaladequacy.  FDICIA also requires that adepository institution provide 90 days prior notice of the closing of anybranches.

 

Various other legislation, including proposals torevise the bank regulatory system and to limit the investments that adepository institution may make with insured funds, is from time to timeintroduced in Congress.  The TDFI andFDIC will examine Legends Bank periodically for compliance with various regulatoryrequirements.  Such examinations, however,are for the protection of the Bank Insurance Fund (“BIF”) and for depositors,and not for the protection of investors and shareholders.

 

#### Interstate Act

 

The Riegle-Neal Interstate Banking and BranchingEfficiency Act of 1994 (“Interstate Act”), which was enacted on September 29,1994, among other things and subject to certain conditions and exceptions,permits on an interstate basis (i) bank holding company acquisitions commencingone year after enactment of banks of a minimum age of up to five years asestablished by state law in any state, (ii) mergers of national and state banksafter May 31, 1997 unless the home state of either bank has opted out of theinterstate bank merger provision, (iii) branching de novo by national and statebanks if the host state has opted-in to this provision of the Interstate Act,and (iv) certain bank agency activities after one year after enactment.  The Interstate Act contains a 30% intrastatedeposit cap, except for the initial acquisition in the state, restriction thatapplies to certain interstate acquisitions unless a different intrastate caphas been adopted by the applicable state pursuant to the provisions of theInterstate Act and a 10% national deposit cap restriction.  Tennessee has opted-in to the InterstateAct.  Management cannot predict theextent to which the business of Legends Bank may be affected.  Tennessee has also adopted legislationallowing banks to acquire branches across state lines subject to certainconditions, including the availability of similar legislation in the otherstate.

 

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#### Brokered Deposits andPass-Through Insurance

 

The FDIC has adopted regulations under FDICIAgoverning the receipt of brokered deposits and pass-through insurance.  Under the regulations, a bank cannot acceptor rollover or renew brokered deposits unless (i) it is well capitalized or(ii) it is adequately capitalized and receives a waiver from the FDIC.  A bank that cannot receive brokered depositsalso cannot offer “pass-through” insurance on certain employee benefitaccounts.  Whether or not it has obtainedsuch a waiver, an adequately capitalized bank may not pay an interest rate onany deposits in excess of 75 basis points over certain index prevailing marketrates specified by regulation.  There areno such restrictions on a bank that is well capitalized.  Because it believes that Legends Bank waswell capitalized as of March 1, 2005, Legends Bank believes the brokereddeposits regulation will have no material effect on the funding or liquidity ofLegends Bank.

 

#### FDIC Insurance Premiums

 

Legends Bank is required to pay semiannual FDICdeposit insurance assessments.  Asrequired by FDICIA, the FDIC adopted a risk-based premium schedule whichincreased the assessment rates for most FDIC-insured depositoryinstitutions.  Under the schedule, thepremiums initially range from $.00 to $.27 for every $100 of deposits.  Each financial institution is assigned to oneof three capital groups - well capitalized, adequately capitalized orundercapitalized - and further assigned to one of three subgroups within acapital group, on the basis of supervisory evaluations by the institution’sprimary federal and, if applicable, state supervisors and other informationrelevant to the institution’s financial condition and the risk posed to theapplicable FDIC deposit insurance fund. The actual assessment rate applicable to a particular institution will,therefore, depend in part upon the risk assessment classification so assignedto the institution by the FDIC.  Recentlythe FDIC has passed a resolution to lower premiums.

 

Under the FDIA, insurance of deposits may beterminated by the FDIC upon a finding that the institution has engaged inunsafe and unsound practices, is in an unsafe or unsound condition to continueoperations or has violated any applicable law, regulation, rule, order orcondition imposed by a federal bank regulatory agency.

 

#### Gramm-Leach-Bliley Act

 

The Gramm-Leach-Bliley Act adopted in November 1999has been referred to as the most important banking bill in over 60 years.  The most significant provisions ratify newpowers for banks and bank holding companies, especially in the areas ofsecurities and insurance.  The Act alsoincludes requirements regarding the privacy and protection of customerinformation held by financial institutions, as well as many other providers offinancial services.  There are provisionsproviding for functional regulation of the various services provided by institutionsamong different regulators.  There areother provisions which limit the future expansion of unitary thrift holdingcompanies which now prevent companies like Wal-Mart from owning a thriftinstitution.  Finally, among many othersections of the Act, there is some relief for small banks from the regulatoryburden of the Community Reinvestment Act. The regulatory agencies have been adopting many new regulations toimplement the Act.

 

#### USA Patriot Act

 

On October 26, 2001, President Bush signed the USAPATRIOT Act of 2001 into law.  This actcontains the International Money Laundering Abatement and FinancialAnti-Terrorism Act of 2001 (the “IMLAFA”). The IMLAFA substantially broadens existing anti-money launderinglegislation and the extraterritorial jurisdiction of the United States, imposesnew compliance and due diligence obligations, creates new crimes and penalties,compels the production of documents located both inside and outside the UnitedStates, including those of foreign institutions that have a correspondentrelationship in the United States, and clarifies the safe harbor from civilliability to customers.  The U.S.Treasury Department has issued a number of regulations implementing the USAPATRIOT Act that apply certain of its requirements to financial institutionssuch as our banking and broker-dealer subsidiaries.  The regulations impose new obligations onfinancial institutions to maintain appropriate policies, procedures andcontrols to detect, prevent and report money laundering and terroristfinancing.  The Treasury Department isexpected to issue a number of additional regulations which will further clarifythe USA PATRIOT Act’s requirements.

 

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The IMLAFA requires all “financial institutions,” asdefined, to establish anti-money laundering compliance and due diligenceprograms no later than April 2003.  Suchprograms must include, among other things, adequate policies, the designationof a compliance officer, employee training programs, and an independent auditfunction to review and test the program. Legends Bank has established anti-money laundering compliance and duediligence programs to comply with IMLAFA.

 

### **Capital Adequacy**

 

Under the Federal Reserve Board’s risk-based capitalguidelines applicable to Legends Bank, the minimum ratio of capital torisk-weighted assets (including certain off-balance sheet items, such asstandby letters of credit) is 8%.  To beconsidered a “well-capitalized” bank under the guidelines, a bank must have atotal risk-based capital ratio in excess of 10%.  Under these guidelines, at least half of thetotal capital is to be comprised of common equity, retained earnings and alimited amount of perpetual preferred stock, after subtracting certainintangibles, 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 certainamount of loan loss reserve (“Tier 2 capital”). Banks are subject to similar capital requirements adopted by theFDIC.  In addition, the Federal ReserveBoard, the FDIC and the Office of the Comptroller of the Currency have adopteda minimum leverage ratio (Tier 1 capital to adjusted quarter average assets) of4%.  Generally, banking organizations areexpected to operate well above the minimum required capital level of 4% unlessthey meet certain specified criteria, including that they have the highestregulatory ratings.  Most bankingorganizations are required to maintain leverage ratio of 4% plus an additionalcushion of at least 1% to 2%.  Theguidelines also provide that banking organizations experiencing internal growthor making acquisitions will be expected to maintain strong capital positionssubstantially above the minimum supervisory levels without significant relianceupon intangible assets.  Failure to meetcapital guidelines could subject a banking institution to a variety ofenforcement remedies available to federal regulatory authorities, including thetermination of deposit insurance by the FDIC, issuance of a capital directive,prohibition on brokered deposits and certain other restrictions.

 

On December 31, 2004, Legends Bank had a Tier 1capital ratio of 11.0%, a total risk-based capital ratio of 12.1% and aleverage ratio of 8.7%.

 

### **Payment of Dividends**

 

The payment of dividends by Legends Financial dependsto a great extent on the ability of Legends Bank to pay dividends to LegendsFinancial.  Legends Bank is subject tothe Tennessee Banking Act, which provides that Legends Bank may not declaredividends in any calendar year that exceeds the total of its net income of thatyear combined with its retained net income of the preceding two years withoutthe approval of the TDFI.  Thereafter,10% of net profits must be transferred to capital surplus prior to payment ofdividends until capital surplus equals capital stock.  Legends Bank is also subject to the minimumcapital requirements of the FDIC which impact Legends Bank’s ability to paydividends.  If Legends Bank fails to meetthese standards, it may not be able to pay dividends or to accept additionaldeposits because of regulatory requirements.

 

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If, in the opinion of the applicable federal bankregulatory authority, a depository institution is engaged in or is about toengage in an unsafe or unsound practice (which, depending on the financialcondition of the depository institution, could include the payment ofdividends), such authority may require that such institution cease and desistfrom such practice.  The federal bankingagencies have indicated that paying dividends that deplete a depositoryinstitution’s capital base to an inadequate level would be such an unsafe andunsound banking practice.  Moreover, theFederal Reserve Board, the Comptroller of the Currency and the FDIC have issuedpolicy statements which provide that bank holding companies and insureddepository institutions generally should only pay dividends out of currentearnings.

 

The payment of dividends by Legends Financial may alsobe affected or limited by other factors, such as the requirement of LegendsBank to maintain adequate capital above regulatory guidelines.  Legends Financial’s board of directorsdeclared a $0.20 per share dividend on the outstanding shares of its commonstock on February 27, 2004 and declared a $0.15 per share dividend on theoutstanding shares of its common stock on February 28, 2003.

 

## **ITEM 2.  DESCRIPTION OF PROPERTY**

 

Legends Bank’s main banking office was completed andopened for full operations in January 2000. This facility also serves as the principal office of Legends Financialand of Legends Bank.  The 14,000 squarefoot facility is located at 310 North First Street in the central businessdistrict of Clarksville.  Legends Bankowns the property on which Legends Financial’s principal office is located.

 

Legends Bank currently operates five full servicebanking locations at 310 North First Street, 1950 Madison Street, 2250-O WilmaRudolph Blvd. And 140 Dover Crossing Road in Clarksville, Tennessee and 300Donelson Parkway in Dover, Tennessee. Legends Bank leases the property for the offices located on MadisonStreet and Wilma Rudolph Blvd.  LegendsBank owns its mobile branch.

 

## **ITEM 3.  LEGAL PROCEEDINGS**

 

From time to time Legends Bank is named as a defendantin suits arising from the ordinary conduct of its affairs. In the opinion ofmanagement, the ultimate outcome of the litigation to which Legends Bank is aparty as of the date of this Form 10-KSB will not adversely affect itsfinancial condition.

 

## **ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSHAREHOLDERS**

 

No matter was submitted to a vote of security holdersduring the fourth quarter of Legends Financial’s fiscal year ended December 31,2004.

 

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# **PARTII**

 

## **ITEM5.  MARKET FOR COMMON EQUITY AND RELATEDSHAREHOLDER MATTERS**

 

### **Market for Common Stock**

 

The common stock of Legends Financial is not tradedthrough an organized exchange nor is there a known active trading market.  At December 31, 2004, the number ofshareholders of record was 1,408,497 and there was also outstanding options topurchase 232,006 shares of common stock, 192,617 of which are currentlyexercisable.

 

The following table shows the quarterly range of highand low sale prices for Legends Financial’s stock during the fiscal years 2004,2003 and 2002. All sale prices have been retroactively adjusted to reflect theeffects of a 1-for-5 stock split in September 2002. These sale prices representknown transactions and do not necessarily represent all trading transactionsfor the periods.

 
| **Year** | ** ** | ** ** | ** **     | **High** | ** ** | **Low** | ** ** |
|----------|------------|------------|----------------|----------|------------|---------|------------|
|     |       |       |           |     |       |    |       |   |
|     | 2002:      |       | First  Quarter |     | $18.75     |    | $15.00     |   |
|     |       |       | Second Quarter |     | $18.75     |    | $15.83     |   |
|     |       |       | Third Quarter  |     | $17.50     |    | $15.83     |   |
|     |       |       | Fourth Quarter |     | $18.33     |    | $17.00     |   |
|     |       |       |           |     |       |    |       |   |
|     | 2003:      |       | First  Quarter |     | $17.00     |    | $17.00     |   |
|     |       |       | Second Quarter |     | $17.00     |    | $17.00     |   |
|     |       |       | Third Quarter  |     | $17.00     |    | $17.00     |   |
|     |       |       | Fourth Quarter |     | $18.00     |    | $17.00     |   |
|     |       |       |           |     |       |    |       |   |
|     | 2004:      |       | First Quarter  |     | $18.00     |    | $18.00     |   |
|     |       |       | Second Quarter |     | $19.00     |    | $18.00     |   |
|     |       |       | Third Quarter  |     | $19.00     |    | $19.00     |   |
|     |       |       | Fourth Quarter |     | $20.00     |    | $19.00     |   |

 

### **Dividends**

 

The payment of dividends is subject to the discretionof Legends Financial’s board of directors. Legends Financial’s ability to paydividends is dependent on cash dividends paid to it by Legends Bank.  The ability of Legends Bank to pay dividendsto Legends Financial is restricted by applicable regulatory requirements. Formore information on these restrictions, please see PART I, ITEM 1 “DESCRIPTIONOF BUSINESS – Payment of Dividends.” Legends Financial’s board of directors declared a $0.20 per sharedividend on the outstanding shares of its common stock on February 27, 2004 anddeclared a $0.15 per share dividend on the outstanding shares of its commonstock on February 28, 2003.  Noassurances can be given that any dividend will be declared or, if declared,what the amount of such dividend would be or whether such dividends wouldcontinue in future periods.

 

### **Securities Authorized forIssuance Under Equity Compensation Plans**

 

In December 1998, the board of directors of LegendsBank approved the Legends Bank 1998 Stock Option Arrangement (the “1998Arrangement”).  In April 2001, the boardof directors of Legends Bank approved the 2001 Stock Option Plan (the “2001Plan”).  Legends Financial’s stockholdershave also approved Legends Bank 1998 Stock Option Arrangement and 2001 StockOption Plan.  Legends Financial exchangedits options with the holders of Legends Bank stock options under the 1998Arrangement and the 2001 Plan on an option-for-option basis.  Thus, options that were outstanding under the1998 Arrangement and the 2001 Plan have been exchanged for options under LegendsFinancial’s Stock Option Plan.

 

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The following table reflects the number of shares tobe issued upon the exercise of options granted under the 1998 Arrangement andthe 2001 Plan, the weighted-average exercise price of all such options, and thetotal number of shares of common stock reserved for issuance upon the exerciseof authorized, not-yet-granted options as of December 31, 2004:

 
| **Plan Category**                                               | ** ** | **# of Securities to be   Issued Upon Exercise of   Outstanding Options,   Warrants and Rights** | ** ** | **Weighted-average   Exercise Price of   Outstanding Options,   Warrants, and Rights** | ** ** | **# of Equity Securities   Remaining Available for  Future Issuance Under   Equity Compensation   Plans** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| **Equity Compensation Plans Approved by  Security Holders**     |       |                                                                                             |       |                                                                                   |       |                                                                                                      |       |   |
| ** **                                                      |       |                                                                                             |       |                                                                                   |       |                                                                                                      |       |   |
| **1998 Arrangement**                                            |       | 56,686                                                                                           |       | $8.33                                                                                  |       | -0-                                                                                                       |       |
| ** **                                                      |       |                                                                                             |       |                                                                                   |       |                                                                                                      |       |   |
| **2001 Plan**                                                   |       | 175,320                                                                                          |       | $18.73                                                                                 |       | 39,478                                                                                                    |       |
| ** **                                                      |       |                                                                                             |       |                                                                                   |       |                                                                                                      |       |   |
| **Equity Compensation Plans Not Approved by  Security Holders** | ** ** | **—**                                                                                       | ** ** | **—**                                                                             | ** ** | **—**                                                                                                | ** ** |
| ** **                                                      | ** ** | ** **                                                                                       | ** ** | ** **                                                                             | ** ** | ** **                                                                                                | ** ** |
| **TOTAL**                                                       |       | 232,006                                                                                          |       | $16.19                                                                                 |       | 39,478                                                                                                    |       |

 

### **Recent Sales ofUnregistered Securities**

 

Since April, 2002, when holders of stock of LegendsBank exchanged their shares for common stock of Legends Financial, throughDecember 31, 2004, Legends Financial has not sold any securities withoutregistration under the Securities Act of 1933, except for:

 

•                  On December 15, 2004, Director Billy Atkins exercised the option topurchase 200 shares of common stock at an exercise price of $8.33 pershare.  The Company relied on theexemption provided by Section 4(2) of the Securities Act of 1933.

 

•                  On December 6, 2004, Director Pravin Patel exercised the option topurchase 1,200 shares of common stock at an exercise price of $18.75 pershare.  The Company relied on theexemption provided by Section 4(2) of the Securities Act of 1933.

 

•                  On December 1, 2004, Director Pravin Patel exercised the option topurchase 700 shares of common stock at an exercise price of $8.33 pershare.  The Company relied on theexemption provided by Section 4(2) of the Securities Act of 1933.

 

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•                  On June 10, 2004, Director Mark Barnett exercised the option topurchase 2,000 shares of common stock at an exercise price of $8.33 pershare.  The Company relied on theexemption provided by Section 4(2) of the Securities Act of 1933.

 

•                  On June 9, 2004, Director Pravin Patel exercised the option to purchase308 shares of common stock at an exercise price of $8.33 per share.  The Company relied on the exemption providedby Section 4(2) of the Securities Act of 1933.

 

•                  On June 8, 2004, Director Pravin Patel exercised the option to purchase700 shares of common stock at an exercise price of $8.33 per share.  The Company relied on the exemption providedby Section 4(2) of the Securities Act of 1933.

 

•                  On June 7, 2004, Director Dwight Dickson exercised the option topurchase 700 shares of common stock at an exercise price of $8.33 pershare.  The Company relied on theexemption provided by Section 4(2) of the Securities Act of 1933.

 

•                  On June 2, 2004, Director James Amos exercised the option to purchase1,952 shares of common stock at an exercise price of $8.33 per share.  The Company relied on the exemption providedby Section 4(2) of the Securities Act of 1933.

 

•                  On May 25, 2004, Director Dick Littleton exercised the option topurchase 3,020 shares of common stock at an exercise price of $8.33 pershare.  The Company relied on theexemption provided by Section 4(2) of the Securities Act of 1933.

 

•                  On March 31, 2004, Senior Vice President Janet Roberts exercised theoption to purchase 9,000 shares of common stock at an exercise price of $8.33per share.  The Company relied on theexemption provided by Section 4(2) of the Securities Act of 1933.

 

•                  On March 25, 2004, Director David Nussbaumer exercised the option topurchase 2,548 shares of common stock at an exercise price of $8.33 pershare.  The Company relied on theexemption provided by Section 4(2) of the Securities Act of 1933.

 

•                  On March 1, 2004, Director Dwight Dickson exercised the option topurchase 700 shares of common stock at an exercise price of $8.33 pershare.  The Company relied on theexemption provided by Section 4(2) of the Securities Act of 1933.

 

•                  On March 1, 2004, Director Billy Atkins exercised the option topurchase 2,500 shares of common stock at an exercise price of $8.33 pershare.  The Company relied on theexemption provided by Section 4(2) of the Securities Act of 1933.

 

•                  On January 26, 2004, Director Ronnie Goad exercised the option topurchase 1,220 shares of common stock at an exercise price of $8.33 per share.  The Company relied on the exemption providedby Section 4(2) of the Securities Act of 1933.

 

•                  On December 29, 2003, Director Jimmy Terry exercised the option topurchase 600 shares of common stock at an exercise price of $8.33 pershare.  The Company relied on theexemption provided by Section 4(2) of the Securities Act of 1933.

 

•                  On November 20, 2003, an employee of the Company, Lynn Williams,exercised the option to purchase 120 shares of common stock at an exerciseprice of $8.33 per share.  The Companyrelied on the exemption provided by Section 4(2) of the Securities Act of 1933.

 

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•                  On October 27, 2003, an employee of the Company, Merritt Bradley,exercised the option to purchase 726 shares of common stock at an exerciseprice of $8.33 per share.  The Companyrelied 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 purchase1,220 shares of common stock at an exercise price of $8.33 per share.  The Company relied on the exemption providedby Section 4(2) of the Securities Act of 1933.

 

•                  On October 18, 2002, Director Jim Amos exercised the option to purchase2880 shares of common stock at an exercise price of $8.33 per share.  The Company relied on the exemption providedby Section 4(2) of the Securities Act of 1933.

 

•                  On September 18, 2002, Director Pravin Patel exercised the option topurchase 700 shares of common stock at an exercise price of $10.00 per share.  The Company relied on the exemption providedby Section 4(2) of the Securities Act of 1933.

 

•                  On September 5, 2002, Director Ronnie Goad exercised the option topurchase 1,500 shares of common stock at an exercise price of $10.00 pershare.  The Company relied on theexemption provided by Section 4(2) of the Securities Act of 1933.

 

•                  On August 2, 2002, Director Jimmy Terry exercised the option topurchase 1,000 shares of common stock at an exercise price of $10.00 pershare.  The Company relied on the exemptionprovided by Section 4(2) of the Securities Act of 1933.

 

**Purchasesof Equity Securities by Legends Financial**

 

Legends Financial did not make any purchases of itscommon stock during the fourth quarter of 2004.

 

## **ITEM 6.**  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS

 

### **General**

 

On February 27, 2002, the stockholders of Legends Bankvoted to exchange their stock for stock in Legends Financial.  Effective July 1, 2002, Legends Financialbecame a bank holding company within the meaning of the Bank Holding CompanyAct of 1956, as amended.  The transactionhas been treated as a reorganization for accounting purposes.  For comparative purposes all financialinformation of Legends Bank prior to the reorganization has been presented orincluded in the financial information of Legends Holdings.  Management believes that the holding companystructure permits greater flexibility in the expansion of Legends Holdings’present business and allows Legends Holdings to be more responsive to itscustomers broadening and changing financial needs.

 

Legends Bank is astate chartered bank which began operations on November 12, 1998.  Legends Holdings offers a wide range ofbanking services, including checking, savings, and money market depositaccounts, certificates of deposit, individual retirement accounts and loans forconsumer, commercial and real estate purposes and investment products throughits wholly-owned subsidiary, Legends Financial Services, Inc.  The area served by Legends Holdings isMontgomery 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.  In addition, Legends Holdings is opening afourth branch in Montgomery County, Tennessee during 2005.  Legends Holdings serves as a financialintermediary whereby its profitability is determined to a large degree by theinterest spread it achieves and the successful measurement of risks.  Legends Holdings’ management believes thatits market area offers an environment for continued growth and LegendsHoldings’ target market is local consumers, professionals and small businesses.

 

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The following discussion and analysis is designed toassist readers in their analysis of Legends Holdings’ financial statements andshould be read in conjunction with such consolidated financial statements.

 

### **Financial Condition**

 

***Balance SheetSummary:***  Legends Holdings’ total assets were$185,124,000 and $150,035,000 at December 31, 2004 and 2003, respectively,an increase of 23.4%.  Loans, net ofallowance for possible loan losses, totaled $128,334,000 and $103,794,000 atDecember 31, 2004 and 2003, respectively, an increase of 23.6% and investmentsecurities totaled $37,580,000 and $31,944,000, respectively, an increase of17.6%.  The increase in loans andsecurities was primarily funded by an increase in deposits, Federal fundspurchased and advances from the Federal Home Loan Bank.  There was no outstanding Federal funds soldbalance as of December 31, 2004 and $3,195,000 from December 31, 2003.

 

Total liabilities were $169,411,000 and $135,895,000at December 31, 2004 and 2003, respectively, an increase of 24.7%.  Stockholders’ equity was $15,713,000 and$14,140,000 at December 31, 2004 and 2003, respectively, an increase of11.1%.  The increase in liabilities wasprimarily funded by an increase in deposits of $25,159,000 or 19.4% from December31, 2003 to December 31, 2004, an increase in advances from the Federal HomeLoan Bank of $3,928,000 or 78.7% for the same period and an increase in Federalfunds purchased of $3,804,000.  A moredetailed discussion of assets, liabilities and capital follows.

 

### **Loans**

 

Loan categories are as follows:

 
| ** **                             | ** ** | **December 31,**   | ** ** |
|----------------------------------------|------------|--------------------|------------|
| ** **                             | ** ** | **2004**           | ** ** | **2003** | ** ** |
| ** **                             | ** ** | **Amount**         | ** ** | **Percentage** | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **                             | ** ** | **(In Thousands)** | ** ** | ** ** | ** ** | **(In Thousands)** | ** ** | ** ** | ** ** |
|                                   |       |               |       |   |   |   |   |   |   |
| Commercial, financial and agricultural |       | $                  | 24,481     |   | 18.8 | % | $ | 20,256 |   | 19.3 | % |
| Installment                            |       | 5,307              |       | 4.1 |   | 4,870 |   | 4.6 |   |
| Real estate – mortgage            |       | 77,646             |       | 59.8 |   | 66,500 |   | 63.3 |   |
| Real estate – construction        |       | 22,417             |       | 17.3 |   | 13,393 |   | 12.8 |   |
| Total                                  |       | $                  | 129,851    |   | 100.0 | % | $ | 105,019 |   | 100.0 | % |

 

Loans are a large component of Legends Holdings’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.  Thetable above sets forth the loan categories and the percentage of such loans inthe portfolio at December 31, 2004 and 2003.

 

As represented in the table, primary loan growth wasin real estate mortgage, construction and commercial loans. Management isincreasing loans in an orderly fashion to maintain quality.

 

19

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Banking regulators define highly leveragedtransactions to include leveraged buy-outs, acquisition loans, andrecapitalization loans of an existing business. Under the regulatory definition, at December 31, 2004 and 2003, LegendsHoldings had no highly leveraged transactions, and there were no foreign loansoutstanding.

 

In a continuing effort to grow market share in theClarksville, Tennessee market, during 2003 management acquired certain assetsand assumed certain liabilities of NBC Bank’s Clarksville operations.  The acquisition was accounted for as apurchase summarized as follows:

 
| *** ***                           | *** *** | **(In Thousands)** | *** *** |
|----------------------------------------|--------------|--------------------|--------------|
|                                   |         |               |         |
| Loans (including overdrafts) purchased |         | $                  | 1,243        |   |
| Deposits assumed                       |         | (2,718             | )            |
| Accrued interest payable               |         | (6                 | )            |
| Cash received from NBC                 |         | 1,328              |         |
| Goodwill                               |         | 153                |         |
|                                        |              |                    |              |  |

 

Legends Holdings follows the provisions of Statementof Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditorsfor Impairment of a Loan” and SFAS No. 118, “Accounting by Creditors for Impairmentof a Loan - Income Recognition and Disclosures.”  These pronouncements apply to impaired loansexcept for large groups of smaller-balance homogeneous loans that arecollectively evaluated for impairment including credit card, residentialmortgage, and consumer installment loans.

 

A loan is impaired when it is probable that LegendsHoldings will be unable to collect the scheduled payments of principal andinterest due under the contractual terms of the loan agreement.  Impaired loans are measured at the presentvalue of expected future cash flows discounted at the loan’s effective interestrate, at the loan’s observable market price, or the fair value of thecollateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investmentin the loan, Legends Holdings shall recognize an impairment by creating avaluation allowance with a corresponding charge to the provision for loanlosses or by adjusting an existing valuation allowance for the impaired loan witha corresponding charge or credit to the provision for loan losses.

 

Legends Holdings’ first mortgage single familyresidential and installment loans which total approximately $25,322,000 and$23,589,000 and $4,895,000 and $4,634,000, respectively at December 31, 2004and 2003, are divided into various groups of smaller-balance homogeneous loansthat are collectively evaluated for impairment and thus are not subject to theprovisions of SFAS Nos. 114 and 118. Substantially all other loans of Legends Holdings are evaluated forimpairment under the provisions of SFAS Nos. 114 and 118.

 

Legends Holdings considers all loans subject to theprovisions of SFAS Nos. 114 and 118 that are on nonaccrual status to beimpaired.  Loans are placed on nonaccrualstatus when doubt as to timely collection of principal or interest exists, orwhen principal or interest is past due 90 days or more unless such loans arewell-secured and in the process of collection. Delays or shortfalls in loan payments are evaluated with various otherfactors to determine if a loan is impaired. Generally, delinquencies under 90 days are considered insignificantunless certain other factors are present which indicate impairment is probable.  The decision to place a loan on nonaccrualstatus is also based on an evaluation of the borrower’s financial condition,collateral, liquidation value, and other factors that affect the borrower’sability to pay.

 

20

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Generally, at the time a loan is placed on nonaccrualstatus, all interest accrued on the loan in the current fiscal year is reversedfrom income, and all interest accrued and uncollected from the prior year ischarged off against the allowance for loan losses.  Thereafter, interest on nonaccrual loans isrecognized as interest income only to the extent that cash is received andfuture collection of principal is not in doubt. If the collectibility of outstanding principal is doubtful, suchinterest received is applied as a reduction of principal.  A nonaccrual loan may be restored to accruingstatus when principal and interest are no longer past due and unpaid and futurecollection of principal and interest on a timely basis is not in doubt.  At December 31, 2004 and 2003 Legends Bankhad $420,000 and $305,000, respectively, of loans on nonaccrual status.

 

Loans not on nonaccrual status are classified asimpaired in certain cases where there is inadequate protection by the currentnet worth and financial capacity of the borrower or of the collateral pledged,if any.  In those cases, such loans havea well-defined weakness or weaknesses that jeopardize the liquidation of thedebt, and if such deficiencies are not corrected, there is a probability thatLegends Holdings will sustain some loss. In such cases, interest income continues to accrue as long as the loandoes not meet Legends Holdings’ criteria for nonaccrual status.

 

Generally Legends Holdings also classifies as impairedany loans the terms of which have been modified in a troubled debt restructuring.  Interest is accrued on such loans thatcontinue to meet the modified terms of their loan agreements.  At December 31, 2004 and 2003, LegendsHoldings had no loans that have had the terms modified in a troubled debtrestructuring.

 

Legends Holdings’ charge-off policy for impaired loansis similar to its charge-off policy for all loans in that loans are charged-offin the month when they are considered uncollectible.

 

As of December 31, 2004 Legends Holdings had impairedloans totaling $3,052,000.  A specificreserve of $196,000 has been established by management related to theseloans.  As of December 31, 2003 LegendsHoldings had impaired loans totaling $1,832,000.  A specific reserve of $163,000 has beenestablished by management related to these loans.  The total amount of interest recognized onimpaired loans was $195,000 in 2004.  Thetotal amount of interest recognized during 2003 on impaired loans was $105,000.  The impaired loans are generally commercialloans and have been classified as substandard by management’s internal gradingsystem.  The total value of thecollateral securing these loans is approximately $3,853,000 and $2,044,000 forDecember 31, 2004 and December 31, 2003, respectively.

 

Non-performing loans, which include non-accrual loansand loans 90 days past due, at December 31, 2004, totaled $420,000.  There were $305,000 of non-performing loansat December 31, 2003.

 

21

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The following schedule details selected information asto non-performing loans of Legends Bank at December 31, 2004 and 2003:

 
| ** **         | ** **   | **2004**              | ** ** | **2003**           | ** **   |
|--------------------|--------------|-----------------------|------------|--------------------|--------------|
| ** **         | ** **   | **Past Due  90 Days** | ** ** | **Non-Accrual**    | ** **   | **Past Due  90 Days** | ** ** | **Non-Accrual** | ** ** |
| *** ***       | *** *** | **(In Thousands)**    | ** ** | **(In Thousands)** | *** *** |
|               |         |                  |       |               |         |   |   |   |   |
| Real estate loans  |         | $                     | —     |               | $            | 350 |   | $ | — |   | $ | — |   |
| Consumer loans     |         | —                |       | 25                 |         | — |   | 39 |   |
| Commercial         |         | —                |       | 45                 |         | — |   | 266 |   |
|               |         | $                     | —     |               | $            | 420 |   | $ | — |   | $ | 305 |   |
|               |         |                  |       |               |         |   |   |   |   |
| Renegotiated loans |         | $                     | —     |               |         |   | $ | — |   |   |   |

 

The allowance for possible loan losses is discussedunder “Provision for Possible Loan Losses” below.  Legends Holdings maintains its allowance forpossible loan losses at an amount considered by management to be adequate toprovide for the possibility of loan losses in the loan portfolio.  Management has in place a system of quality controlsto identify and monitor problem loans. Management believes the allowance for possible loan losses at December31, 2004 to be adequate.

 

Essentially all of Legends Holdings’ loans originatefrom Montgomery and adjacent Tennessee counties.  Legends Holdings seeks to exercise prudentrisk management in lending, including diversification by loan category andindustry segment, as well as by identification of credit risks.

 

Legends Holdings’ management believes there is asignificant opportunity to continue to increase the loan portfolio in LegendsHoldings’ primary market area.  LegendsHoldings has targeted commercial business lending, commercial and residentialreal estate lending and consumer lending. Legends Holdings seeks to build a loan portfolio which is capable ofadjusting to swings in the interest rate market, and it is Legends Holdings’policy to maintain a diverse loan portfolio not dependent on any particularmarket or industrial segment.  Managementhas set a goal for loans to range between 80% and 85% of deposits.

 

### **Securities**

### ** **

Securities increased 17.6% from $31,944,000 atDecember 31, 2003 to $37,580,000 at December 31, 2004 and was a primarycomponent of Legends Holdings’ earning assets. At December 31, 2004, the market value of Legends Holdings’ securitiesportfolio was less than its amortized cost by $297,000 or 0.8%.  At December 31, 2003, the market value ofLegends Holdings’ securities was less than its amortized cost by $315,000 or1.0%.  The weighted average yield (statedon a tax-equivalent basis, assuming a Federal income tax rate of 34%) of thesecurities at December 31, 2004 was 4.50% as compared to an average yield of5.24% at December 31, 2003.

 

Legends Holdings has adopted the provisions ofStatement of Financial Accounting Standards No. 115 (SFAS No. 115), “Accountingfor Certain Investments in Debt and Equity Securities.”  Under the provisions of the Statement,securities are to be classified in three categories and accounted for asfollows:

 

22

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•                                          Debt securities that the enterprise has the positiveintent and ability to hold to maturity are classified as held-to-maturitysecurities and reported at amortized costs.

 

•                                          Debt and equity securities that are bought and heldprincipally for the purpose of selling them in the near term are classified astrading securities and reported at fair value, with unrealized gains and lossesincluded in earnings.

 

•                                          Debt and equity securities not classified as eitherheld-to-maturity securities or trading securities are classified asavailable-for-sale securities and reported at fair value, with unrealized gainsand losses excluded from earnings and reported in a separate component ofstockholders’ equity.

 

Legends Holdings’ classification of securities as ofDecember 31, 2004 and 2003 is as follows:

 
| ** **                                                         | ** ** | **Available-For-Sale** | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                         | ** ** | **2004**               | ** ** | **2003** | ** ** |
| **(In Thousands)**                                                 | ** ** | **Amortized  Cost**    | ** ** | **Estimated  Market  Value** | ** ** | **Amortized  Cost** | ** ** | **Estimated  Market  Value** | ** ** |
|                                                               |       |                   |       |   |   |   |   |   |   |
| U.S. Treasury and other U.S. Government agencies  and corporations |       | $                      | 4,070      |   | $ | 4,001 |   | $ | 1,796 |   | $ | 1,755 |   |
| Obligations of states and political subdivisions                   |       | 12,123                 |       | 12,104 |   | 8,237 |   | 8,091 |   |
| Domestic corporate bonds                                           |       | 2,750                  |       | 2,731 |   | 3,250 |   | 3,175 |   |
| Mortgage-backed securities                                         |       | 18,934                 |       | 18,744 |   | 18,976 |   | 18,923 |   |
|                                                               |       | $                      | 37,877     |   | $ | 37,580 |   | $ | 32,259 |   | $ | 31,944 |   |

 

No securities have been classified as trading or held-to-maturitysecurities.

 

### **Deposits**

 

Total deposits,which in the future are expected to be the principal source of funds forLegends Holdings, totaled $154,975,000 and $129,816,000 at December 31, 2004and 2003, respectively, representing an increase of $25,159,000 or 19.4%.  Demand deposits increased 31.8% from$20,455,000 at December 31, 2003 to $26,965,000 at December 31, 2004.  Negotiable order of withdrawal, savingsdeposits and money market demand accounts increased $10,305,000 or 18.2%.  Certificates of deposit and individualretirement accounts increased $8,344,000 or 15.8%.  Legends Holdings has targeted localconsumers, professionals, local governments and commercial businesses as itscentral clientele; therefore, deposit instruments in the form of demanddeposits, savings accounts, money market demand accounts, certificates ofdeposits and individual retirement accounts are offered to customers.

 

Managementbelieves the Montgomery County area is a growing economic market offeringgrowth opportunities for Legends Holdings; however, Legends Holdings competeswith several of the larger bank holding companies that have branch offices inthis area; and therefore, no assurances of market growth can be given.  Even though Legends Holdings is in a verycompetitive market, management currently believes that its market share will beexpanded.  Management firmly believesthat its position as a locally owned financial institution that offerspersonalized service will contribute significantly to quality loan and depositgrowth and profitability.

 

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### **Liquidity and AssetManagement**

### ** **

Legends Holdings’ management seeks to maximize netinterest income by managing Legends Holdings’ assets and liabilities withinappropriate constraints on capital, liquidity and interest rate risk.  Liquidity is the ability to maintainsufficient cash levels necessary to fund operations, meet the requirements ofdepositors and borrowers and fund attractive investment opportunities.  A company has liquidity potential when it hasthe ability to obtain sufficient funds in a timely manner at a reasonable cost.  Legends Holdings’ primary source of liquidityis expected to be a stable core deposit base. In addition, short-term investments, loan payments, investment securitymaturities and Federal Home Loan Bank advances provide a secondary source.  Legends Holdings’ loan to deposit ratio wasapproximately 83.8% and 80.9% at December 31, 2004 and December 31, 2003,respectively.

 

Legends Holdings’ investment portfolio, as representedabove, consists of earning assets that provide interest income.

 

Funds management decisions must reflect management’sintent to maintain profitability in both the immediate and long-termearnings.  Legends Holdings’ ratesensitivity position has an important impact on earnings.  Senior management of Legends Holdings meetsmonthly to analyze the rate sensitivity position of Legends Holdings.  These meetings focus on the spread betweenthe subsidiary bank’s cost of funds and interest yields generated primarilythrough loans and investments.

 

Legends Holdings presently maintains a liabilitysensitive position over the 2005 year or a negative gap.  Liability sensitivity means that more ofLegends Holdings’ liabilities are capable of repricing over certain time framesthan assets.  The interest ratesassociated with these liabilities may not actually change over this period butare capable of changing.

 

**Interest-ratesensitivity gaps:**

 
| **(In Thousands)**                                    | ** ** | **0-30  Days** | ** ** | **31-90  Days** | ** ** | **91-180  Days** | ** ** | **181-365  Days** | ** ** | **One Year  and  Longer** | ** ** | **Total** | ** ** |
|-------------------------------------------------------|------------|----------------|------------|-----------------|------------|------------------|------------|-------------------|------------|---------------------------|------------|-----------|------------|
|                                                  |       |           |       |            |       |             |       |              |       |                      |       |      |       |
| Interest-earning assets                               |       | $              | 60,116     |            | 4,551      |             | 6,181      |              | 9,823      |                      | 87,415     |      | 168,086    |   |
| Interest-bearing liabilities                          |       | 80,418         |       | 15,069          |       | 10,509           |       | 11,509            |       | 23,864                    |       | 141,369   |       |
|                                                  |       |           |       |            |       |             |       |              |       |                      |       |      |       |
| Interest rate sensitivity                             |       | $              | (20,302    | )               | (10,518    | )                | (4,328     | )                 | (1,686     | )                         | 63,551     |      | 26,717     |   |
|                                                  |       |           |       |            |       |             |       |              |       |                      |       |      |       |
| Cumulative gap                                        |       | $              | (20,302    | )               | (30,820    | )                | (35,148    | )                 | (36,834    | )                         | 26,717     |      |       |   |
|                                                  |       |           |       |            |       |             |       |              |       |                      |       |      |       |
| Interest rate sensitivity gap as a % of  total assets |       | (10.97         | )%         | (5.68           | )%         | (2.34            | )%         | (0.91             | )%         | 34.33                     | %          |      |       |
|                                                  |       |           |       |            |       |             |       |              |       |                      |       |      |       |
| Cumulative gap as a % of total assets                 |       | (10.97         | )%         | (16.65          | )%         | (18.99           | )%         | (19.90            | )%         | 14.43                     | %          |      |       |

 

24

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Historically, there has beenno significant reduction in immediately withdrawable accounts such asnegotiable order of withdrawal, money market demand, demand deposit and regularsavings accounts.  Management does notanticipate that there will be significant withdrawals from these accounts inthe future.

 

Legends Holdings completedand opened its main office in January of 2000.  In addition to its existing branch, a secondbranch was opened in January, 2001, a third branch was opened in March, 2003,and a fourth branch was opened in Dover, Tennessee in November, 2003.  Capital investments can be detrimental to abank’s earnings thus management evaluates the potential growth andprofitability at making such expenditures before proceeding.  As previously discussed certain assets andliabilities 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.  Other than the items discussed below, thereare no known trends or any known commitments, demands, events or uncertaintiesthat will result in or that are reasonably likely to result in Legends Holdings’liquidity changing in any material way. It is anticipated that with present maturities, the anticipated growthin deposit base, and the efforts of management in its asset/liabilitymanagement program, liquidity will not pose a problem in the foreseeablefuture.

 

Legends Holdings plans toexpand its facilities during 2005 at an estimated cost of $1,500,000.  In addition, Legends Holdings plans to openan additional branch in the Clarksville, Tennessee, Montgomery County, area atan estimated cost of $500,000. Currently, Legends Holdings maintains nearly all deposit accounts forlocal municipalities and related departments. As of December 31, 2004, such deposits approximated$37,000,000.  The loss of these depositsor some portion thereof, could have a negative impact on deposit growth andliquidity.

 

### **CapitalPosition and Dividends**

### ** **

At December 31, 2004and 2003, total stockholders’ equity was $15,713,000 and $14,140,000 or 8.5%and 9.4% of total assets.  The increasein stockholders’ equity results from net earnings of $1,606,000, a net decreasein unrealized losses on available-for-sale securities of $12,000 and proceedsfrom sales of common stock totaling $234,000 issued in connection with LegendsHoldings’ stock option plan which was offset by a dividend paid of $279,000.

 

Legends Holdings’ principalregulators have established minimum risk-based capital requirements and leveragecapital requirements for Legends Holdings. These guidelines classify capital into two categories of Tier I andTotal risk-based capital.  Totalrisk-based capital consists of Tier I (or core) capital (essentially commonequity less intangible assets) and Tier II capital (essentially qualifyinglong-term debt, of which Legends Holdings has none, and a part of the allowancefor possible loan losses).  Indetermining risk-based capital requirements, assets are assigned risk-weights of 0% to 100%, depending on regulatoryassigned levels of credit risk associated with such assets.  The risk-based capital guidelines requireLegends Holdings to have a total risk-based capital ratio of 8.0% and a Tier Irisk-based capital ratio of 4.0%.  At December 31,2004 and 2003, Legends Holdings’ total risk-based capital ratio was 12.1% and13.6%, respectively, and its Tier I risk-based capital ratio was 11.0% and12.5%, respectively.  At December 31,2004 and 2003, Legends Holdings had a leverage ratio of 8.7% and 9.9%, respectively.

 

It is management’s objectiveto leverage Legends Holdings to approximately a 7.5% capital ratio.  The emphasis will be on asset quality andgrowth in core deposits both of which should be aided by the large stockholderbase and expansion into new markets.

 

There is no establishedtrading market for Legends Holdings’ stock. From time to time Legends Holdings may acquire shares of its stock toprovide some liquidity in the shares. During the year ended December 31, 2004 and 2003, Legends Holdingsdid not redeem any shares of its voting common stock and issued 26,748 (25,548at $8.33 per share and 1,200 at $18.75 per share) and 2,666 shares at $8.33 pershare in conjunction with its stock option plan.  Privately negotiated trades may involve LegendsHoldings, its directors and officers and, accordingly, may not be reliableindicators of value.

 

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On February 17, 2004,the Board of Directors recommended a dividend be declared at the Annual Shareholdersmeeting on April 20, 2004.  Therecommendation was to set the dividend rate for 2004 at 33% of 2003earnings.  On May 28, 2004, the dividendswere paid in the amount of $279,000 or $.20 per share of voting common stock.

 

### **Resultsof Operations**

### ** **

Net earnings for the yearended December 31, 2004 were $1,606,000, an increase of $777,000 or 93.7%from net earnings of $829,000 for the year ended December 31, 2003.  Net earnings for the year ended December 31,2003 increased by $235,000 or 39.6% from net earnings of $594,000 in 2002.  The earnings in 2004, 2003 and 2002 are aresult of net interest income increasing as a result of Company’s growth whichoffset the overhead costs required to facilitate growth and a large charge offloan in 2002 discussed hereafter.  Basicand diluted earnings per common share were $1.15 and $1.12, respectively, in2004, $.60 and $.59 in 2003 and $.43 in 2002.

 

### **NetInterest Income**

### ** **

Net interest incomerepresents the amount by which interest earned on various earning assets exceedsinterest paid on deposits and other interest-bearing liabilities and is themost significant component of Legends Holdings’ earnings.  Total interest income was $8,854,000,$6,954,000 and $6,083,000 for the years ended December 31, 2004, 2003 and2002, respectively, and total interest expense was $2,162,000, $1,748,000 and$2,035,000, respectively.  Net interestincome for the same periods netted $6,692,000, $5,206,000 and $4,048,000,respectively.  Interest rates roseslightly during 2004 and are expected to increase slightly in 2005.  The continued growth in interest income andexpense are a direct result of growth in earning assets and deposits consistentwith the growth of Legends Holdings and the opening of additionalbranches.  The increases in interestincome and interest expense primarily relate to volume increases.  Management believes that a satisfactory levelof loans and deposits can be recorded in 2005 to maintain a stable net interestmargin.

 

### **Provisionfor Possible Loan Losses**

### ** **

The provision for loanlosses represents a charge to earnings necessary to establish an allowance forpossible loan losses that, in management’s evaluation, is adequate to providecoverage for estimated losses on outstanding loans and to provide foruncertainties in the economy.  Theprovision for loan losses for the years ended December 31, 2004, 2003 and2002 were $440,000, $361,000 and $703,000, respectively.  The allowance for possible loan losses were$1,517,000 and $1,225,000 at December 31, 2004 and 2003, respectively.  The level of the allowance and the amount ofthe provision involve evaluation of uncertainties and matters of judgment.  Management believes the allowance forpossible loan losses at December 31, 2004 and 2003 to be adequate.  The allowance for loan losses was 1.17% ofloans at December 31, 2004 and 2003.

 

The increase in theprovision for loan loss in 2002 is the result of the charge off of two loanstotaling $628,000.  Management believesthat the circumstances related to these loans is an isolated occurrence anddoes not believe that this represents a trend or pattern of poor lendingperformance or monitoring that would adversely affect the consolidatedfinancial statements.

 

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### **Non-InterestIncome**

### ** **

Legends Holdings’non-interest income consists of other fees and commissions.  Total non-interest income for the year ended2004 was $1,582,000 and $998,000 for the year ended December 31, 2003, anincrease of $584,000 or 58.5%. Non-interest income increased $241,000 or 31.8% for the year ended December 31,2003 from $757,000 for the year ended December 31, 2002.  Included in the year ended December 31,2004 non-interest income are security gains of $67,000.  Included in the year ended December 31,2002 earnings was security gains of $140,000. Management projects that other fees and commissions and service chargeson deposit accounts will increase in 2005 due to growth of Legends Holdings.

 

### **Non-InterestExpense**

### ** **

Non-interest expensesconsist primarily of employee costs, occupancy expenses, furniture andequipment expenses, and other operating expenses.  Total non-interest expense for the year endedDecember 31, 2004 was $5,532,000 and was $4,605,000 for the year ended December 31,2003, an increase of $927,000 or 20.1%. Non-interest expense increased $1,048,000 or 29.5% for the year ended December 31,2003 from $3,557,000 for the year ended December 31, 2002.  The increases in 2004 and 2003 were primarilythe result of increases in salaries and benefits due to the addition ofpersonnel to facilitate bank growth, and an increase in other costs associatedwith opening new branches and services, the opening of an investment divisionand expansion of mortgage lending services.

 

### **MonetaryPolicy**

### ** **

Legends Holdings is affectedby commercial bank credit policies of regulatory authorities, including theBoard of Governors.  An importantfunction of the Board of Governors is to regulate the national supply of bankcredit in order to attempt to combat recessionary and curb inflationarypressures.  Among the instruments ofmonetary policy used by the Board of Governors to implement these objectivesare:  open market operations in U.S.government securities, changes in discount rates on member borrowings, changesin reserve requirements against bank deposits and limitations on interest rateswhich member banks may pay on time and savings deposits.  These means are used in varying combinationsto influence overall growth of bank loans, investments and deposits, and mayalso affect interest rates charged on loans or paid on deposits.  The monetary policies of the Board ofGovernors have had a significant effect on the operating results of commercialbanks, including nonmembers as well as members, in the past and are expected tocontinue to do so in the future.

 

### **ContractualObligations**

### ** **

Legends Holdings has thefollowing contractual obligations as of December 31, 2004:

 
| **(In Thousands)**       | ** ** | **Less  than 1  Year** | ** ** | **1 - 3  Years** | ** ** | **3 - 5  Years** | ** ** | **More  than 5  Years** | ** ** | **Total** | ** ** |
|--------------------------|------------|------------------------|------------|------------------|------------|------------------|------------|-------------------------|------------|-----------|------------|
|                     |       |                   |       |             |       |             |       |                    |       |      |       |
| Long-term  debt          |       | $                      | 5,500      |             | 2,000      |             | 1,000      |                    | 419        |      | 8,919      |   |
| Capital  leases          |       | —                 |       | —           |       | —           |       | —                  |       | —    |       |
|                     |       |                   |       |             |       |             |       |                    |       |      |       |
| Operating  leases        |       | 97                     |       | 103              |       | 41               |       | —                  |       | 241       |       |
| Federal  funds purchased |       | 3,804                  |       | —           |       | —           |       | —                  |       | 3,804     |       |
|                     |       |                   |       |             |       |             |       |                    |       |      |       |
| Total                    |       | $                      | 9,401      |             | 2,103      |             | 1,041      |                    | 419        |      | 12,964     |   |

 

27

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### **OffBalance Sheet Arrangements**

### ** **

At December 31, 2004,Legends Holdings had unfunded loan commitments outstanding of $29.0 million andoutstanding standby letters of credit of $1.2 million.  Because these commitments generally have fixedexpiration dates and many will expire without being drawn upon, the totalcommitment level does not necessarily represent future cash requirements.  If needed to fund these outstandingcommitments, Legends Holdings has the ability to liquidate securitiesavailable-for-sale or on a short-term basis to borrow and purchase Federalfunds from other financial institutions. Additionally, Legends Holdings could sell participations in these orother loans to correspondent banks.  Asmentioned above, Legends Holdings has been able to fund its ongoing liquidityneeds through its stable core deposit base, loan payments, its investmentsecurity maturities and short-term borrowings.

 

### **Impactof Inflation**

### ** **

The primary impact whichinflation has on the results of Legends Holdings’ operations is evidenced byits effects on interest rates.  Interestrates tend to reflect, in part, the financial market’s expectations of thelevel of inflation and, therefore, will generally rise or fall as the level ofexpected inflation fluctuates.  To theextent interest rates paid on deposits and other sources of funds rise or fallat a faster rate than the interest income earned on funds, loans or investments,net interest income will vary.  Inflationalso 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 increasesslightly, management believes that the effect on earnings will not besignificant.

 

### **Quantitativeand Qualitative Disclosures About Market Risk**

### ** **

Legends Holdings’ primarycomponent of market risk is interest rate volatility.  Fluctuations in interest rates willultimately impact both the level of income and expense recorded on a largeportion of Legends Bank’s assets and liabilities, and the market value of allinterest-earning assets and interest-bearing liabilities, other than thosewhich possess a short term to maturity. Based upon the nature of Legends Holdings’ operations, Legends Holdingsis not subject to foreign currency exchange or commodity price risk.

 

Interest rate risk(sensitivity) management focuses on the earnings risk associated with changinginterest rates.  Management seeks tomaintain profitability in both immediate and long term earnings through fundsmanagement/interest rate risk management. Legends Holdings’ rate sensitivity position has an important impact onearnings.  Senior management of LegendsHoldings meets monthly to analyze the rate sensitivity position.  These meetings focus on the spread betweenthe cost of funds and interest yields generated primarily through loans andinvestments.

 

28

----

 

I.                                         Distributionof Assets, Liabilities and Stockholders’ Equity:

 

Interest Rates and Interest Differential

 

The Schedule whichfollows indicates the average balances for each major balance sheet item, ananalysis of net interest income and the change in interest income and interestexpense attributable to changes in volume and changes in rates.

 

The difference betweeninterest income on interest-earning assets and interest expense oninterest-bearing liabilities is net interest income, which is the Company’sgross margin.  Analysis of net interestincome is more meaningful when income from tax-exempt earning assets isadjusted to a tax equivalent basis. Accordingly, the following schedule includes a tax equivalentadjustment of tax-exempt earning assets, assuming a weighted average Federalincome tax rate of 34%.

 

In the following Schedule “changedue to volume” is the change in volume multiplied by the interest rate for theprior year.  “Change due to rate” is thechange in interest rate multiplied by the volume for the prior year.  Changes in interest income and expense notdue solely to volume or rate changes are allocated between volume change andrate change at the ratio of how much each component bears to the absolute valueof their total.

 

Non-accrual loans have beenincluded in the loan category.  Loan feesof $368,000, $318,000 and $188,000 for 2004, 2003 and 2002, respectively, areincluded in loan income and represent an adjustment of the yield on theseloans.

 
| ** **                             | ** ** | **In Thousands, Except Interest Rates** | ** ** |
|----------------------------------------|------------|-----------------------------------------|------------|
| ** **                             | ** ** | **2004**                                | ** ** | **2003** | ** ** | **2004/2003 Change** | ** ** |
| ** **                             | ** ** | **Average  Balance**                    | ** ** | **Interest  Rate** | ** ** | **Income/  Expense** | ** ** | **Average  Balance** | ** ** | **Interest  Rate** | ** ** | **Income/  Expense** | ** ** | **Due to  Volume** | ** ** | **Due to  Rate** | ** ** | **Total** | ** ** |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans, net of unearned interest        |       | $                                       | 116,340    |   | 6.44 | % | 7,495 |   | 85,872 |   | 6.76 | % | 5,803 |   | 1,978 |   | (286 | ) | 1,692 |   |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment securities - taxable        |       | 26,584                                  |       | 3.57 |   | 950 |   | 25,400 |   | 3.51 |   | 893 |   | 44 |   | 13 |   | 57 |   |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment securities - tax-exempt     |       | 8,442                                   |       | 4.39 |   | 371 |   | 5,572 |   | 3.66 |   | 204 |   | 120 |   | 47 |   | 167 |   |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable equivalent adjustment          |       | —                                  |       | 2.27 |   | 191 |   | — |   | 1.89 |   | 105 |   | 62 |   | 24 |   | 86 |   |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total tax-exempt investment securities |       | 8,442                                   |       | 6.66 |   | 562 |   | 5,572 |   | 5.55 |   | 309 |   | 182 |   | 71 |   | 253 |   |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total investment securities            |       | 35,026                                  |       | 4.32 |   | 1,512 |   | 30,972 |   | 3.88 |   | 1,202 |   | 166 |   | 144 |   | 310 |   |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans held for sale                    |       | 34                                      |       | 5.88 |   | 2 |   | 288 |   | 5.21 |   | 15 |   | (15 | ) | 2 |   | (13 | ) |
| Federal funds sold                     |       | 1,317                                   |       | 1.21 |   | 16 |   | 2,316 |   | 1.08 |   | 25 |   | (12 | ) | 3 |   | (9 | ) |
| Restricted equity securities           |       | 569                                     |       | 3.51 |   | 20 |   | 429 |   | 3.26 |   | 14 |   | 5 |   | 1 |   | 6 |   |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total earning assets                   |       | 153,286                                 |       | 5.90 |   | 9,045 |   | 119,877 |   | 5.89 |   | 7,059 |   | 1,974 |   | 12 |   | 1,986 |   |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                |       | 6,589                                   |       |   |   |   |   | 5,043 |   |   |   |   |   |   |   |   |   |   |   |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for possible loan losses     |       | (1,389                                  | )          |   |   |   |   | (1,019 | ) |   |   |   |   |   |   |   |   |   |   |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Bank premises and equipment            |       | 5,617                                   |       |   |   |   |   | 4,602 |   |   |   |   |   |   |   |   |   |   |   |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other assets                           |       | 2,471                                   |       |   |   |   |   | 2,083 |   |   |   |   |   |   |   |   |   |   |   |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets                           |       | $                                       | 166,574    |   |   |   |   |   | 130,586 |   |   |   |   |   |   |   |   |   |   |   |

 

29

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| ** **                                         | ** ** | **In Thousands, Except Interest Rates** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                         | ** ** | **2004**                                | ** ** | **2003** | ** ** | **2004/2003 Change** | ** ** |
| ** **                                         | ** ** | **Average  Balance**                    | ** ** | **Interest  Rate** | ** ** | **Income/  Expense** | ** ** | **Average  Balance** | ** ** | **Interest  Rate** | ** ** | **Income/  Expense** | ** ** | **Due to  Volume** | ** ** | **Due to  Rate** | ** ** | **Total** | ** ** |
|                                               |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                          |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Negotiable order of withdrawal accounts            |       | $                                       | 34,696     |   | 1.01 | % | 350 |   | 28,982 |   | 1.05 | % | 304 |   | 58 |   | (12 | ) | 46 |   |
| Money market demand accounts                       |       | 25,562                                  |       | 1.07 |   | 273 |   | 20,663 |   | 1.12 |   | 231 |   | 52 |   | (10 | ) | 42 |   |
| Individual retirement accounts                     |       | 2,464                                   |       | 2.76 |   | 68 |   | 1,977 |   | 3.14 |   | 62 |   | 14 |   | (8 | ) | 6 |   |
| Other savings deposits                             |       | 2,976                                   |       | 0.67 |   | 20 |   | 2,220 |   | 0.90 |   | 20 |   | 6 |   | (6 | ) | — |   |
| Certificates of deposit, $100,000 and over         |       | 36,103                                  |       | 2.41 |   | 871 |   | 26,324 |   | 2.49 |   | 655 |   | 237 |   | (21 | ) | 216 |   |
| Certificates of deposit under $100,000             |       | 16,698                                  |       | 2.43 |   | 406 |   | 14,367 |   | 2.71 |   | 390 |   | 59 |   | (43 | ) | 16 |   |
| Total interest-bearing deposits                    |       | 118,499                                 |       | 1.68 |   | 1,988 |   | 94,533 |   | 1.76 |   | 1,662 |   | 405 |   | (79 | ) | 326 |   |
|                                               |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal funds purchased                            |       | 1,251                                   |       | 1.20 |   | 15 |   | 1,022 |   | 1.57 |   | 16 |   | 3 |   | (4 | ) | (1 | ) |
| Securities sold under repurchase agreements        |       | 565                                     |       | 0.53 |   | 3 |   | 1,444 |   | 0.90 |   | 13 |   | (6 | ) | (4 | ) | (10 | ) |
| Advances from Federal Home Loan Bank               |       | 7,685                                   |       | 2.03 |   | 156 |   | 3,751 |   | 1.52 |   | 57 |   | 75 |   | 24 |   | 99 |   |
| Total interest-bearing deposits and borrowed funds |       | 128,000                                 |       | 1.69 |   | 2,162 |   | 100,750 |   | 1.73 |   | 1,748 |   | 455 |   | (41 | ) | 414 |   |
|                                               |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand                                             |       | 23,442                                  |       |   |   | — |   | 15,438 |   |   |   | — |   |   |   |   |   |   |   |
|                                               |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other liabilities                                  |       | 501                                     |       |   |   | — |   | 503 |   |   |   | — |   |   |   |   |   |   |   |
|                                               |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stockholders’ equity                          |       | 14,631                                  |       |   |   | — |   | 13,895 |   |   |   | — |   |   |   |   |   |   |   |
| Total liabilities and stockholders’ equity    |       | $                                       | 166,574    |   |   |   | 2,162 |   | 130,586 |   |   |   | 1,748 |   |   |   |   |   |   |   |
|                                               |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                |       |                                    |       |   |   | 6,883 |   |   |   |   |   | 5,311 |   |   |   |   |   |   |   |
|                                               |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net yield on earning assets                        |       |                                    |       | 4.49 | % |   |   |   |   | 4.43 | % |   |   |   |   |   |   |   |   |
|                                               |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest spread                                |       |                                    |       | 4.21 | % |   |   |   |   | 4.16 | % |   |   |   |   |   |   |   |   |

 

30

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| ** **                             | ** ** | **In Thousands, Except Interest Rates** | ** ** |
|----------------------------------------|------------|-----------------------------------------|------------|
| ** **                             | ** ** | **2003**                                | ** ** | **2002** | ** ** | **2003/2002 Change** | ** ** |
| ** **                             | ** ** | **Average  Balance**                    | ** ** | **Interest  Rate** | ** ** | **Income/  Expense** | ** ** | **Average  Balance** | ** ** | **Interest  Rate** | ** ** | **Income/  Expense** | ** ** | **Due to  Volume** | ** ** | **Due to  Rate** | ** ** | **Total** | ** ** |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans, net of unearned interest        |       | $                                       | 85,872     |   | 6.76 | % | 5,803 |   | 70,171 |   | 7.02 | % | 4,925 |   | 1,066 |   | (188 | ) | 878 |   |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment securities - taxable        |       | 25,400                                  |       | 3.52 |   | 893 |   | 21,977 |   | 4.86 |   | 1,069 |   | 149 |   | (325 | ) | (176 | ) |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment securities - tax-exempt     |       | 5,572                                   |       | 3.66 |   | 204 |   | 632 |   | 2.69 |   | 17 |   | 179 |   | 8 |   | 187 |   |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable equivalent adjustment          |       | —                                  |       | 1.89 |   | 105 |   | — |   | 1.42 |   | 9 |   | 92 |   | 4 |   | 96 |   |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total tax-exempt investment securities |       | 5,572                                   |       | 5.55 |   | 309 |   | 632 |   | 4.11 |   | 26 |   | 271 |   | 12 |   | 283 |   |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total investment securities            |       | 30,972                                  |       | 3.88 |   | 1,202 |   | 22,609 |   | 4.84 |   | 1,095 |   | 352 |   | (245 | ) | 107 |   |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans 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 | ) |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Restricted equity securities           |       | 429                                     |       | 3.26 |   | 14 |   | 381 |   | 3.94 |   | 15 |   | 2 |   | (3 | ) | (1 | ) |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total earning assets                   |       | 119,877                                 |       | 5.89 | % | 7,059 |   | 95,851 |   | 6.36 | % | 6,092 |   | 1,442 |   | (475 | ) | 967 |   |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                |       | 5,043                                   |       |   |   |   |   | 3,859 |   |   |   |   |   |   |   |   |   |   |   |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for possible loan losses     |       | (1,019                                  | )          |   |   |   |   | (797 | ) |   |   |   |   |   |   |   |   |   |   |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Bank premises and equipment            |       | 4,602                                   |       |   |   |   |   | 3,506 |   |   |   |   |   |   |   |   |   |   |   |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other assets                           |       | 2,083                                   |       |   |   |   |   | 989 |   |   |   |   |   |   |   |   |   |   |   |
|                                   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets                           |       | $                                       | 130,586    |   |   |   |   |   | 103,408 |   |   |   |   |   |   |   |   |   |   |   |

 

31

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| ** **                                      | ** ** | **In Thousands, Except Interest Rates** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                      | ** ** | **2003**                                | ** ** | **2002** | ** ** | **2003/2002 Change** | ** ** |
| ** **                                      | ** ** | **Average  Balance**                    | ** ** | **Interest  Rate** | ** ** | **Income/  Expense** | ** ** | **Average  Balance** | ** ** | **Interest  Rate** | ** ** | **Income/  Expense** | ** ** | **Due to  Volume** | ** ** | **Due to  Rate** | ** ** | **Total** | ** ** |
|                                            |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                       |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Negotiable order of withdrawal accounts         |       | $                                       | 28,982     |   | 1.05 | % | 304 |   | 19,033 |   | 1.43 | % | 273 |   | 116 |   | (85 | ) | 31 |   |
| Money market demand accounts                    |       | 20,663                                  |       | 1.12 |   | 231 |   | 15,938 |   | 1.81 |   | 288 |   | 72 |   | (129 | ) | (57 | ) |
| Individual retirement accounts                  |       | 1,977                                   |       | 3.14 |   | 62 |   | 1,387 |   | 4.18 |   | 58 |   | 21 |   | (17 | ) | 4 |   |
| Other savings deposits                          |       | 2,220                                   |       | 0.90 |   | 20 |   | 1,340 |   | 1.49 |   | 20 |   | 10 |   | (10 | ) | — |   |
| Certificates of deposit, $100,000 and over      |       | 26,324                                  |       | 2.49 |   | 655 |   | 21,823 |   | 3.40 |   | 742 |   | 135 |   | (222 | ) | (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 |   | 463 |   | (741 | ) | (278 | ) |
|                                            |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal funds purchased                         |       | 1,022                                   |       | 1.57 |   | 16 |   | 465 |   | 2.58 |   | 12 |   | 10 |   | (6 | ) | 4 |   |
| Securities sold under repurchase agreements     |       | 1,444                                   |       | 0.90 |   | 13 |   | 684 |   | 1.17 |   | 8 |   | 7 |   | (2 | ) | 5 |   |
| Advances from Federal Home Loan Bank            |       | 3,751                                   |       | 1.52 |   | 57 |   | 3,138 |   | 2.39 |   | 75 |   | 13 |   | (31 | ) | (18 | ) |
| Total deposits and borrowed funds               |       | 100,750                                 |       | 1.73 |   | 1,748 |   | 78,023 |   | 2.61 |   | 2,035 |   | 504 |   | (791 | ) | (287 | ) |
|                                            |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand                                          |       | 15,438                                  |       |   |   | — |   | 11,455 |   |   |   | — |   |   |   |   |   |   |   |
|                                            |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other liabilities                               |       | 503                                     |       |   |   | — |   | 605 |   |   |   | — |   |   |   |   |   |   |   |
|                                            |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stockholders’ equity                       |       | 13,895                                  |       |   |   | — |   | 13,325 |   |   |   | — |   |   |   |   |   |   |   |
| Total liabilities and stockholders’ equity |       | $                                       | 130,586    |   |   |   | 1,748 |   | 103,408 |   |   |   | 2,035 |   |   |   |   |   |   |   |
|                                            |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income                             |       |                                    |       |   |   | 5,311 |   |   |   |   |   | 4,057 |   |   |   |   |   |   |   |
|                                            |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net yield on earning assets                     |       |                                    |       | 4.43 | % |   |   |   |   | 4.23 | % |   |   |   |   |   |   |   |   |
|                                            |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest spread                             |       |                                    |       | 4.16 | % |   |   |   |   | 3.75 | % |   |   |   |   |   |   |   |   |

 

32

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II.                                     InvestmentPortfolio:

 

A.                                   Securitiesat December 31, 2004 consist of the following:

 
| ** **                                                         | ** ** | **Securities Available-For-Sale** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                         | ** ** | **(In Thousands)**                | ** ** |
| ** **                                                         | ** ** | **Amortized  Cost**               | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Market  Value** | ** ** |
|                                                               |       |                              |       |   |   |   |   |   |   |
| U.S.  Treasury and other U.S. Government agencies and corporations |       | $                                 | 4,070      |   | 2 |   | 71 |   | 4,001 |   |
| Obligations  of states and political subdivision                   |       | 12,123                            |       | 102 |   | 121 |   | 12,104 |   |
| Domestic  corporate bonds                                          |       | 2,750                             |       | — |   | 19 |   | 2,731 |   |
| Mortgage-backed  securities                                        |       | 18,934                            |       | 34 |   | 224 |   | 18,744 |   |
|                                                               |       | $                                 | 37,877     |   | 138 |   | 435 |   | 37,580 |   |

 

Securities at December 31, 2003 consistof the following:

 
| ** **                                                         | ** ** | **Securities Available-For-Sale** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                         | ** ** | **(In Thousands)**                | ** ** |
| ** **                                                         | ** ** | **Amortized  Cost**               | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Market  Value** | ** ** |
|                                                               |       |                              |       |   |   |   |   |   |   |
| U.S.  Treasury and other U.S. Government agencies and corporations |       | $                                 | 1,796      |   | — |   | 41 |   | 1,755 |   |
| Obligations  of states and political subdivisions                  |       | 8,237                             |       | — |   | 146 |   | 8,091 |   |
| Domestic  corporate bonds                                          |       | 3,250                             |       | — |   | 75 |   | 3,175 |   |
| Mortgage-backed  securities                                        |       | 18,976                            |       | — |   | 53 |   | 18,923 |   |
|                                                               |       | $                                 | 32,259     |   | — |   | 315 |   | 31,944 |   |

 

33

----

 

B.                                     Thefollowing schedule details the estimated maturities and weighted averageyields of investment securities of the Company at December 31, 2004.

 
| **Available-For-Sale Securities**                                                       | ** ** | **Amortized  Cost** | ** ** | **Estimated  Market  Value** | ** ** | **Weighted  Average  Yields** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **                                                                              | ** ** | **(In Thousands)**  | ** ** | ** **                   | ** ** |
|                                                                                    |       |                |       |                         |       |                          |       |
| Obligations  of U.S. Treasury and other U.S. Government agencies and corporations:      |       |                |       |                         |       |                          |       |
| Less than  one year                                                                     |       | $                   | 150        |                         | 149        |                          | 2.489      | % |
| One to five  years                                                                      |       | 2,408               |       | 2,385                        |       | 3.329                         |       |
| Five to ten  years                                                                      |       | 693                 |       | 684                          |       | 4.171                         |       |
| More than  ten years                                                                    |       | 819                 |       | 783                          |       | 4.144                         |       |
| Total  securities of U.S. Treasury and other U.S. Government agencies and  corporations |       | 4,070               |       | 4,001                        |       | 3.605                         |       |
|                                                                                    |       |                |       |                         |       |                          |       |
| Obligations  of states and political subdivisions (tax-exempt)*:                        |       |                |       |                         |       |                          |       |
| Less than  one year                                                                     |       | 585                 |       | 586                          |       | 5.068                         |       |
| One to five  years                                                                      |       | 4,486               |       | 4,441                        |       | 5.026                         |       |
| Five to ten  years                                                                      |       | 3,656               |       | 3,656                        |       | 5.978                         |       |
| More than  ten years                                                                    |       | 3,396               |       | 3,421                        |       | 6.461                         |       |
| Total  obligations of states and political subdivisions                                 |       | 12,123              |       | 12,104                       |       | 5.717                         |       |
|                                                                                    |       |                |       |                         |       |                          |       |
| Domestic  corporate bonds:                                                              |       |                |       |                         |       |                          |       |
| Less than  one year                                                                     |       | —              |       | —                       |       | —                        |       |
| One to five  years                                                                      |       | —              |       | —                       |       | —                        |       |
| Five to ten  years                                                                      |       | —              |       | —                       |       | —                        |       |
| More than  ten years                                                                    |       | 2,750               |       | 2,731                        |       | 4.979                         |       |
|                                                                                    |       | 2,750               |       | 2,731                        |       | 4.979                         |       |
|                                                                                    |       |                |       |                         |       |                          |       |
| Other:                                                                                  |       |                |       |                         |       |                          |       |
| Mortgage  backed securities                                                             |       | 18,934              |       | 18,744                       |       | 3.842                         |       |
|                                                                                    |       |                |       |                         |       |                          |       |
| Total  investment securities                                                            |       | $                   | 37,877     |                         | 37,580     |                          | 4.499      | % |

 

----

*Weightedaverage yield is stated on a tax-equivalent basis assuming a weighted averageFederal income tax rate of 34%.

 

34

----

 

III.                                 Loan Portfolio:

 

A.                                   LoanTypes

 

The following schedule detailsthe loans of the Company at December 31, 2004 and 2003.

 
| ** **                               | ** ** | **In Thousands** | ** ** |
|------------------------------------------|------------|------------------|------------|
| ** **                               | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                                     |       |             |       |   |   |
| Commercial,  financial and agricultural  |       | $                | 24,481     |   | 20,256 |   |
| Real estate  - construction              |       | 22,417           |       | 13,393 |   |
| Real estate  - mortgage                  |       | 77,646           |       | 66,500 |   |
| Installment                              |       | 5,307            |       | 4,870 |   |
| Total loans                              |       | 129,851          |       | 105,019 |   |
| Less  allowance for possible loan losses |       | (1,517           | )          | (1,225 | ) |
| Net loans                                |       | $                | 128,334    |   | 103,794 |   |

 

B.                                     Maturitiesand Sensitivities of Loans to Changes in Interest Rates

 

The following schedule detailsmaturities and sensitivity to interest rate changes for commercial and realestate construction loans of the Company at December 31, 2004.

 
| ** **                                                                                 | ** ** | **(In Thousands)**    | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                 | ** ** | **Less Than  1 Year** | ** ** | **1 Year to  Less Than  5 Years** | ** ** | **After 5  Years** | ** ** | **Total** | ** ** |
|                                                                                       |       |                  |       |   |   |   |   |   |   |
| Maturity  Distribution:                                                                    |       |                  |       |   |   |   |   |   |   |
| Commercial,  financial and agricultural*                                                   |       | $                     | 15,935     |   | 7,333 |   | 1,213 |   | 24,481 |   |
| Real estate –  construction                                                           |       | 19,428                |       | 2,989 |   | — |   | 22,417 |   |
|                                                                                       |       | $                     | 35,363     |   | 10,322 |   | 1,213 |   | 46,898 |   |
|                                                                                       |       |                  |       |   |   |   |   |   |   |
| Interest-Rate  Sensitivity:                                                                |       |                  |       |   |   |   |   |   |   |
| Fixed  interest rates                                                                      |       | $                     | 7,148      |   | 10,322 |   | 1,213 |   | 18,683 |   |
| Floating or  adjustable interest rates                                                     |       | 28,215                |       | — |   | — |   | 28,215 |   |
| Total  commercial, financial and agricultural loans plus real estate - construction  loans |       | $                     | 35,363     |   | 10,322 |   | 1,213 |   | 46,898 |   |

 

----

*Includes demand loans, bankers acceptances, commercial paper anddeposit notes.

 

35

----

 

C.                                     RiskElements

 

The following schedule detailsselected information as to non-performing loans of the Company at December 31,2004 and 2003.

 
| ** **                                                                                        | ** ** | **In Thousands  except percentages** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                        | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Non accrual  loans:                                                                               |       |                                 |       |   |   |
| Commercial,  financial and agricultural                                                           |       | $                                    | 45         |   | 266 |   |
| Real estate –  construction                                                                  |       | —                               |       | — |   |
| Real estate –  mortgage                                                                      |       | 350                                  |       | — |   |
| Installment                                                                                       |       | 25                                   |       | 39 |   |
| Lease financing  receivable                                                                       |       | —                               |       | — |   |
| Total  non-accrual                                                                                |       | $                                    | 420        |   | 305 |   |
|                                                                                              |       |                                 |       |   |   |
| Loans 90  days past due:                                                                          |       |                                 |       |   |   |
| Commercial,  financial and agricultural                                                           |       | $                                    | —     |   | — |   |
| Real estate –  construction                                                                  |       | —                               |       | — |   |
| Real estate –  mortgage                                                                      |       | —                               |       | — |   |
| Installment                                                                                       |       | —                               |       | — |   |
| Lease financing  receivable                                                                       |       | —                               |       | — |   |
| Total loans  90 days past due                                                                     |       | $                                    | —     |   | — |   |
|                                                                                              |       |                                 |       |   |   |
| Renegotiated  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                                                                       |       | $                                    | 420        |   | 305 |   |
|                                                                                              |       |                                 |       |   |   |
| Total loans,  net of unearned interest                                                            |       | $                                    | 129,851    |   | 105,019 |   |
|                                                                                              |       |                                 |       |   |   |
| Total  non-performing loans as a percentage of total loans outstanding, net of  unearned interest |       | 0.32                                 | %          | 0.29 | % |
|                                                                                              |       |                                 |       |   |   |
| Other real  estate                                                                                |       | $                                    | 281        |   | 92 |   |

 

36

----

 

The accrual of interestincome is discontinued when it is determined that collection of interest isless than probable or the collection of any amount of principal isdoubtful.  The decision to place a loanon non-accrual status is based on an evaluation of the borrower’s financialcondition, collateral liquidation value, economic and business conditions andother factors that affect the borrower’s ability to pay.  At the time a loan is placed on a non-accrualstatus, 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 asreceived.  Non-accrual loans totaled$420,000 at December 31, 2004 and $305,000 at December 31, 2003.

 

At December 31, 2004loans totaling $3,912,000 were included in the Company’s internal classifiedloan list.  Of these loans $3,052,000 arecommercial and $860,000 are installment and real estate mortgage loans.  The collateral value related to these loansapproximated $4,965,000 ($3,853,000 related to commercial and $1,112,000related to installment and real estate mortgage).  At December 31, 2003 loans totaling$1,832,000 were included in the Company’s internal classified loan list.  Of these loans $1,534,000 are commercial and$298,000 are installment.  The collateralvalue related to these loans approximated $2,044,000 ($1,670,000 related tocommercial and $374,000 related to installment).  Loans are listed as classified wheninformation obtained about possible credit problems of the borrower hasprompted management to question the ability of the borrower to comply with therepayment terms of the loan agreement. The loan classifications do not represent or result from trends oruncertainties which management expects will materially impact future operatingresults, liquidity or capital resources.

 

At December 31, 2004and 2003 there were no loan concentrations that exceeded ten percent of totalloans other than as included in the preceding table of types of loans.  Loan concentrations are amounts loaned to amultiple number of borrowers engaged in similar activities which would causethem to be similarly impacted by economic or other conditions.

 

At December 31, 2004and 2003 other real estate totaled $281,000 and $92,000, respectively.

 

There were no materialamounts of other interest-bearing assets (interest-bearing deposits with otherbanks, municipal bonds, etc.) at December 31, 2004 which would be requiredto be disclosed as past due, non-accrual, restructured or potential problemloans, if such interest-bearing assets were loans.

 

37

----

 

IV.                                 Summary of LoanLoss Experience:

 

The following schedule detailsselected information related to the allowance for possible loan loss account ofthe Company at December 31, 2004 and 2003.

 
| ** **                                                                                   | ** ** | **In Thousands,  Except Percentages** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                   | ** ** | **2004**                              | ** ** | **2003** | ** ** |
|                                                                                         |       |                                  |       |   |   |
| Allowance  for loan losses at beginning of year                                              |       | $                                     | 1,225      |   | 879 |   |
|                                                                                         |       |                                  |       |   |   |
| Less net  loan charge offs:                                                                  |       |                                  |       |   |   |
| Charge-offs:                                                                                 |       |                                  |       |   |   |
| Commercial,  financial and agricultural                                                      |       | (62                                   | )          | (30 | ) |
| Real estate  construction                                                                    |       | —                                |       | — |   |
| Real estate  – mortgage                                                                 |       | (40                                   | )          | — |   |
| Installment                                                                                  |       | (54                                   | )          | (19 | ) |
| Lease  financing                                                                             |       | (1                                    | )          |   |   |
|                                                                                         |       | (157                                  | )          | (49 | ) |
|                                                                                         |       |                                  |       |   |   |
| Recoveries:                                                                                  |       |                                  |       |   |   |
| Commercial,  financial and agricultural                                                      |       | 1                                     |       | — |   |
| Real estate  construction                                                                    |       | —                                |       | — |   |
| Real estate  – mortgage                                                                 |       | —                                |       | — |   |
| Installment                                                                                  |       | 8                                     |       | 5 |   |
| Lease  financing                                                                             |       | —                                |       | 29 |   |
|                                                                                         |       | 9                                     |       | 34 |   |
|                                                                                         |       |                                  |       |   |   |
| Net loan  charge offs                                                                        |       | (148                                  | )          | (15 | ) |
|                                                                                         |       |                                  |       |   |   |
| Provision  for loan losses charged to expense                                                |       | 440                                   |       | 361 |   |
|                                                                                         |       |                                  |       |   |   |
| Allowance  for loan losses at end of year                                                    |       | $                                     | 1,517      |   | 1,225 |   |
|                                                                                         |       |                                  |       |   |   |
| Total loans  at end of year                                                                  |       | $                                     | 129,851    |   | 105,019 |   |
|                                                                                         |       |                                  |       |   |   |
| Average  total loans outstanding during year                                                 |       | $                                     | 116,340    |   | 85,872 |   |
|                                                                                         |       |                                  |       |   |   |
| Net  charge-offs as a percentage of average total loans outstanding during year              |       | 0.13                                  | %          | .02 | % |
|                                                                                         |       |                                  |       |   |   |
| Ending  allowance for loan losses as a percentage of total loans outstanding at end  of year |       | 1.17                                  | %          | 1.17 | % |

 

38

----

 

The following detailprovides a breakdown of the allocation of the allowance for possible loanlosses:

 
| ** **                              | ** ** | **December 31, 2004** | ** ** | **December 31, 2003**                                | ** ** |
|-----------------------------------------|------------|----------------------------|------------|-----------------------------------------------------------|------------|
| ** **                              | ** ** | **In Thousands**           | ** ** | **Percent  of Loans  in Each  Category  to Total  Loans** | ** ** | **In Thousands** | ** ** | **Percent  of Loans  in Each  Category  to Total  Loans** | ** ** |
| ** **                              | ** ** | ** **                 | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Commercial,  financial and agricultural |       | $                          | 275        |                                                      | 18.8       | % | 475 |   | 19.3 | % |
| Real estate  – construction        |       | 178                        |       | 17.3                                                      |       | 117 |   | 12.8 |   |
| Real estate  – mortgage            |       | 974                        |       | 59.8                                                      |       | 567 |   | 63.3 |   |
| Installment                             |       | 90                         |       | 4.1                                                       |       | 66 |   | 4.6 |   |
|                                    |       | $                          | 1,517      |                                                      | 100.0      | % | 1,225 |   | 100.0 | % |

 

The allowance for possibleloan losses is an amount that management believes will be adequate to absorbpossible losses on existing loans that may become uncollectible.  The provision for possible loan lossescharged to operating expense is based on past loan loss experience and otherfactors which, in management’s judgment, deserve current recognition inestimating possible loan losses.  Suchother factors considered by management include growth and composition of theloan portfolio, review of specific loan problems, the relationship of theallowance for possible loan losses to outstanding loans, adverse situationsthat may affect the borrower’s ability to repay, the estimated value of anyunderlying collateral and current economic conditions that may affect theborrower’s ability to pay.

 

Management conducts acontinuous review of all loans that are delinquent, previously charged down orloans which are determined to be potentially uncollectible.  Loan classifications are reviewedperiodically by a person independent of the lending function.  The Board of Directors periodically reviewsthe adequacy of the allowance for possible loan losses.

 

The Company maintains itsallowance for possible loan losses at an amount considered by management to beadequate to provide for the possibility of loan losses in the loan portfolio.

 

39

----

 

V.                                     Deposits:

 

The average amounts andaverage interest rates for deposits for 2004 and 2003 are detailed in thefollowing schedule:

 
| ** **                                 | ** ** | **2004**             | ** ** | **2003**          | ** ** |
|--------------------------------------------|------------|----------------------|------------|-------------------|------------|
| ** **                                 | ** ** | **Average  Balance** | ** ** | **Average  Rate** | ** ** | **Average  Balance** | ** ** | **Average  Rate** | ** ** |
| ** **                                 | ** ** | **In Thousands**     | ** ** | ** **        | ** ** | **In Thousands** | ** ** | ** ** | ** ** |
|                                       |       |                 |       |              |       |   |   |   |   |
| Non-interest  bearing deposits             |       | $                    | 23,442     |              | —     | % | $ | 15,438 |   | — | % |
| Negotiable  order of withdrawable accounts |       | 34,696               |       | 1.01              | %          | 28,982 |   | 1.05 | % |
| Money market  demand accounts              |       | 25,562               |       | 1.07              | %          | 20,663 |   | 1.12 | % |
| Individual  retirement accounts            |       | 2,464                |       | 2.76              | %          | 1,977 |   | 3.14 | % |
| Other  savings                             |       | 2,976                |       | 0.67              | %          | 2,220 |   | 0.90 | % |
| Certificates  of deposit $100,000 and over |       | 36,103               |       | 2.41              | %          | 26,324 |   | 2.49 | % |
| Certificates  of deposit under $100,000    |       | 16,698               |       | 2.43              | %          | 14,367 |   | 2.71 | % |
|                                       |       |                 |       |              |       |   |   |   |   |
|                                       |       | $                    | 141,941    |              | 1.40       | % | $ | 109,971 |   | 1.51 | % |

 

The following schedule detailsthe maturities of certificates of deposit and individual retirement accounts of$100,000 and over at December 31, 2004.

 
| ** **               | ** ** | **In Thousands**              | ** ** |
|--------------------------|------------|-------------------------------|------------|
| ** **               | ** ** | **Certificates  of  Deposit** | ** ** | **Individual  Retirement  Accounts** | ** ** | **Total** | ** ** |
|                     |       |                          |       |   |   |   |   |
| Less than  three months  |       | $                             | 10,938     |   | 243 |   | 11,181 |   |
|                     |       |                          |       |   |   |   |   |
| Three to six  months     |       | 4,478                         |       | 208 |   | 4,686 |   |
|                     |       |                          |       |   |   |   |   |
| Six to  twelve months    |       | 7,773                         |       | — |   | 7,773 |   |
|                     |       |                          |       |   |   |   |   |
| More than  twelve months |       | 16,391                        |       | 336 |   | 16,727 |   |
|                     |       |                          |       |   |   |   |   |
|                     |       | $                             | 39,580     |   | 787 |   | 40,367 |   |

 

40

----

 

VI.                                 Returnon Equity and Assets:

 

The following schedule detailsselected key ratios of the Company at December 31, 2004 and 2003.

 
| ** **                                                                                                                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                       |       |     |       |     |       |
| Return on  assets                                                                                                                          |       | 0.96%    |       | 0.63%    |       |
| (Net income  divided by average total assets)                                                                                              |       |     |       |     |       |
|                                                                                                                                       |       |     |       |     |       |
| Return on  equity                                                                                                                          |       | 10.98%   |       | 5.97%    |       |
| (Net income  divided by average equity)                                                                                                    |       |     |       |     |       |
|                                                                                                                                       |       |     |       |     |       |
| Dividend  payout ratio                                                                                                                     |       | 17.39%   |       | 25.00%   |       |
| (Dividends  declared per share divided by net earnings per share)                                                                          |       |     |       |     |       |
|                                                                                                                                       |       |     |       |     |       |
| Equity to  asset ratio                                                                                                                     |       | 8.78%    |       | 10.64%   |       |
| (Average  equity divided by average total assets)                                                                                          |       |     |       |     |       |
|                                                                                                                                       |       |     |       |     |       |
| Leverage  capital ratio                                                                                                                    |       | 8.71%    |       | 9.94%    |       |
| (Equity divided by fourth quarter average  total assets, excluding the net unrealized loss on available-for-sale  securities and goodwill) |       |     |       |     |       |

 

The minimum leverage capitalratio required by the regulatory agencies is 4%.

 

Beginning January 1,1991, new risk-based capital guidelines were adopted by regulatoryagencies.  Under these guidelines, acredit risk is assigned to various categories of assets and commitmentsranging from 0% to 100% based on the risk associated with the asset.

 

41

----

 

The following schedule detailsthe Company’s risk-based capital at December 31, 2004 excluding thenet unrealized loss on available-for-sale securities which is shown as adeduction in stockholders’ equity in the consolidated financial statements:

 
| ** **                                                                                                        | ** ** | **In Thousands** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                        | ** ** | **except**       | ** ** |
| ** **                                                                                                        | ** ** | **percentages**  | ** ** |
| ** **                                                                                                        | ** ** | **2004**         | ** ** |
| Tier I  capital:                                                                                                  |       |             |       |
| Stockholders’  equity, excluding the net unrealized gain/loss on available-for-sale  securities and goodwill |       | $                | 15,743     |   |
|                                                                                                              |       |             |       |
| Total  capital:                                                                                                   |       |             |       |
| Allowable  allowance for loan losses (limited to 1.25% of risk-weighted assets)                                   |       | 1,517            |       |
|                                                                                                              |       |             |       |
| Total  capital                                                                                                    |       | $                | 17,260     |   |
|                                                                                                              |       |             |       |
| Risk-weighted  assets                                                                                             |       | $                | 142,611    |   |
|                                                                                                              |       |             |       |
| Risk-based  capital ratios:                                                                                       |       |             |       |
| Tier I  capital ratio                                                                                             |       | 11.04            | %          |
|                                                                                                              |       |             |       |
| Total  risk-based capital ratio                                                                                   |       | 12.10            | %          |

 

The Company is required tomaintain a Total capital to risk-weighted asset ratio of 8% and a Tier Icapital to risk-weighted asset ratio of 4%. At December 31, 2004, the Company was in compliance with theserequirements.

 

42

----

 

The following schedule detailsthe Company’s interest rate sensitivity at December 31, 2004:

 
| ** **                                        | ** ** | **Repricing Within** | ** ** |
|---------------------------------------------------|------------|----------------------|------------|
| **(In  Thousands)**                               | ** ** | **Total**            | ** ** | **0-30 Days** | ** ** | **31-90 Days** | ** ** | **91-180 Days** | ** ** | **181-365 Days** | ** ** | **Over 1 Year** | ** ** |
|                                              |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Earning assets:                                   |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Loans, net of unearned interest                   |       | $                    | 129,851    |   | 55,533 |   | 3,012 |   | 5,185 |   | 8,527 |   | 57,594 |   |
| Securities                                        |       | 37,580               |       | 3,928 |   | 1,539 |   | 996 |   | 1,296 |   | 29,821 |   |
| Restricted equity securities                      |       | 655                  |       | 655 |   | — |   | — |   | — |   | — |   |
| Total earning assets                              |       | 168,086              |       | 60,116 |   | 4,551 |   | 6,181 |   | 9,823 |   | 87,415 |   |
|                                              |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                     |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Negotiable order of withdrawal accounts           |       | 34,597               |       | 34,597 |   | — |   | — |   | — |   | — |   |
| Money market demand accounts                      |       | 29,151               |       | 29,151 |   | — |   | — |   | — |   | — |   |
| Savings deposits                                  |       | 3,262                |       | 3,262 |   | — |   | — |   | — |   | — |   |
| Certificates of deposit, $100,000 and over        |       | 39,580               |       | 4,346 |   | 6,712 |   | 4,585 |   | 7,773 |   | 16,164 |   |
| Certificates of deposit, under $100,000           |       | 18,925               |       | 1,578 |   | 3,964 |   | 3,679 |   | 3,344 |   | 6,360 |   |
| Individual retirement accounts                    |       | 2,495                |       | 44 |   | 393 |   | 326 |   | 392 |   | 1,340 |   |
| Securities sold under under repurchase agreements |       | 636                  |       | 636 |   | — |   | — |   | — |   | — |   |
| Advances from FHLB                                |       | 8,919                |       | 3,000 |   | 4,000 |   | 1,919 |   | — |   | — |   |
| Federal fund purchased                            |       | 3,804                |       | 3,804 |   | — |   | — |   | — |   | — |   |
| Total interest bearing liabilities                |       | 141,369              |       | 80,418 |   | 15,069 |   | 10,509 |   | 11,509 |   | 23,864 |   |
|                                              |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Interest-sensitivity gap                          |       | $                    | 26,717     |   | (20,302 | ) | (10,518 | ) | (4,328 | ) | (1,686 | ) | 63,551 |   |
|                                              |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Cumulative gap                                    |       |                 |       | (20,302 | ) | (30,820 | ) | (35,148 | ) | (36,834 | ) | 26,717 |   |
|                                              |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Interest-sensitivity gap as % of total assets     |       |                 |       | (10.97 | )% | (5.68 | ) | (2.34 | ) | (0.91 | ) | 34.33 |   |
|                                              |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Cumulative gap as % of total assets               |       |                 |       | (10.97 | )% | (16.65 | ) | (18.99 | ) | (19.90 | ) | 14.43 |   |

 

The Company presentlymaintains a liability sensitive position over the next twelve months.  Management expects that liabilities of ademand nature will renew and that it will not be necessary to replace them withsignificantly higher cost funds.

 

43

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The Company’s primarycomponent of market risk is interest rate volatility.  Fluctuations in interest rates willultimately impact both the level of income and expense recorded on a largeportion of the Company’s assets and liabilities, and the market value of allinterest-earning assets and interest-bearing liabilities, other than thosewhich possess a short term to maturity. Based upon the nature of the Company’s operations, the Company is notsubject to foreign currency exchange or commodity price risk.

 

Interest rate risk(sensitivity) management focuses on the earnings risk associated with changinginterest rates.  Management seeks tomaintain profitability in both immediate and long term earnings through fundsmanagement/interest rate risk management. The Company’s rate sensitivity position has an important impact onearnings.  Senior management of LegendsBank meets monthly to analyze the rate sensitivity position.  These meetings focus on the spread betweenthe cost of funds and interest yields generated primarily through loans andinvestments.

 

VII.                             Short-Term Borrowings:

 

Information related toshort-term borrowings in excess of 30% of stockholders’ equity is as follows:

 
| ** **                                                                     | ** ** | **In Thousands, except  percentages** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                     | ** ** | **2004**                              | ** ** | **2003** | ** ** |
|                                                                           |       |                                  |       |   |   |
| Advances  from Federal Home Loan Bank:                                         |       |                                  |       |   |   |
|                                                                           |       |                                  |       |   |   |
| Balance  outstanding - end of year                                             |       | $                                     | 8,919      |   | $ | 4,991 |   |
|                                                                           |       |                                  |       |   |   |
| Weighted  average interest rate on balance outstanding at end of year          |       | 2.41                                  | %          | 1.83 | % |
|                                                                           |       |                                  |       |   |   |
| Maximum  amount of borrowings at any month end                                 |       | $                                     | 12,925     |   | $ | 7,000 |   |
|                                                                           |       |                                  |       |   |   |
| Average  amounts outstanding during each year                                  |       | $                                     | 7,685      |   | $ | 3,751 |   |
|                                                                           |       |                                  |       |   |   |
| Weighted  average interest rate on average amounts outstanding during the year |       | 2.03                                  | %          | 1.52 | % |

 

44

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**ITEM 7. FINANCIAL STATEMENTS**

 

**LEGENDS FINANCIAL HOLDINGS,INC.CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2004 AND 2003(WITH INDEPENDENT AUDITOR’S REPORT THEREON)**

** **

**TABLEOF CONTENTS**

 
| Report of Independent Public Accounts                            | 46     |
|------------------------------------------------------------------|--------|
|                                                             |   |
| Consolidated Financial Statements                                | 47     |
|                                                             |   |
| Consolidated balance sheets                                      | 47     |
| Consolidated statements of earnings                              | 48     |
| Consolidated statements of comprehensive  earnings               | 49     |
| Consolidated statements of changes in  stockholders’ equity | 50     |
| Consolidated statements of cash flows                            | 51     |
| Notes to consolidated financial statements                       | 53     |

 

45

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**INDEPENDENTAUDITOR’S REPORT**

 

 

The Board of Directors

Legends Financial Holdings, Inc.

 

 

We have audited the accompanyingconsolidated balance sheets of Legends Financial Holdings, Inc. andSubsidiaries as of December 31, 2004 and 2003 and the related consolidatedstatements of earnings, comprehensive earnings, changes in stockholders’ equityand cash flows for each of the three years ended December 31, 2004.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Accounting Oversight Board in theUnited States.  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Legends Financial Holdings, Inc. andSubsidiaries as of December 31, 2004 and 2003, and the results of itsoperations and its cash flows for each of the three years ended December 31,2004, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

 
| /s/ Maggart & Associates, P.C. |   |
|------------------------------------|--------|
| Nashville, Tennessee               |
| January 25, 2005              |

 

46

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***LEGENDS FINANCIAL HOLDINGS, INC.***

***Consolidated BalanceSheets***

***December 31, 2004 and 2003***

 
| ** **                                                                                                                               | ** ** | **In Thousands** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                               | ** ** | **2004**         | ** ** | **2003** | ** ** |
| ASSETS                                                                                                                                   |       |             |       |   |   |
|                                                                                                                                     |       |             |       |   |   |
| Loans, less  allowance for possible loan losses of $1,517,000 and $1,225,000, respectively                                               |       | $                | 128,334    |   | 103,794 |   |
| Securities  available-for-sale, at market (amortized cost of $37,877,000 and $32,259,000,  respectively)                                 |       | 37,580           |       | 31,944 |   |
| Restricted  equity securities                                                                                                            |       | 655              |       | 480 |   |
| Loans held  for sale                                                                                                                     |       | —           |       | 274 |   |
| Federal  funds sold                                                                                                                      |       | —           |       | 3,195 |   |
| Total  earning assets                                                                                                                    |       | 166,569          |       | 139,687 |   |
|                                                                                                                                     |       |             |       |   |   |
| Cash and due  from banks                                                                                                                 |       | 11,052           |       | 3,401 |   |
| Bank  premises and equipment, net                                                                                                        |       | 5,717            |       | 5,488 |   |
| Accrued  interest receivable                                                                                                             |       | 765              |       | 632 |   |
| Other real  estate owned                                                                                                                 |       | 281              |       | 92 |   |
| Deferred tax  asset, net                                                                                                                 |       | 325              |       | 306 |   |
| Goodwill                                                                                                                                 |       | 153              |       | 153 |   |
| Other assets                                                                                                                             |       | 262              |       | 276 |   |
|                                                                                                                                     |       |             |       |   |   |
| Total assets                                                                                                                             |       | $                | 185,124    |   | 150,035 |   |
|                                                                                                                                     |       |             |       |   |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                               |       |             |       |   |   |
|                                                                                                                                     |       |             |       |   |   |
| Deposits                                                                                                                                 |       | $                | 154,975    |   | 129,816 |   |
| Securities  sold under repurchase agreements                                                                                             |       | 636              |       | 651 |   |
| Accrued  interest payable                                                                                                                |       | 282              |       | 316 |   |
| Accounts  payable and other liabilities                                                                                                  |       | 795              |       | 121 |   |
| Advances  from Federal Home Loan Bank                                                                                                    |       | 8,919            |       | 4,991 |   |
| Federal  funds purchased                                                                                                                 |       | 3,804            |       | — |   |
| Total  liabilities                                                                                                                       |       | 169,411          |       | 135,895 |   |
|                                                                                                                                     |       |             |       |   |   |
| Stockholders’  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, 1,408,497 and  1,381,749 shares issued and outstanding, respectively |       | 1,408            |       | 1,382 |   |
| Additional  paid-in capital                                                                                                              |       | 12,495           |       | 12,287 |   |
| Retained  earnings                                                                                                                       |       | 1,993            |       | 666 |   |
| Net  unrealized losses on available-for-sale securities, net of income taxes of  $114,000 and $120,000 in 2004 and 2003, respectively    |       | (183             | )          | (195 | ) |
| Total  stockholders’ equity                                                                                                         |       | 15,713           |       | 14,140 |   |
|                                                                                                                                     |       |             |       |   |   |
| COMMITMENTS  AND CONTINGENCIES                                                                                                           |       |             |       |   |   |
|                                                                                                                                     |       |             |       |   |   |
| Total  liabilities and stockholders’ equity                                                                                         |       | $                | 185,124    |   | 150,035 |   |

 

47

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***LEGENDS FINANCIAL HOLDINGS, INC.***

***ConsolidatedStatements of Earnings***

***For the Years Ended December 31, 2004,2003 and 2002***

 
| ** **                                                             | ** ** | **In Thousands  (except per share amounts)** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                             | ** ** | **2004**                                     | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                   |       |                                         |       |   |   |   |   |
| Interest  income:                                                      |       |                                         |       |   |   |   |   |
| Interest and  fees on loans                                            |       | $                                            | 7,495      |   | 5,803 |   | 4,925 |   |
| Interest and  dividends on taxable securities                          |       | 950                                          |       | 893 |   | 1,069 |   |
| Interest and  dividends on securities exempt from Federal income taxes |       | 371                                          |       | 204 |   | 17 |   |
| Interest and  dividends on restricted equity securities                |       | 20                                           |       | 14 |   | 15 |   |
| Interest on  loans held for sale                                       |       | 2                                            |       | 15 |   | 21 |   |
| Interest on  Federal funds sold                                        |       | 16                                           |       | 25 |   | 36 |   |
| Total  interest income                                                 |       | 8,854                                        |       | 6,954 |   | 6,083 |   |
|                                                                   |       |                                         |       |   |   |   |   |
| Interest  expense:                                                     |       |                                         |       |   |   |   |   |
| Interest on  negotiable order of withdrawal accounts                   |       | 350                                          |       | 304 |   | 273 |   |
| Interest on  money market and savings accounts                         |       | 293                                          |       | 251 |   | 308 |   |
| Interest on  certificates of deposits over $100,000                    |       | 891                                          |       | 670 |   | 758 |   |
| Interest on  certificates of deposits - other                          |       | 454                                          |       | 437 |   | 601 |   |
| Interest on  Federal funds purchased                                   |       | 15                                           |       | 16 |   | 12 |   |
| Interest on  advances from Federal Home Loan Bank                      |       | 156                                          |       | 57 |   | 75 |   |
| Interest on  securities sold under repurchase agreements               |       | 3                                            |       | 13 |   | 8 |   |
| Total  interest expense                                                |       | 2,162                                        |       | 1,748 |   | 2,035 |   |
|                                                                   |       |                                         |       |   |   |   |   |
| Net interest  income before provision for possible loan losses         |       | 6,692                                        |       | 5,206 |   | 4,048 |   |
| Provision  for possible loan losses                                    |       | 440                                          |       | 361 |   | 703 |   |
| Net interest  income after provision for possible loan losses          |       | 6,252                                        |       | 4,845 |   | 3,345 |   |
|                                                                   |       |                                         |       |   |   |   |   |
| Non-interest  income                                                   |       | 1,582                                        |       | 998 |   | 757 |   |
| Non-interest  expense                                                  |       | 5,532                                        |       | 4,605 |   | 3,557 |   |
|                                                                   |       |                                         |       |   |   |   |   |
| Earnings  before income taxes                                          |       | 2,302                                        |       | 1,238 |   | 545 |   |
|                                                                   |       |                                         |       |   |   |   |   |
| Income tax  benefit (expense)                                          |       | (696                                         | )          | (409 | ) | 49 |   |
|                                                                   |       |                                         |       |   |   |   |   |
| Net earnings                                                           |       | $                                            | 1,606      |   | 829 |   | 594 |   |
|                                                                   |       |                                         |       |   |   |   |   |
| Basic  earnings per common share                                       |       | $                                            | 1.15       |   | .60 |   | .43 |   |
|                                                                   |       |                                         |       |   |   |   |   |
| Diluted  earnings per common share                                     |       | $                                            | 1.12       |   | .59 |   | .43 |   |

 

48

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***LEGENDS FINANCIAL HOLDINGS,INC.***

***ConsolidatedStatements of Comprehensive Earnings***

***For the Years Ended December 31, 2004,2003 and 2002***

 
| ** **                                                                                                                                     | ** ** | **In Thousands** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                                     | ** ** | **2004**         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                                                                           |       |             |       |   |   |   |   |
| Net earnings                                                                                                                                   |       | $                | 1,606      |   | 829 |   | 594 |   |
|                                                                                                                                           |       |             |       |   |   |   |   |
| Other  comprehensive earnings (loss):                                                                                                          |       |             |       |   |   |   |   |
| Unrealized  gains (losses) on available-for-sale securities arising during year, net of  taxes of $32,000, $226,000 and $123,000, respectively |       | 53               |       | (366 | ) | 199 |   |
| Reclassification  adjustment for (gains) losses included in net earnings, net of taxes of  $26,000, $9,000 and $54,000, respectively           |       | (41              | )          | 13 |   | (86 | ) |
| Other  comprehensive earnings (loss)                                                                                                           |       | 12               |       | (353 | ) | 113 |   |
|                                                                                                                                           |       |             |       |   |   |   |   |
| Comprehensive  earnings                                                                                                                        |       | $                | 1,618      |   | 476 |   | 707 |   |

 

49

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***LEGENDS FINANCIAL HOLDINGS, INC.***

***Statements ofChanges in Stockholders’ Equity***

***For the Years Ended December 31, 2004,2003 and 2002***

 
| ** **                                                                                                         | ** ** | **In Thousands**  | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                         | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings  (Deficit)** | ** ** | **Net  Unrealized  Gain  (Loss)  On Available-  For-Sale  Securities** | ** ** | **Total** | ** ** |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Balance December 31,  2001                                                                                    |       | $                 | 1,142      |   | 12,434 |   | (551 | ) | 45 |   | 13,070 |   |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Issuance of  8,400 shares of $1 par value common stock                                                             |       | 8                 |       | 62 |   | — |   | — |   | 70 |   |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Stock-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 |   | 113 |   |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Net earnings  for the year                                                                                         |       | —            |       | — |   | 594 |   | — |   | 594 |   |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Balance December 31,  2002                                                                                    |       | 1,379             |       | 12,267 |   | 43 |   | 158 |   | 13,847 |   |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Issuance of  2,666 shares of $1 par value common stock                                                             |       | 3                 |       | 20 |   | — |   | — |   | 23 |   |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Cash  dividends declared ($.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 |   | — |   | 829 |   |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Balance December 31,  2003                                                                                    |       | 1,382             |       | 12,287 |   | 666 |   | (195 | ) | 14,140 |   |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Issuance of  26,748 shares of $1 par value common stock                                                            |       | 26                |       | 208 |   | — |   | — |   | 234 |   |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Cash dividends  declared ($.20 per share)                                                                          |       | —            |       | — |   | (279 | ) | — |   | (279 | ) |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Net change  in unrealized loss on available-for-sales securities during the year, net of  taxes of $6,000          |       | —            |       | — |   | — |   | 12 |   | 12 |   |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Net earnings  for the year                                                                                         |       | —            |       | — |   | 1,606 |   | — |   | 1,606 |   |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Balance December 31,  2004                                                                                    |       | $                 | 1,408      |   | 12,495 |   | 1,993 |   | (183 | ) | 15,713 |   |

 

50

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***LEGENDS FINANCIAL HOLDINGS, INC.***

***ConsolidatedStatements of Cash Flows***

***For the Years Ended December 31, 2004,2003 and 2002***

***Increase (Decrease) in Cash and CashEquivalents***

 
| ** **                                                                                | ** ** | **In Thousands** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                | ** ** | **2004**         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                      |       |             |       |   |   |   |   |
| Cash flows  from operating activities:                                                    |       |             |       |   |   |   |   |
| Interest  received                                                                        |       | $                | 8,910      |   | 6,803 |   | 5,993 |   |
| Fees and  commissions received                                                            |       | 1,515            |       | 977 |   | 473 |   |
| Proceeds  from sales of loans                                                             |       | 1,207            |       | 13,014 |   | 9,375 |   |
| Origination  of loans held for sale                                                       |       | (933             | )          | (11,601 | ) | (10,676 | ) |
| Interest  paid                                                                            |       | (2,196           | )          | (1,481 | ) | (1,989 | ) |
| Cash paid to  suppliers and employees                                                     |       | (4,920           | )          | (4,251 | ) | (3,277 | ) |
| Income taxes  paid                                                                        |       | (212             | )          | (539 | ) | (69 | ) |
| Net cash  provided by (used in) operating activities                                      |       | 3,371            |       | 2,922 |   | (170 | ) |
|                                                                                      |       |             |       |   |   |   |   |
| Cash flows  from investing activities:                                                    |       |             |       |   |   |   |   |
| Purchase of  available-for-sale securities                                                |       | (15,228          | )          | (32,846 | ) | (23,395 | ) |
| Purchase of  restricted equity securities                                                 |       | (159             | )          | (75 | ) | (20 | ) |
| Proceeds  from maturities, calls and principal payments of available-for-sale  securities |       | 5,247            |       | 14,521 |   | 7,874 |   |
| Proceeds  from sale of available-for-sale securities                                      |       | 4,225            |       | 9,685 |   | 10,927 |   |
| Loans made  to customers, net of repayments                                               |       | (25,464          | )          | (26,109 | ) | (15,548 | ) |
| Purchase of  bank premises and equipment, net                                             |       | (664             | )          | (1,784 | ) | (958 | ) |
| Proceeds  from disposal of premises and equipment                                         |       | 2                |       | 32 |   | — |   |
| Proceeds  from sale of other real estate                                                  |       | 295              |       | — |   | 174 |   |
| Proceeds  from acquisition of NBC, net                                                    |       | —           |       | 1,334 |   | — |   |
| Net cash  used in investing activities                                                    |       | (31,746          | )          | (35,242 | ) | (20,946 | ) |
|                                                                                      |       |             |       |   |   |   |   |
| Cash flows  from financing activities:                                                    |       |             |       |   |   |   |   |
| Net increase  in non-interest bearing, savings and NOW deposit accounts                   |       | 16,815           |       | 36,599 |   | 4,094 |   |
| Net increase  (decrease) in time deposits                                                 |       | 8,344            |       | (4,472 | ) | 17,439 |   |
| Proceeds  from sale of common stock                                                       |       | 234              |       | 23 |   | 70 |   |
| Proceeds  from (repayment of) Federal fund purchased                                      |       | 3,804            |       | — |   | (483 | ) |
| Advances  from (repayment of) advances from Federal Home Loan Bank                        |       | 3,928            |       | 3,491 |   | (1,000 | ) |
| Advances  from (repayment of) repurchase agreements                                       |       | (15              | )          | (3,031 | ) | 3,682 |   |
| Dividends  paid                                                                           |       | (279             | )          | (206 | ) | — |   |
| Net cash  provided by financing activities                                                |       | 32,831           |       | 32,404 |   | 23,802 |   |
|                                                                                      |       |             |       |   |   |   |   |
| Net increase  in cash and cash equivalents                                                |       | 4,456            |       | 84 |   | 2,686 |   |
|                                                                                      |       |             |       |   |   |   |   |
| Cash and  cash equivalents at beginning of year                                           |       | 6,596            |       | 6,512 |   | 3,826 |   |
|                                                                                      |       |             |       |   |   |   |   |
| Cash and  cash equivalents at end of year                                                 |       | $                | 11,052     |   | 6,596 |   | $ | 6,512 |   |
|                                                                                           |            |                  |            |  |  |  |  |  |  |

 

51

----

 
| ** **                                                                                                                   | ** ** | **In Thousands** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                   | ** ** | **2004**         | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                                                                                                         |       |             |       |   |   |   |   |
| Reconciliation  of net earnings to net cash provided by (used in) operating activities:                                      |       |             |       |   |   |   |   |
| Net earnings                                                                                                                 |       | $                | 1,606      |   | 829 |   | 594 |   |
| Adjustments  to reconcile net earnings to net cash provided by (used in) operating  activities:                              |       |             |       |   |   |   |   |
| Depreciation                                                                                                                 |       | 413              |       | 343 |   | 297 |   |
| Amortization  and accretion                                                                                                  |       | 205              |       | 303 |   | 124 |   |
| Loss (gain)  on sale of securities, net                                                                                      |       | (67              | )          | 21 |   | (140 | ) |
| Loss on sale  bank premises and equipment                                                                                    |       | 20               |       | — |   | — |   |
| FHLB  dividend reinvestment                                                                                                  |       | (16              | )          | (10 | ) | (12 | ) |
| Provision  for possible loan losses                                                                                          |       | 440              |       | 361 |   | 703 |   |
| Decrease  (increase) in loans held for sale                                                                                  |       | 274              |       | 1,413 |   | (1,448 | ) |
| Increase in  accrued interest receivable                                                                                     |       | (133             | )          | (121 | ) | (66 | ) |
| Increase in  other assets                                                                                                    |       | (107             | )          | (37 | ) | (51 | ) |
| Decrease  (increase) in income tax receivable                                                                                |       | 121              |       | (121 | ) | — |   |
| Decrease in  interest payable                                                                                                |       | (34              | )          | (56 | ) | (87 | ) |
| Increase in  other liabilities                                                                                               |       | 286              |       | 7 |   | 14 |   |
| Increase  (decrease) in income taxes payable                                                                                 |       | 388              |       | (54 | ) | 52 |   |
| Decrease  (increase) in deferred taxes                                                                                       |       | (25              | )          | 44 |   | (150 | ) |
| Total  adjustments                                                                                                           |       | 1,765            |       | 2,093 |   | (764 | ) |
|                                                                                                                         |       |             |       |   |   |   |   |
| Net cash  provided by (used in) operating activities                                                                         |       | $                | 3,371      |   | 2,922 |   | (170 | ) |
|                                                                                                                         |       |             |       |   |   |   |   |
|                                                                                                                         |       |             |       |   |   |   |   |
|                                                                                                                         |       |             |       |   |   |   |   |
| Supplemental  Schedule of Non-Cash Activities:                                                                          |       |             |       |   |   |   |   |
|                                                                                                                         |       |             |       |   |   |   |   |
| Non-cash  transfers from loans to other real estate, net                                                                     |       | $                | 484        |   | 92 |   | — |   |
|                                                                                                                         |       |             |       |   |   |   |   |
| Unrealized  gain (loss) on available-for-sale securities, net of income taxes of $6,000,  $217,000 and $97,000, respectively |       | $                | 12         |   | (353 | ) | 113 |   |

 

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***LEGENDS FINANCIAL HOLDINGS, INC.***

***Notes toConsolidated Financial Statements***

***December 31, 2004, 2003 and 2002***

 

***(1)******                                 Summaryof Significant Accounting Policies***

 

The consolidated financial statementsinclude the accounts of Legends Financial Holdings, Inc. (the “Company”),Legends Bank (the “Bank”), its wholly-owned subsidiary, and Legends FinancialServices, Inc., a wholly-owned subsidiary of Legends Bank.  On February 27, 2002, the stockholdersof Legends Bank voted to exchange their stock for stock in Legends FinancialHoldings, Inc.  Effective July 1,2002, Legends Financial Holdings, Inc. became a bank holding company within themeaning of Legends Bank Holding Company Act of 1956, as amended.  The transaction has been treated as areorganization for accounting purposes. For comparative purposes all financial information of Legends Bank priorto the reorganization has been presented or included in the financialinformation of the Company.

 

The accounting and reportingpolicies of Legends Financial Holdings, Inc. are in accordance with accountingprinciples generally accepted in the United States of America and conform togeneral practices within the banking industry. The following is a brief summary of the more significant policies.

 

***(a)******                                 Principlesof Consolidation***

 

The consolidated financial statements include theaccounts of the Company, its wholly-owned subsidiary, Legends Bank and LegendsBank’s wholly-owned subsidiary, Legends Financial Services, Inc.  All significant intercompany accounts andtransactions have been eliminated in consolidation.

 

***(b)******                                 Natureof Operations***

 

The Company isregistered as a one bank holding company under the Bank Holding Company Act of1956.  Legends Bank operates under astate bank charter and provides full banking services.  As a state bank, Legends Bank is subject toregulations of the Tennessee Department of Financial Institutions and theFederal Deposit Insurance Corporation. The area served by Legends Bank is Montgomery County, Tennessee andsurrounding 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 widearray of financial products such as annuities, stocks, bonds, mutual funds andother investment products.

 

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***(c)******                                  Estimates***

 

The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates. Material estimates that are particularly susceptible to significantchange in the near term relate to determination of the allowance for possibleloan losses and the valuation of debt and equity securities and the relateddeferred taxes.

 

***(d)******                                 Loans***

 

Loans are stated at the principal amountoutstanding.  Unearned discount, deferredloan fees net of loan acquisition costs, and the allowance for possible loanlosses are shown as reductions of loans. Loan origination and commitment fees and certain loan-related costs arebeing deferred and the net amount amortized as an adjustment of the relatedloan’s yield over the contractual life of the loan.  Unearned discount represents the unamortizedamount of finance charges, principally related to certain installmentloans.  Interest income on most loans isaccrued based on the principal amount outstanding.

 

The Company follows the provisions of Statement of FinancialAccounting Standards (SFAS) No. 114, “Accounting by Creditors for Impairment ofa 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 ofsmaller-balance homogeneous loans that are collectively evaluated forimpairment including residential mortgage and installment loans.

 

A loan is impaired when it is probable that theCompany will be unable to collect the scheduled payments of principal andinterest due under the contractual terms of the loan agreement.  Impaired loans are measured at the presentvalue of expected future cash flows discounted at the loan’s effective interestrate, at the loan’s observable market price, or the fair value of thecollateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investmentin the loan, the Company shall recognize an impairment by creating a valuationallowance with a corresponding charge to the provision for possible loan lossesor by adjusting an existing valuation allowance for the impaired loan with acorresponding charge or credit to the provision for possible loan losses.

 

The Company’s residential mortgage and installmentloans are divided into various groups of smaller-balance, homogeneous loansthat are collectively evaluated for impairment and, thus, are not subject tothe provisions of SFAS Nos. 114 and 118. Substantially all other loans of the Company are evaluated for impairmentunder the provisions of SFAS Nos. 114 and 118.

 

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The Company considers all loans subject to theprovisions of SFAS Nos. 114 and 118 that are on a nonaccrual status to beimpaired.  Loans are placed on nonaccrualstatus when doubt as to timely collection of principal or interest exists, orwhen principal or interest is past due 90 days or more unless such loans arewell-secured and in the process of collection. Delays or shortfalls in loan payments are evaluated along with variousother factors to determine if a loan is impaired.  Generally, delinquencies under 90 days areconsidered insignificant unless certain other factors are present whichindicate impairment is probable.  Thedecision to place a loan on nonaccrual status is also based on an evaluation ofthe borrower’s financial condition, collateral, liquidation value, and otherfactors that affect the borrower’s ability to pay.

 

Generally, at the time a loan is placed onnonaccrual status, all interest accrued and uncollected on the loan in thecurrent fiscal year is reversed from income, and all interest accrued anduncollected from the prior year is charged off against the allowance forpossible loan losses.  Thereafter,interest on nonaccrual loans is recognized as interest income only to theextent that cash is received and future collection of principal is not indoubt.  If the collectibility ofoutstanding principal is doubtful, such cash received is applied as a reductionof principal.  A nonaccrual loan may berestored to an accruing status when principal and interest are no longer pastdue and unpaid and future collection of principal and interest on a timelybasis is not in doubt.

 

Loans not on nonaccrual status are classified asimpaired in certain cases when there is inadequate protection by the currentnet worth and financial capacity of the borrower or of the collateral pledged,if any.  In those cases, such loans havea well-defined weakness or weaknesses that jeopardize the liquidation of thedebt, and if such deficiencies are not corrected, there is a probability thatthe Company will sustain some loss.  Insuch cases, interest income continues to accrue as long as the loan does notmeet the Company’s criteria for nonaccrual status.

 

Generally, the Company also classifies as impairedany loans the terms of which have been modified in a troubled debtrestructuring.  Interest is generallyaccrued on such loans that continue to meet the modified terms of their loanagreements.

 

The Company’s charge-offpolicy for impaired loans is similar to its charge-off policy for all loans inthat loans are charged off in the month when they are considered uncollectible.

 

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***(e)******                                  Allowancefor Possible Loan Losses***

 

The provision for possible loan losses represents acharge to earnings necessary, after loan charge-offs and recoveries, tomaintain the allowance for possible loan losses at an appropriate level whichis adequate to absorb estimated losses inherent in the loan portfolio.  Such estimated losses arise primarily fromthe loan portfolio but may also be derived from other sources, includingcommitments to extend credit and standby letters of credit.  The level of the allowance is determined on aquarterly basis using procedures which include: (1) categorizing commercial and commercial real estate loans into riskcategories to estimate loss probabilities based primarily on the historicalloss experience of those risk categories and current economic conditions; (2)analyzing significant commercial and commercial real estate credits andcalculating specific reserves as necessary; (3) assessing various homogeneousconsumer loan categories to estimate loss probabilities based primarily onhistorical loss experience; (4) reviewing unfunded commitments (included inother liabilities if significant); and (5) considering various other factors,such as changes in credit concentrations, loan mix, and economic conditionswhich may not be specifically quantified in the loan analysis process.

 

The allowance for possible loan losses consists ofan allocated portion and an unallocated, or general portion.  The allocated portion is maintained to coverestimated losses applicable to specific segments of the loan portfolio.  The unallocated portion is maintained toabsorb losses which probably exist as of the evaluation date but are notidentified by the more objective processes used for the allocated portion ofthe allowance due to risk of errors or imprecision.  While the total allowance consists of anallocated portion and an unallocated portion, these terms are primarily used todescribe a process.  Both portions of theallowance are available to provide for inherent loss in the entire portfolio.

 

The allowance for possible loan losses is increasedby provisions for possible loan losses charged to expense and is reduced byloans charged off net of recoveries on loans previously charged off.  The provision is based on management’sdetermination of the amount of the allowance necessary to provide for estimatedloan losses based on its evaluation of the loan portfolio.  Determining the appropriate level of theallowance and the amount of the provision involves uncertainties and matters ofjudgment and therefore cannot be determined with precision.

 

***(f)******                                    Securities***

 

The Company accounts for securities under theprovisions of Statement of Financial Accounting Standards (SFAS) No. 115, “Accountingfor Certain Investments in Debt and Equity Securities.”  Under the provisions of the Statement,securities are to be classified in three categories and accounted for asfollows:

 

***Securities Held-to-Maturity***

 

Debt securities that the enterprise has the positiveintent and ability to hold to maturity are classified as held-to-maturity securitiesand reported at amortized cost.  Nosecurities have been classified as securities held-to-maturity.

 

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***Trading Securities***

 

Debt and equity securities that are bought and heldprincipally for the purpose of selling them in the near term are classified astrading securities and reported at fair value, with unrealized gains and lossesincluded in earnings.  No securities havebeen classified as trading securities.

 

***Securities Available-for-Sale***

 

Debt and equity securities not classified as eitherheld-to-maturity securities or trading securities are classified asavailable-for-sale securities and reported at fair value, with unrealized gainsand losses excluded from earnings and reported in a separate component ofstockholders’ equity.

 

The Company has classified all its securities assecurities available-for-sale.

 

Realized gains or losses from the sale of securitiesare recognized upon realization based upon the specific identification method.

 

***(g)******                                 Premisesand Equipment***

 

Premises and equipment are stated at cost.  Depreciation is computed by the straight-linemethod over the estimated useful lives of the related assets.  Gain or loss on items retired and otherwisedisposed of is credited or charged to operations and cost and relatedaccumulated depreciation are removed from the asset and accumulateddepreciation accounts.

 

Expenditures for major renewals and improvements ofpremises and equipment are capitalized and those for maintenance and repairs arecharged to earnings as incurred.

 

***(h)******                                 IntangibleAssets***

 

Statement of Financial Accounting Standards No. 142,“Goodwill and Other Intangible Assets” (SFAS No. 142) requires that managementdetermine the allocation of intangible assets into identifiable groups at thedate of acquisition and appropriate amortization periods be established.  Under the provisions of SFAS No. 142 goodwillis not to be amortized rather it is to be monitored for impairment and writtendown to the impairment value at the time impairment occurs.  The Company has determined that no impairmentloss needs to be recognized related to the goodwill.

 

***(i)******                                    LoansHeld for Sale***

 

Mortgage loans held for sale are reported at thelower of cost or market value, determined by outstanding commitments frominvestors at the balance sheet date. These loans are valued on an aggregate basis.

 

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***(j)******                                    Long-TermAssets***

 

Premises and equipment and other long-term assetsare reviewed for impairment when events indicate their carrying amount may notbe recoverable from future undiscounted cash flows.  If impaired, the assets are recorded at fairvalue.

 

***(k)******                                 StockOptions***

 

The Company uses the fair value method to calculatethe compensation reported in the proforma earnings in note 17 to theconsolidated financial statements.

 

***(l)******                                    OtherReal Estate***

 

Real estate acquired in settlement of loans isinitially recorded at the lower of cost (loan value of real estate acquired insettlement of loans plus incidental expense) or estimated fair value, lessestimated cost of disposal.  Based onperiodic evaluations by management, the carrying values are reduced by a directcharge to earnings when they exceed net realizable value.  Costs relating to the development and improvementof the property are capitalized, while holding costs of the property arecharged to expense in the period incurred.

 

***(m)******                              Cashand Cash Equivalents***

 

For purposes of reporting cash flows, cash and cashequivalents include cash on hand, amounts due from banks, and Federal fundssold.  Generally, Federal funds sold arepurchased and sold for one-day periods. The Company maintains deposits in excess of the Federal insurance amountswith other financial institutions. Management makes deposits only with financial institutions it considersto be financially sound.

 

***(n)******                                 SecuritiesSold Under Agreements to Repurchase***

 

Substantially all repurchase agreement liabilitiesrepresent amounts advanced by various customers.  Securities are pledged to cover these liabilities,which are not covered by federal deposit insurance.

 

***(o)******                                 IncomeTaxes***

 

Provisions for income taxes are based on taxespayable or refundable for the current year (after exclusion of non-taxableincome such as interest on state and municipal securities) and deferred taxeson temporary differences between the amount of taxable and pretax financialincome and between the tax bases of assets and liabilities and their reportedamounts in the financial statements.  Deferredtax assets and liabilities are included in the financial statements atcurrently enacted income tax rates applicable to the period in which thedeferred tax asset and liabilities are expected to be realized or settled asprescribed in Statement of Financial Accounting Standards (SFAS) No. 109,“Accounting for Income Taxes.”  Aschanges in tax laws or rates are enacted, deferred tax assets and liabilitiesare adjusted through the provision for income taxes.

 

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The Company and its subsidiaries file a consolidatedFederal income tax return.  Eachcorporation provides for income taxes on a separate return basis.

 

***(p)******                                 AdvertisingCosts***

 

Advertising costs are expensed when incurred.

 

***(q)******                                 Off-Balance-SheetFinancial Instruments***

 

In the ordinary course of business the Company hasentered into off balance sheet financial instruments consisting of commitmentsto extend credit, commitments under credit card arrangements, commercialletters of credit and standby letters of credit.  Such financial instruments are recorded inthe financial statements when they are funded or related fees are incurred orreceived.

 

***(r)******                                   Reclassifications***

 

Certain reclassifications have been made to the 2003and 2002 figures to conform to the presentation for 2004.

 

***(s)******                                   Impactof New Accounting Standards***

 

In June, 2002, the FASB issued SFAS 146, “Accountingfor Costs Associated with Exit or Disposal Activities.”  SFAS 146 addresses financial accounting andreporting for costs associated with exit or disposal activities and nullifiesEmerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring).”  The provisions of theStatement are effective for exit or disposal activities that are initiatedafter December 31, 2002.  Theadoption of SFAS 146 did not have a material impact on the Company’s financialposition or results of operations.

 

In October, 2002, the Financial Accounting StandardsBoard issued Statement of Financial Accounting Standard No. 147, “Acquisitionsof Certain Financial Institutions.”  SFASNo. 147 amends SFAS No. 72 and FASB Interpretation No. 9 to eliminate allacquisitions of financial institutions other than transactions between mutualenterprises from their scope. Accordingly, the excess of the purchase price paid to acquire a financialinstitution over the fair value of the identifiable tangible and intangibleassets and liabilities acquired now must be recorded as goodwill following SFASNo. 141 and assessed for impairment following SFAS No. 142, “Goodwill and OtherIntangible Assets.”  Furthermore, anypreviously recognized unidentifiable intangible assets resulting from priorbusiness combinations that do not meet SFAS No. 141’s criteria for separaterecognition must be reclassified to goodwill. The Company has adopted SFAS 147, and it has not had any impact on theCompany’s financial position or results of operations.

 

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In November, 2002, the FASB issued Interpretation(FIN) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantee of Indebtedness of Others,” which elaborates onthe disclosure to be made by a guarantor in its interim and annual financialstatements about its obligations under certain guarantees that it hasissued.  The interpretation alsoclarifies that a guarantor is required to recognize, at the inception of theguarantee, a liability for the fair value of the obligation undertaken inissuing the guarantee.  The adoption ofFIN 45 did not have a material impact on the consolidated financial statements.

 

In May, 2003, the FASB issued SFAS 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity.”  This Statement establishedstandards for how an issuer classifies and measures certain financialinstruments with characteristics of both liabilities and equity.  It requires that an issuer classify afinancial instrument that is within its scope as a liability (or an asset insome circumstances).  Many of thoseinstruments were previously classified as equity.  This statement is effective for financialinstruments entered into or modified after May 31, 2003, and otherwise iseffective at the beginning of the first interim period beginning after June 15,2003.  The adoption of SFAS 150 did nothave an impact on the Company’s financial position or results of operations.

 

In June, 2003, the American Institute of CertifiedPublic Accountants issued an exposure draft on a Proposed Statement of Position(SOP) on Allowance for Credit Losses.  Ifapproved, the Proposed SOP would significantly change the way the allowance forpossible loan losses is calculated. Under the Proposed SOP, any loans determined to be impaired, as definedin FASB Statement No. 114, would be assigned a specific reserve based on factsand circumstances surrounding the particular loan and no loss percentage wouldbe assigned.  If a loan is determined notto be impaired, it would be assigned to a pool of similar homogeneousloans.  A loss percentage would then beassigned to the pool based on historical charge-offs adjusted for internal orexternal factors such as the economy, changes in underwriting standards,etc.  Management has not yet determinedthe impact this Proposed SOP would have on their consolidated financialstatements, but anticipates that it could result in a reduction in theallowance for possible loan losses. Under the Proposal, any changes resulting from the initial applicationof this Proposed SOP would be treated as a change in accounting estimate.

 

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In June, 2003, the Financial Accounting StandardsBoard issued Statement of Financial Accounting Standard No. 149, “Amendment ofStatement 133 on Derivative Instruments and Hedging Activities.”  SFAS 149 amends and clarifies financialaccounting and reporting for derivative instruments, including certainderivative instruments embedded in other contracts (collectively referred to asderivatives) and for hedging activities under FASB Statement No. 133, “Accountingfor Derivative Instruments and Hedging Activities.”  Under SFAS 149 loan commitments that relateto the origination of mortgage loans that will be held for sale, commonlyreferred to as interest rate lock commitments, must be accounted for asderivatives by the issuer of the commitment. Commitments to originate mortgage loans that will be held for investmentpurposes and commitments to originate other types of loans are not consideredderivatives.  The Company has adoptedSFAS 149, but it has not had any material impact on the Company’s financialposition or results of operations.

 

In November 2003, the Emerging Issues TaskForce (“EITF”) issued Position 03-1, “The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments.”  The EITF provides guidance on the meaning ofthe phrase other-than-temporary impairment and its application to several typesof investments, including debt securities classified as held-to-maturity andavailable-for-sale under FASB Statement No. 115, “Accounting for CertainInvestments in Debt and Equities Securities.” For purposes of EITF No. 03-1 an investment is impaired if the fairmarket value of the investment is less than its cost.  Controversy has developed over the criteriato be used to determine whether an impairment is other than temporary.  The EITF requires that an investor shouldmake an evidenced-based judgment about a recovery of fair value up to (orbeyond) the cost of the investment by considering the severity and duration ofthe impairment in relation to the forecasted recovery of fair value.  Because of the controversy related to the determinationof whether the impairment is other than temporary, certain aspects of theposition of the EITF have been temporarily delayed.  The Company cannot access the effect on thefinancial position or results of operations until the controversy has beenresolved.  The EITF requires disclosuresrelated to securities with fair values less than cost.  The disclosures have been included in note 3to the consolidated financial statements.

 

In December, 2004, the Financial AccountingStandards Board (“FASB”) reissued Statement of Financial Accounting StandardsNo. 123 (revised 2004) (“SFAS”) related to share based payments.  For Legends Financial Holdings, Inc. the SFASapplies to the accounting for stock options. The substance of the revised statement is to require companies to recordas an expense amortization of the fair market value of stock options determinedas of the grant date.  The offsettingcredit is to additional paid-in capital unless there is an obligation to buyback the stock or exchange other assets for the stock.  If such an obligation exists the offsettingcredit would be to a liability account. The statement is effective for the first interim reporting period after December 15,2005.  Legends Financial Holdings, Inc.is currently assessing the impact of this SFAS; however, management does notexpect the impact to be material to the financial condition or results ofoperations.

 

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***(2)******                                 Loansand Allowance for Possible Loan Losses***

 

Thedetail of loans at December 31, 2004 and 2003 is as follows:

 
| ** **                              | ** ** | **In Thousands** | ** ** |
|-----------------------------------------|------------|------------------|------------|
| ** **                              | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                                    |       |             |       |   |   |
| Commercial,  financial and agricultural |       | $                | 24,481     |   | 20,256 |   |
| Installment                             |       | 5,307            |       | 4,870 |   |
| Real estate  - mortgage                 |       | 77,646           |       | 66,500 |   |
| Real estate  - construction             |       | 22,417           |       | 13,393 |   |
|                                    |       | 129,851          |       | 105,019 |   |
| Allowance  for possible loan losses     |       | (1,517           | )          | (1,225 | ) |
|                                    |       | $                | 128,334    |   | 103,794 |   |

 

At December 31, 2004,variable rate and fixed rate loans totaled $52,423,000 and $77,428,000,respectively.  At December 31, 2003,variable rate and fixed rate loans totaled $23,806,000 and $81,213,000,respectively.

 

The principal maturities onloans at December 31, 2004 are as follows:

 
| ** **        | ** ** | **In Thousands**                             | ** ** |
|-------------------|------------|----------------------------------------------|------------|
| ** **        | ** ** | **Commercial  Financial  and  Agricultural** | ** ** | **Installment** | ** ** | **Real estate -  Mortgage** | ** ** | **Real estate -  Construction** | ** ** | **Total** | ** ** |
|              |       |                                         |       |   |   |   |   |   |   |   |   |
| 3 months or  less |       | $                                            | 14,659     |   | 1,037 |   | 22,040 |   | 16,141 |   | 53,877 |   |
| 3 to 12  months   |       | 1,276                                        |       | 684 |   | 6,483 |   | 3,287 |   | 11,730 |   |
| 1 to 5 years      |       | 7,333                                        |       | 3,586 |   | 45,292 |   | 2,989 |   | 59,200 |   |
| over 5 years      |       | 1,213                                        |       | — |   | 3,831 |   | — |   | 5,044 |   |
|              |       | $                                            | 24,481     |   | 5,307 |   | 77,646 |   | 22,417 |   | 129,851 |   |

 

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In the normal course ofbusiness, the Company has made loans at prevailing interest rates and terms toits executive officers, directors and their affiliates aggregating $2,092,000and $2,097,000 at December 31, 2004 and 2003, respectively.  As of December 31, 2004 and 2003, noneof these loans were restructured, nor were any related party loans charged offin 2004 or 2003.

 

An analysis of the activitywith respect to such loans to related parties is as follows:

 
| ** **                  | ** ** | **In Thousands** | ** ** |
|-----------------------------|------------|------------------|------------|
| ** **                  | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                        |       |             |       |   |   |
| Balance, January 1     |       | $                | 2,097      |   | 2,398 |   |
| New loans  during the year  |       | 806              |       | 2,251 |   |
| Repayments  during the year |       | (811             | )          | (2,552 | ) |
| Balance, December 31   |       | $                | 2,092      |   | 2,097 |   |

 

Transactions in theallowance for possible loan losses of the Company for the years ended December 31,2004 and 2003 are summarized as follows:

 
| ** **                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                    |       |     |       |     |       |     |       |
| Balance -  beginning of year            |       | $        | 1,225      |     | 879        |     | 755        |   |
| Provision  charged to operating expense |       | 440      |       | 361      |       | 703      |       |
| Loans  charged off                      |       | (157     | )          | (49      | )          | (628     | )          |
| Recoveries                              |       | 9        |       | 34       |       | 49       |       |
| Net  charge-offs                        |       | (148     | )          | (15      | )          | (579     | )          |
|                                    |       |     |       |     |       |     |       |
| Balance -  end of year                  |       | $        | 1,517      |     | 1,225      |     | 879        |   |

 

The Company’s principalcustomers are basically in the Middle Tennessee area with a concentration inMontgomery County.  Credit is extended tobusinesses and individuals and is evidenced by promissory notes.  The terms and conditions of the loansincluding collateral varies depending upon the purpose of the credit and theborrower’s financial condition.

 

There were no restructuredloans outstanding at December 31, 2004 and 2003.  The Company had $420,000 and $305,000,respectively, of nonaccrual loans outstanding as of December 31, 2004 and2003, respectively.  Had interest incomebeen recognized on non-accrual loans in 2004 net earnings would have increasedby approximately $33,000.  The impact oninterest income in 2003 and 2002 was not significant.  There were no loans greater than 90 days pastdue at December 31, 2004 and 2003.

 

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Impaired loans and relatedloan loss reserve amounts at December 2004 and 2003 were as follows:

 
| ** **            | ** ** | **In Thousands** | ** ** |
|-----------------------|------------|------------------|------------|
| ** **            | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                  |       |             |       |   |   |
| Recorded  investment  |       | $                | 3,052      |   | 1,534 |   |
| Loan loss  allocation |       | $                | 196        |   | 136 |   |

 

The average recordedinvestment in impaired loans for the years ended December 31, 2004, 2003and 2002 was $2,443,000, $1,529,000 and $2,034,000, respectively.

 

The related total amount ofinterest income recognized on the accrual basis for the period that such loanswere impaired was $195,000 for 2004, $105,000 in 2003 and $143,000 in 2002.

 

In 2004, 2003 and 2002, theCompany originated loans for sale in the secondary market of $933,000,$11,601,000 and $10,676,000.  At December 31,2004, the wholly-owned subsidiary Bank had not been required to repurchase anyof the loans originated by Legends Bank and sold in the secondary market.  The fees and gain on sale of these loanstotaled $316,000, $246,000 and $147,000 in 2004, 2003 and 2002, respectively.

 

Of the loans sold in thesecondary market, the recourse to the wholly-owned subsidiary Bank islimited.  Nearly all other loans sold inthe secondary market provide the purchaser recourse to Legends Bank for aperiod of 60 to 90 days from the date of purchase and only in the event of adefault by the borrower pursuant to the terms of the individual loanagreement.  At December 31, 2004,Legends Bank did not have loans sold with recourse.

 

***(3)******                                 Debtand Equity Securities***

 

Debt and equity securitieshave been classified in the balance sheet according to management’sintent.  The Company’s classification ofsecurities at December 31, 2004 was as follows:

 
| ** **                                                         | ** ** | **In Thousands**                  | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                         | ** ** | **Securities Available-For-Sale** | ** ** |
| ** **                                                         | ** ** | **2004**                          | ** ** |
| ** **                                                         | ** ** | **Amortized  Cost**               | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Market  Value** | ** ** |
| U.S.  Treasury and other U.S. government agencies and corporations |       | $                                 | 4,070      |   | 2 |   | 71 |   | 4,001 |   |
| Obligations  of states and political subdivisions                  |       | 12,123                            |       | 102 |   | 121 |   | 12,104 |   |
| Domestic  corporate bonds                                          |       | 2,750                             |       | — |   | 19 |   | 2,731 |   |
| Mortgage-backed  securities                                        |       | 18,934                            |       | 34 |   | 224 |   | 18,744 |   |
|                                                               |       | $                                 | 37,877     |   | 138 |   | 435 |   | 37,580 |   |

 

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The Company’s classificationof securities at December 31, 2003 was as follows:

 
| ** **                                                         | ** ** | **In Thousands**                  | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                         | ** ** | **Securities Available-For-Sale** | ** ** |
| ** **                                                         | ** ** | **2003**                          | ** ** |
| ** **                                                         | ** ** | **Amortized  Cost**               | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Market  Value** | ** ** |
|                                                               |       |                              |       |   |   |   |   |   |   |
| U.S.  Treasury and other U.S. government agencies and corporations |       | $                                 | 1,796      |   | — |   | 41 |   | 1,755 |   |
| Obligations  of states and political subdivisions                  |       | 8,237                             |       | — |   | 146 |   | 8,091 |   |
| Domestic  corporate bonds                                          |       | 3,250                             |       | — |   | 75 |   | 3,175 |   |
| Mortgage-backed  securities                                        |       | 18,976                            |       | — |   | 53 |   | 18,923 |   |
|                                                               |       | $                                 | 32,259     |   | — |   | 315 |   | 31,944 |   |

 

Included in mortgage backedsecurities as of December 31, 2004 and 2003, are collateralized mortgageobligations with a market value of $497,000 (amortized cost of $509,000) and$1,113,000 (amortized cost of $1,146,000), respectively.  The effective yield at December 31, 2004and 2003, on collateralized mortgage obligations was 3.5% and 4.1%,respectively.

 

The amortized cost andestimated market value of debt and equity securities at December 31, 2004,by contractual maturity, are shown below. Expected maturities will differ from contractual maturities becauseborrowers may have the right to call or prepay obligations with or without callor prepayment penalties.

 
| ** **                              | ** ** | **In Thousands** | ** ** |
|-----------------------------------------|------------|------------------|------------|
| **Securities Available-For-Sale**       | ** ** | **Cost**         | ** ** | **Estimated  Market  Value** | ** ** |
|                                    |       |             |       |   |   |
| Due in one  year or less                |       | $                | 735        |   | 735 |   |
| Due after  one year through five years  |       | 6,894            |       | 6,826 |   |
| Due after  five years through ten years |       | 4,349            |       | 4,340 |   |
| Due after  ten years                    |       | 6,965            |       | 6,935 |   |
|                                    |       | 18,943           |       | 18,836 |   |
| Mortgage-backed  securities             |       | 18,934           |       | 18,744 |   |
|                                    |       | $                | 37,877     |   | 37,580 |   |
|                                         |            |                  |            |  |  |  |  |

 

65

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Results from sales of debtand equity securities are as follows:

 
| ** **                   | ** ** | **In Thousands** | ** ** |
|------------------------------|------------|------------------|------------|
| ** **                   | ** ** | **2004**         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                         |       |             |       |   |   |   |   |
| Gross  proceeds              |       | $                | 4,225      |   | 9,685 |   | 10,927 |   |
|                         |       |             |       |   |   |   |   |
| Gross  realized gains        |       | $                | 67         |   | — |   | 140 |   |
| Gross  realized losses       |       | —           |       | (21 | ) | — |   |
| Net realized  gains (losses) |       | $                | 67         |   | (21 | ) | 140 |   |

 

Investment securitiescarried in the balance sheet of $27,501,000 (amortized cost of $27,724,000) and$20,619,000 (amortized cost of $20,716,000) as of December 31, 2004 and2003, respectively, were pledged to secure public and trust deposits and forother purposes as required or permitted by law.

 

The following table showsthe Company’s investments’ gross unrealized losses and fair value, aggregatedby investment category and length of time that individual securities have beenin a continuous unrealized loss position, at December 31, 2004:

 
| ** **                                                       | ** ** | **In Thousands, Except Number of  Securities** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                       | ** ** | **Less than 12 Months**                        | ** ** | **12 Months or More** | ** ** | **Total** | ** ** |
| ** **                                                       | ** ** | **Fair  Value**                                | ** ** | **Unrealized  Losses** | ** ** | **Number  of  Securities  Included** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Number  of  Securities  Included** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| U.S.  Treasury obligations and direct obligations of US agencies |       | $                                              | 2,505      |   | $ | 32 |   | 7 |   | $ | 986 |   | $ | 39 |   | 3 |   | $ | 3,491 |   | $ | 71 |   |
|                                                             |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Obligations  of states and political sub-divisions               |       | 4,684                                          |       | 59 |   | 19 |   | 2,043 |   | 62 |   | 11 |   | 6,727 |   | 121 |   |
|                                                             |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal  agency mortgage-backed securities                       |       | 9,848                                          |       | 115 |   | 21 |   | 5,289 |   | 109 |   | 14 |   | 15,137 |   | 224 |   |
|                                                             |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Corporate  bonds                                                 |       | —                                         |       | — |   | — |   | 488 |   | 19 |   | 1 |   | 488 |   | 19 |   |
|                                                             |       |                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  temporarily impaired securities                           |       | $                                              | 17,037     |   | $ | 206 |   | 47 |   | $ | 8,806 |   | $ | 229 |   | 29 |   | $ | 25,843 |   | $ | 435 |   |

 

66

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The impaired securities areconsidered high quality investments in line with normal industry investingpractices.  The unrealized losses areprimarily the result of changes in the interest rate and sector environments.  Consistent with the original classification,as available-for-sale or held-to-maturity securities, the Company intends andhas the ability to hold the above securities until the value is realized.

 

The Company may sell theabove or other securities in the ordinary course of business in response tosignificant changes in liquidity needs, unexpected and significant increases ininterest rates and/or security spreads that significantly extend a security’sholding period, or when conducting a small volume of security transactions.

 

***(4)******                                 RestrictedEquity Securities***

 

Restricted equity securitiesconsisted of stock of The Bankers Bank and the Federal Home Loan Bank amountingto $162,000 and $493,000, respectively, at December 31, 2004.  The stocks totaled to $162,000 and $318,000,respectively, at December 31, 2003. The stock can be sold back to The Bankers Bank and Federal Home LoanBank only at par.  The securities arerecorded at cost.

 

***(5)******                                 BankPremises and Equipment***

 

The detail of premises andequipment at December 31, 2004 and 2003 is as follows:

 
| ** **                     | ** ** | **In Thousands** | ** ** |
|--------------------------------|------------|------------------|------------|
| ** **                     | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                           |       |             |       |   |   |
| Land                           |       | $                | 1,539      |   | 1,187 |   |
| Buildings                      |       | 3,403            |       | 2,378 |   |
| Leasehold  improvements        |       | 316              |       | 310 |   |
| Furniture  and fixtures        |       | 253              |       | 217 |   |
| Equipment  and software        |       | 1,804            |       | 1,455 |   |
| Construction  in process       |       | 9                |       | 1,149 |   |
|                           |       | 7,324            |       | 6,696 |   |
| Less  accumulated depreciation |       | (1,607           | )          | (1,208 | ) |
|                           |       | $                | 5,717      |   | 5,488 |   |

 

Depreciation expense was$413,000, $343,000 and $297,000 for the years ended December 31, 2004,2003 and 2002, respectively.

 

67

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***(6)******                                 Goodwill***

 

Effective March 24,2003, the Company acquired certain assets and assumed certain liabilities ofNBC Bank in the Clarksville, Tennessee area. The acquisition was accounted for as a purchase summarized as follows:

 
| ** **                            | ** ** | **(In Thousands)** | ** ** |
|---------------------------------------|------------|--------------------|------------|
|                                  |       |               |       |
| Loans  including overdrafts purchased |       | $                  | 1,243      |   |
| Deposits  assumed                     |       | (2,718             | )          |
| Accrued  interest payable             |       | (6                 | )          |
| Cash  received from NBC               |       | 1,328              |       |
| Goodwill                              |       | 153                |       |
|                                       |            |                    |            |  |

 

The change in the carryingvalue of goodwill during the years ended December 31, 2004 and 2003follows:

 
| ** **                          | ** ** | **(In Thousands)** | ** ** |
|-------------------------------------|------------|--------------------|------------|
| ** **                          | ** ** | **2004**           | ** ** | **2003** | ** ** |
|                                |       |               |       |   |   |
| Carrying  value - beginning of year |       | $                  | 153        |   | — |   |
| Goodwill  acquired                  |       | —             |       | 153 |   |
| Goodwill  impairment losses         |       | —             |       | — |   |
| Carrying  value - end of year       |       | $                  | 153        |   | 153 |   |

 

***(7)******                                 Deposits***

 

Deposits at December 31,2004 and 2003 are summarized as follows:

 
| ** **                                          | ** ** | **In Thousands** | ** ** |
|-----------------------------------------------------|------------|------------------|------------|
| ** **                                          | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                                                |       |             |       |   |   |
| Demand  deposits                                    |       | $                | 26,965     |   | 20,455 |   |
| Savings  deposits                                   |       | 3,262            |       | 2,569 |   |
| Negotiable  order of withdrawal                     |       | 34,597           |       | 31,676 |   |
| Money market  demand accounts                       |       | 29,151           |       | 22,460 |   |
| Certificates  of deposit $100,000 or greater        |       | 39,580           |       | 33,956 |   |
| Other  certificates of deposit                      |       | 18,925           |       | 16,270 |   |
| Individual  retirement accounts $100,000 or greater |       | 787              |       | 873 |   |
| Other  individual retirement accounts               |       | 1,708            |       | 1,557 |   |
|                                                |       | $                | 154,975    |   | 129,816 |   |

 

68

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Principal maturities ofcertificates of deposit and individual retirement accounts at December 31,2004 are as follows:

 
| ** **        | ** ** | **In Thousands**                      | ** ** |
|-------------------|------------|---------------------------------------|------------|
| **Maturity**      | ** ** | **Single  Deposits  Under  $100,000** | ** ** | **Single  Deposits  Over $100,000** | ** ** | **Total** | ** ** |
|              |       |                                  |       |   |   |   |   |
| 3 months or  less |       | $                                     | 5,854      |   | 11,181 |   | 17,035 |   |
| 3 to 12  months   |       | 7,642                                 |       | 12,459 |   | 20,101 |   |
| 1 to 5 years      |       | 7,137                                 |       | 16,727 |   | 23,864 |   |
|              |       | $                                     | 20,633     |   | 40,367 |   | 61,000 |   |
|                   |            |                                       |            |  |  |  |  |  |  |

 

At December 31, 2004and 2003 certificates of deposit and other deposits in denominations of$100,000 or more amounted to $103,749,000 and $83,564,000, respectively.

 

The aggregate amount ofoverdrafts reclassified as loans receivable was $390,000 and $375,000 at December 31,2004 and 2003, respectively.

 

The Company maintainssignificant cash deposit accounts for various local municipalities and relateddepartments.  As of December 31,2004, these deposits totaled approximately $36,956,000.

 

The Company is required tomaintain cash balances or balances with the Federal Reserve Bank or othercorrespondent banks based on certain percentages of deposit types.  The average required amounts for the yearsended December 31, 2004 and 2003 were approximately $2,101,000 and$978,000, respectively.

 

***(8)******                                 SecuritiesSold Under Repurchase Agreements***

 

The maximumamounts of outstanding repurchase agreements during 2004 and 2003 were$1,403,000 and $7,379,000, respectively. The average daily balance outstanding during 2004 and 2003 was $565,000and $1,444,000, respectively.  The weightedaverage interest rate at December 31, 2004 and 2003 was 1.50% and 0.14%,respectively.  The underlying securitiesare typically held by other financial institutions and are designated aspledged.  As of December 31, 2004,Legends Financial had pledged $2,750,000 in securities to collateralize thisagreement.

 

69

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***(9)******                                 Advancesfrom Federal Home Loan Bank***

 

The advances from theFederal Home Loan Bank at December 31, 2004 and 2003 consist of thefollowing:

 
| ** **                        | ** ** | **In Thousands**      | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **December 31,** | ** ** |
| ** **                        | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ** **                        | ** ** | **Amount**            | ** ** | **Weighted  Average Rate** | ** ** | **Amount** | ** ** | **Weighted  Average Rate** | ** ** |
| Fixed and  variable rate advances |       | $                     | 8,919      |   | 2.41 | % | $ | 4,991 |   | 1.83 | % |
|                                   |            |                       |            |  |  |  |  |  |  |  |  |

 

Advances from the FederalHome Loan Bank are to mature as follows at December 31, 2004:

 
| ** ** | ** ** | **(In Thousands)** | ** ** |
|------------|------------|--------------------|------------|
| ** ** | ** ** | **Amount**         | ** ** |
|       |       |               |       |
| 2005       |       | $                  | 5,500      |   |
| 2006       |       | 1,000              |       |
| 2007       |       | 1,000              |       |
| 2008       |       | 1,000              |       |
| 2009       |       | —             |       |
| Thereafter |       | 419                |       |
|       |       | $                  | 8,919      |   |

 

Loans totaling $12,040,000were pledged to FHLB as collateral at December 31, 2004.

 

70

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***(10)******                          Non-InterestIncome and Non-Interest Expense***

 

The significant componentsof non-interest income and non-interest expense for the years ended December 31are presented below:

 
| ** **                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                 |       |     |       |     |       |     |       |
| Non-interest  income:                |       |     |       |     |       |     |       |
| Service  charges on deposit accounts |       | $        | 657        |     | 489        |     | 297        |   |
| Other fees  and commissions          |       | 542      |       | 263      |       | 173      |       |
| Gains and  fees on sales of loans    |       | 316      |       | 246      |       | 147      |       |
| Gain on sale  of securities          |       | 67       |       | —   |       | 140      |       |
|                                 |       | $        | 1,582      |     | 998        |     | 757        |   |
|                                 |       |     |       |     |       |     |       |
| Non-interest  expense:               |       |     |       |     |       |     |       |
| Employee  salaries and benefits      |       | $        | 2,811      |     | 2,220      |     | 1,732      |   |
| Occupancy  expenses                  |       | 399      |       | 282      |       | 250      |       |
| Furniture  and equipment expenses    |       | 475      |       | 450      |       | 373      |       |
| Data  processing expenses            |       | 413      |       | 357      |       | 226      |       |
| Professional  fees                   |       | 271      |       | 243      |       | 243      |       |
| Advertising                          |       | 185      |       | 134      |       | 131      |       |
| Directors  fees                      |       | 153      |       | 136      |       | 102      |       |
| Printing and  supplies               |       | 129      |       | 120      |       | 99       |       |
| Community  relations                 |       | 135      |       | 128      |       | 66       |       |
| Loss on sale  of securities          |       | —   |       | 21       |       | —   |       |
| Other  operating expenses            |       | 561      |       | 514      |       | 335      |       |
|                                 |       | $        | 5,532      |     | 4,605      |     | 3,557      |   |

 

***(11)******                          IncomeTaxes***

 

The components of the netdeferred income tax asset at December 31, 2004 and 2003 are as follows:

 
| ** **               | ** ** | **In Thousands** | ** ** |
|--------------------------|------------|------------------|------------|
| ** **               | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                     |       |             |       |   |   |
| Deferred tax  asset:     |       |             |       |   |   |
| Federal                  |       | $                | 511        |   | 430 |   |
| State                    |       | 104              |       | 89 |   |
|                     |       | 615              |       | 519 |   |
|                     |       |             |       |   |   |
| Deferred tax  liability: |       |             |       |   |   |
| Federal                  |       | (241             | )          | (177 | ) |
| State                    |       | (49              | )          | (36 | ) |
|                     |       | (290             | )          | (213 | ) |
|                     |       |             |       |   |   |
| Net deferred  assets     |       | $                | 325        |   | 306 |   |

 

71

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The tax effects of each typeof significant item that gave rise to deferred taxes at December 31, 2004and 2003 are:

 
| ** **                                                                                                                | ** ** | **In Thousands** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Financial  statement allowance for loan losses in excess of the tax allowance                                             |       | $                | 498        |   | 393 |   |
|                                                                                                                      |       |             |       |   |   |
| Excess of  depreciation deducted for tax purposes over the amounts deducted in the  financial statements                  |       | (260             | )          | (196 | ) |
|                                                                                                                      |       |             |       |   |   |
| Pre-opening  costs amortized over a five-year period for tax purposes, expensed for  financial statements in initial year |       | 3                |       | 5 |   |
|                                                                                                                      |       |             |       |   |   |
| Excess of  amortized cost over estimated market value related to available-for-sale  securities                           |       | 114              |       | 121 |   |
|                                                                                                                      |       |             |       |   |   |
| Financial  statement income on FHLB stock dividends not recognized for tax purposes                                       |       | (23              | )          | (17 | ) |
|                                                                                                                      |       |             |       |   |   |
| Goodwill  amortized for tax purposes and monitored for impairment for financial  reporting purposes                       |       | (7               | )          | — |   |
|                                                                                                                      |       |             |       |   |   |
|                                                                                                                      |       | $                | 325        |   | 306 |   |

 

The components of income taxexpense (benefit) are summarized as follows:

 
| ** **                                                        | ** ** | **In Thousands** | ** ** |
|-------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                        | ** ** | **2004**         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Current:                                                          |       |             |       |   |   |   |   |
| Federal                                                           |       | $                | 562        |   | 285 |   | 81 |   |
| State                                                             |       | 160              |       | 87 |   | 20 |   |
|                                                              |       | 722              |       | 372 |   | 101 |   |
| Deferred:                                                         |       |             |       |   |   |   |   |
| Federal                                                           |       | (22              | )          | 31 |   | 49 |   |
| State                                                             |       | (4               | )          | 6 |   | 10 |   |
|                                                              |       | (26              | )          | 37 |   | 59 |   |
|                                                              |       |             |       |   |   |   |   |
| Subtotal                                                          |       | 696              |       | 409 |   | 160 |   |
|                                                              |       |             |       |   |   |   |   |
| Adjustment  of valuation allowance related to deferred tax assets |       | —           |       | — |   | (209 | ) |
|                                                              |       |             |       |   |   |   |   |
| Actual tax  expense (benefit)                                     |       | $                | 696        |   | 409 |   | (49 | ) |

 

72

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A reconciliation of actualincome tax expense (benefit) in the consolidated financial statements to the “expected”tax expense (benefit) (computed by applying the statutory Federal income taxrate of 34% to earnings before income taxes) is as follows:

 
| ** **                                                 | ** ** | **In Thousands** | ** ** |
|------------------------------------------------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **2004**         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                       |       |             |       |   |   |   |   |
| Computed “expected”  tax expense                 |       | $                | 783        |   | 421 |   | 185 |   |
| State income  taxes, net of effect of Federal income taxes |       | 101              |       | 53 |   | 18 |   |
| Disallowed  expenses                                       |       | 5                |       | 5 |   | 5 |   |
| Benefit of  graduated rates                                |       | —           |       | — |   | (1 | ) |
| Benefit  related to nonqualified stock options             |       | (47              | )          | (5 | ) | (35 | ) |
| Tax exempt  interest, net of interest expense exclusion    |       | (137             | )          | (75 | ) | (12 | ) |
| Recognition  of deferred tax assets                        |       | —           |       | — |   | (209 | ) |
| Other                                                      |       | (9               | )          | 10 |   | — |   |
|                                                       |       |             |       |   |   |   |   |
| Actual tax  expense (benefit)                              |       | $                | 696        |   | 409 |   | (49 | ) |

 

***(12)******                          Commitmentand Contingencies***

 

The Company has entered intothree separate federal funds guideline facilities with certain timerestrictions on outstanding borrowings. The lines are generally renewable annually and bear interest at avariable rate equivalent to the correspondent bank’s daily internal lendingrate.  The combined lines provide for upto $7,450,000 in borrowings.

 

The Company currently hastwo leases related to the operation of two branches.  One lease, entered into in 1998, is for aperiod of five years and can be renewed for two consecutive five-yearterms.  The Company renewed this lease December 1,2003.  The other lease was entered intoduring 2001 and is for a period of three years and can be renewed for twoconsecutive three-year terms.  TheCompany renewed this lease in 2004.

 

The Company also has threeleases related to automated teller machines in Clarksville, Tennessee.  The leases commenced in July, 2003 for twoyears and can be renewed for two consecutive two year terms.

 

During 2004, the Company hasa lease related to its mortgage operations. The lease is for one year and can be renewed for two consecutiveone-year terms.  The Company renewed thislease in January, 2005.

 

The Company also has a leaserelated to office equipment.  The leasecommenced during February, 2004 for a four-year term.

 

73

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Minimum future rentalpayments required under the terms of the leases are as follows:

 
| **Year Ending  December 31,** | ** ** | **In Thousands** | ** ** |
|------------------------------------|------------|------------------|------------|
|                               |       |             |       |
| 2005                               |       | $                | 97         |   |
| 2006                               |       | 63               |       |
| 2007                               |       | 40               |       |
| 2008                               |       | 40               |       |
| 2009                               |       | 1                |       |
|                               |       | $                | 241        |   |

 

Total rent expense under theleases amounted to $114,000, $69,000 and $68,000 during the years ended December 31,2004, 2003 and 2002, respectively.

 

***(13)******                          FinancialInstruments with Off-Balance-Sheet Risk***

 

The Company is party tofinancial instruments with off-balance-sheet risk in the normal course ofbusiness to meet the financing needs of its customers.  These financial instruments consist primarilyof commitments to extend credit.  Theseinstruments involve, to varying degrees, elements of credit risk in excess ofthe amount recognized in the consolidated balance sheets.  The contract or notional amounts of thoseinstruments reflect the extent of involvement the Company has in particularclasses of financial instruments.

 

The Company’s exposure tocredit loss in the event of nonperformance by the other party to the financialinstrument for commitments to extend credit is represented by the contractualnotional amount of those instruments. The Company uses the same credit policies in making commitments andconditional obligations as it does for on-balance-sheet instruments.

 
| ** **                                                           | ** ** | **In Thousands** | ** ** |
|----------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                           | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                                                                 |       |             |       |   |   |
| Financial instruments whose contract  amounts represent credit risk: |       |             |       |   |   |
| Unused  commitments to extend credit                                 |       | $                | 28,974     |   | 17,611 |   |
| Standby  letters of credit                                           |       | 1,161            |       | 637 |   |
|                                                                 |       |             |       |   |   |
| Total                                                                |       | $                | 30,135     |   | 18,248 |   |

 

Unused commitments to extendcredit are agreements to lend to a customer as long as there is no violation ofany condition established in the contract. Commitments generally have fixed expiration dates or other terminationclauses and may require payment of a fee. Since many of the commitments are expected to be drawn upon, the totalcommitment amounts generally represent future cash requirements.  The Company evaluates each customer’scredit-worthiness on a case-by-case basis. The amount of collateral, if deemed necessary by the Company uponextension of credit, is based on management’s credit evaluation of thecounterparty.  Collateral normallyconsists of real property.

 

74

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Standby letters of creditare conditional commitments issued by the Company to guarantee the performanceof a customer to a third party.  Thoseguarantees are primarily issued to support public and private borrowingarrangements, including commercial paper, bond financing, and similartransactions.  Most guarantees extendfrom one to two years.  The credit riskinvolved in issuing letters of credit is essentially the same as that involvedin extending loan facilities to customers. The fair value of standby letters of credit is estimated using the feescurrently charged to enter into similar agreements, taking into account theremaining terms of the agreements, the likelihood of the counter partiesdrawing on such financial instruments and the present creditworthiness of suchcounter parties.  Such commitments havebeen made on terms which are competitive in the markets in which the Companyoperates, thus, the fair value of standby letters of credit equals the carryingvalue for the purposes of this disclosure. The maximum potential amount of future payments that the Company couldbe required to make under the guarantees totaled $1,161,000 at December 31,2004.

 

75

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***(14)******                          LegendsFinancial Holdings, Inc. - Parent Company Financial Information***

 

**LEGENDSFINANCIAL HOLDINGS, INC.**

**(ParentCompany Only)**

 

**BalanceSheets**

 

**December 31,2004 and 2003**

 
| ** **                                                                                                                               | ** ** | **In Thousands** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                               | ** ** | **2004**         | ** ** | **2003** | ** ** |
| ASSETS                                                                                                                                   |       |             |       |   |   |
|                                                                                                                                     |       |             |       |   |   |
| Cash                                                                                                                                     |       | $                | 145        | *  | 97 | * |
| Deferred tax  asset                                                                                                                      |       | 4                |       | 5 |   |
| Investment  in commercial bank subsidiary                                                                                                |       | 15,489           | *     | 13,989 | * |
| Due from  commercial bank subsidiary                                                                                                     |       | 75               | *          | 49 | * |
|                                                                                                                                     |       |             |       |   |   |
| Total assets                                                                                                                             |       | $                | 15,713     |   | 14,140 |   |
|                                                                                                                                     |       |             |       |   |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                               |       |             |       |   |   |
|                                                                                                                                     |       |             |       |   |   |
| Stockholders’  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, 1,408,497 and  1,381,749 shares issued and outstanding, respectively |       | 1,408            |       | 1,382 |   |
| Additional  paid-in capital                                                                                                              |       | 12,495           |       | 12,287 |   |
| Retained  earnings                                                                                                                       |       | 1,993            |       | 666 |   |
| Net  unrealized losses on available-for-sale securities, net of income taxes of  $114,000 and $120,000, respectively                     |       | (183             | )          | (195 | ) |
| Total  stockholders’ equity                                                                                                         |       | 15,713           |       | 14,140 |   |
|                                                                                                                                     |       |             |       |   |   |
| Total  liabilities and stockholders’ equity                                                                                         |       | $                | 15,713     |   | 14,140 |   |

 

----

*Eliminated in consolidation.

 

76

----

 

**LEGENDSFINANCIAL HOLDINGS, INC.**

**(ParentCompany Only)**

 

**Statementsof Earnings and Comprehensive Earnings**

 

**Forthe Years Ended December 31, 2004 and 2003 and**

**Forthe Period July 1, 2002 (Inception) through December 31, 2002**

 
| ** **                                                                                                                                        | ** ** | **In Thousands** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                                        | ** ** | **2004**         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                                                                              |       |             |       |   |   |   |   |
| Income:                                                                                                                                           |       |             |       |   |   |   |   |
| Dividends  from commercial bank subsidiary                                                                                                        |       | $                | 100        | * | 349 | * | — |   |
|                                                                                                                                              |       |             |       |   |   |   |   |
| Operating  expenses                                                                                                                               |       | 56               |       | 107 |   | 18 |   |
|                                                                                                                                              |       |             |       |   |   |   |   |
| Earnings  (loss) before Federal income tax benefits and equity in undistributed earnings  of commercial bank subsidiary                           |       | 44               |       | 242 |   | (18 | ) |
|                                                                                                                                              |       |             |       |   |   |   |   |
| Federal  income tax benefit                                                                                                                       |       | 74               |       | 47 |   | 7 |   |
|                                                                                                                                              |       | 118              |       | 289 |   | (11 | ) |
|                                                                                                                                              |       |             |       |   |   |   |   |
| Equity in  undistributed earnings of commercial bank subsidiary                                                                                   |       | 1,488            | *          | 540 | * | 395 | * |
|                                                                                                                                              |       |             |       |   |   |   |   |
| Net earnings                                                                                                                                      |       | 1,606            |       | 829 |   | 384 |   |
|                                                                                                                                              |       |             |       |   |   |   |   |
| Other  comprehensive earnings (loss), net of tax:                                                                                                 |       |             |       |   |   |   |   |
| Unrealized  gains (losses) on available-for-sale securities arising during the year, net  of taxes of $32,000, $226,000 and $24,000, respectively |       | 53               |       | (366 | ) | 38 |   |
| Reclassification  adjustment for (gains) losses included in net earnings, net of taxes of  $26,000, $9,000 and $3,000, respectively               |       | (41              | )          | 13 |   | 5 |   |
| Other  comprehensive earnings (loss)                                                                                                              |       | 12               |       | (353 | ) | 43 |   |
|                                                                                                                                              |       |             |       |   |   |   |   |
| Comprehensive  earnings                                                                                                                           |       | $                | 1,618      |   | 476 |   | 427 |   |

 

----

*Eliminated in consolidation.

 

77

----

 

**LEGENDSFINANCIAL HOLDINGS, INC.**

**(ParentCompany Only)**

 

**Statementsof Stockholders’ Equity**

 

**Forthe Years Ended December 31, 2004 and 2003 and**

**Forthe Period July 1, 2002 (Inception) through December 31, 2002**

 
| ** **                                                                                                         | ** ** | **In Thousands**  | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                         | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | *** *** | **Retained  Earnings  (Deficit)** | ** ** | **Net Unrealized  Gains (Losses)  On Available-  For-Sale  Securities** | ** ** | **Total** | ** ** |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Acquisition  by share exchange with Legends  Bank, July 1, 2002                                               |       | $                 | 1,143      |   | 12,446 |   | (341 | ) | 115 |   | 13,363 |   |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Issuance of  6,720 shares of $1 par value common stock                                                             |       | 7                 |       | 50 |   | — |   | — |   | 57 |   |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Stock-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 |   | 43 |   |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Net earnings  for the period July 1, 2002 (inception) through December 31, 2002                          |       | —            |       | — |   | 384 |   | — |   | 384 |   |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Balance December 31,  2002                                                                                    |       | 1,379             |       | 12,267 |   | 43 |   | 158 |   | 13,847 |   |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Issuance of  2,666 shares of $1 par value common stock                                                             |       | 3                 |       | 20 |   | — |   | — |   | 23 |   |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Cash dividends  declared ($.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 |   | — |   | 829 |   |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Balance December 31,  2003                                                                                    |       | 1,382             |       | 12,287 |   | 666 |   | (195 | ) | 14,140 |   |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Issuance of  26,748 shares of $1 par value common stock                                                            |       | 26                |       | 208 |   | — |   | — |   | 234 |   |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Cash  dividends declared ($.20 per share)                                                                          |       | —            |       | — |   | (279 | ) | — |   | (279 | ) |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Net change  in unrealized loss on available-for-sale securities during the year, net of  taxes of $6,000           |       | —            |       | — |   | — |   | 12 |   | 12 |   |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Net earnings  for the year                                                                                         |       | —            |       | — |   | 1,606 |   | — |   | 1,606 |   |
|                                                                                                               |       |              |       |   |   |   |   |   |   |   |   |
| Balance December 31,  2004                                                                                    |       | $                 | 1,408      |   | 12,495 |   | 1,993 |   | (183 | ) | 15,713 |   |

 

78

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**LEGENDSFINANCIAL HOLDINGS, INC.**

**(ParentCompany Only)**

 

**Statementsof Cash Flows**

 

**Forthe Years Ended December 31, 2004 and 2003 and**

**Forthe Period July 1, 2002 (Inception) through December 31, 2002**

 

**Increase(Decrease) in Cash and Cash Equivalents**

 
| ** **                                                                                                                                         | ** ** | **In Thousands** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                                         | ** ** | **2004**         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                                                                               |       |             |       |   |   |   |   |
| Cash flows  from operating activities:                                                                                                             |       |             |       |   |   |   |   |
| Cash paid to  suppliers                                                                                                                            |       | $                | (56        | ) | (107 | ) | (18 | ) |
| Net cash  used in operating activities                                                                                                             |       | (56              | )          | (107 | ) | (18 | ) |
|                                                                                                                                               |       |             |       |   |   |   |   |
| Cash flows  from investing activities:                                                                                                             |       |             |       |   |   |   |   |
| Repayment of  subsidiary advance, net                                                                                                              |       | 49               |       | 6 |   | (7 | ) |
| Dividends  received from subsidiary                                                                                                                |       | 100              |       | 349 |   | — |   |
| Net cash  provided by (used in) investing activities                                                                                               |       | 149              |       | 355 |   | (7 | ) |
|                                                                                                                                               |       |             |       |   |   |   |   |
| Cash flows  from financing activities:                                                                                                             |       |             |       |   |   |   |   |
| Dividends  paid                                                                                                                                    |       | (279             | )          | (206 | ) | — |   |
| Proceeds  from sale of common stock                                                                                                                |       | 234              |       | 23 |   | 57 |   |
| Net cash  provided by (used in) financing activities                                                                                               |       | (45              | )          | (183 | ) | 57 |   |
|                                                                                                                                               |       |             |       |   |   |   |   |
| Net increase  in cash and cash equivalents                                                                                                         |       | 48               |       | 65 |   | 32 |   |
|                                                                                                                                               |       |             |       |   |   |   |   |
| Cash and  cash equivalents at beginning of period                                                                                                  |       | 97               |       | 32 |   | — |   |
|                                                                                                                                               |       |             |       |   |   |   |   |
| Cash and  cash equivalents at end of year                                                                                                          |       | $                | 145        |   | 97 |   | 32 |   |
|                                                                                                                                               |       |             |       |   |   |   |   |
| Supplemental  Schedule of Non-Cash Activities:                                                                                                |       |             |       |   |   |   |   |
|                                                                                                                                               |       |             |       |   |   |   |   |
| Increase  (decrease) in unrealized gain (loss on available-for-sale securities, net of  income taxes of $6,000, $217,000 and $21,000, respectively |       | $                | 12         |   | (353 | ) | 43 |   |

 

79

----

 
| ** **                                                                       | ** ** | **In Thousands** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                       | ** ** | **2004**         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                             |       |             |       |   |   |   |   |
| Reconciliation  of net earnings to net cash used in operating activities:        |       |             |       |   |   |   |   |
| Net earnings                                                                     |       | $                | 1,606      |   | 829 |   | 384 |   |
|                                                                             |       |             |       |   |   |   |   |
| Adjustments  to reconcile net earnings to net cash used in operating activities: |       |             |       |   |   |   |   |
| Equity in  earnings of commercial bank subsidiary                                |       | (1,588           | )          | (889 | ) | (395 | ) |
| Increase in  assets                                                              |       | (74              | )          | (47 | ) | (7 | ) |
| Total  adjustments                                                               |       | (1,662           | )          | (936 | ) | (402 | ) |
|                                                                             |       |             |       |   |   |   |   |
| Net cash  used in operating activities                                           |       | $                | (56        | ) | (107 | ) | (18 | ) |

 

80

----

 

***(15)******                          Concentrationof Credit Risk***

 

Practically all of theCompany’s loans, commitments, and commercial and standby letters of credit havebeen granted to customers in the Company’s market area.  Practically all such customers are depositorsof the Company.  The concentrations ofcredit by type of loan are set forth in note 2 to the consolidated financial statements.

 

***(16)******                          EmployeeBenefit Plan***

 

The Company maintains a401(K) plan which covers eligible employees. All full time employees are eligible to participate.  The plan provides for both employee andemployer contributions.  For the yearsended December 31, 2004, 2003, and 2002 the Company contributed $86,000,$64,000 and $45,000, respectively.

 

***(17)******                          RegulatoryMatters and Restrictions on Dividends***

 

The Company and itssubsidiary is subject to regulatory capital requirements administered by theFederal Deposit Insurance Corporation and the Tennessee Department of FinancialInstitutions.  Failure to meet capitalrequirements can initiate certain mandatory — and possibly additionaldiscretionary-actions by regulators that could, in that event, have a directmaterial effect on the institution’s financial statements.  The relevant regulations require the Companyand its subsidiary to meet specific capital adequacy guidelines that involvequantitative measures of the Company’s assets, liabilities and certainoff-balance sheet items as calculated under regulatory accountingprinciples.  The Company’s capitalclassifications are also subject to qualitative judgments by the Regulatorsabout components, risk weightings and other factors.  Those qualitative judgments could also affectthe Company’s capital status and the amount of dividends the Company maydistribute.

 

The Company and itssubsidiary is required to maintain minimum amounts of capital to total “riskweighted” assets, as defined by the banking regulators.  The Company and its subsidiary is required tohave a minimum Tier I and Total Capital ratios of 4.0% and 8.0%,respectively.  The actual ratioswere 11.0% and 12.1% at December 31, 2004 and 12.5% and 13.6% at December 31,2003.  The leverage ratios at December 31,2004 and 2003 were 8.7% and 9.9%, respectively, and the minimum requirement was4.0%.

 

As of December 31,2004, the Company and its subsidiary is categorized as “well capitalized” underthe regulatory framework for prompt corrective action.  There are no conditions or events since thenotification that management believes have changed the Company’s category.

 

On February 27, 2004,the Board of Directors recommended a dividend be declared at the AnnualShareholders meeting on April 20, 2004. The recommendation was to set the dividend rate for 2004 at 33% of 2003earnings.  On May 28, 2004, the dividendswere paid in the amount of $279,000 or $.20 per share of voting common stock.

 

81

----

 

***(18)******                          StockOption Arrangement***

 

In December, 1998, the Boardof Directors of Legends Bank approved the Legends Bank 1998 Stock OptionArrangement (the “1998 Arrangement”). The Arrangement provides for the granting of stock options, andauthorizes the issuance of common stock upon the exercise of such options, forup to 74,400 shares of common stock, to officers of Legends Bank and up to33,600 shares of common stock to the Directors of Legends Bank.

 

Under the Stock OptionArrangement, stock option awards may be granted in the form of incentive stockoptions or nonstatutory stock options, and are generally exercisable for up tofive years following the date such option awards are granted.  Exercise prices of incentive stock optionsmust be equal to or greater than 100% of the fair market value of the commonstock on the grant date.

 

In April of 2001 theBoard of Directors of Legends Bank approved the 2001 Stock Option Plan (the “2001Plan”).  The 2001 Plan provides for thegranting of 215,998 shares of stock available for options.  Under the 2001 Plan, stock option awards maybe granted in the form of incentive stock options or nonstatutory stock optionsand are exercisable over three to six years.

 

The Company’s stockholdersapproved Legends Bank 1998 Stock Option Arrangement and 2001 Stock OptionPlan.  The Company exchanged its optionswith the holders of Legends Bank stock options under the 1998 Arrangement andthe 2001 Plan on an option-for-option basis. Thus options that were outstanding under the 1998 Arrangement and the2001 Plan have been exchanged for options under the Company’s Stock OptionPlan.

 

On September 17, 2002,the Board of Directors of the Company approved a stock-split effected in theform of a one-for-five stock dividend. The stock dividend also applied to all option arrangements and as suchthe number of options, exercise prices and related earnings per sharedisclosures have been retroactively adjusted to reflect the stock-spliteffected in the form of a dividend.

 

Statement of FinancialAccounting 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 ofarrangements similar to those of the Company. As is permitted, management has elected to continue accounting for thearrangement under APB Opinion 25 and related Interpretations in accounting forits arrangement.  However, under SFAS No.123, the Company is required to make proforma disclosures as if cost had beenrecognized in accordance with the pronouncement.  Had compensation cost for the Company’s stockoption arrangement been determined based on the fair value at the grant datesfor awards under the arrangement consistent with the method of SFAS No. 123,the Company’s net earnings and basic earnings per common share and dilutedearnings per common share would have been reduced to the proforma amountsindicated below.

 

82

----

 
| ** **        | ** ** | ** **  | ** ** | **In Thousands, Except Per Share  Amounts** | ** ** |
|-------------------|------------|-------------|------------|---------------------------------------------|------------|
| ** **        | ** ** | ** **  | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
|              |       |        |       |                                        |       |   |   |   |   |
| Net earnings      |       | As Reported |       | $                                           | 1,606      |   | $ | 829 |   | $ | 594 |   |
|              |       | Proforma    |       | $                                           | 1,576      |   | $ | 780 |   | $ | 518 |   |
|              |       |        |       |                                        |       |   |   |   |   |
| Basic  earnings   |       | As Reported |       | $                                           | 1.15       |   | $ | .60 |   | $ | .43 |   |
| per common  share |       | Proforma    |       | $                                           | 1.13       |   | $ | .57 |   | $ | .39 |   |
|              |       |        |       |                                        |       |   |   |   |   |
| Diluted  earnings |       | As Reported |       | $                                           | 1.12       |   | $ | .59 |   | $ | .43 |   |
| per common  share |       | Proforma    |       | $                                           | 1.10       |   | $ | .55 |   | $ | .39 |   |

 

A summary of the stockoption activity is as follows:

 
| ** **                        | ** ** | **2004**   | ** ** | **2003**                               | ** ** | **2002**   | ** ** |
|-----------------------------------|------------|------------|------------|----------------------------------------|------------|------------|------------|
| ** **                        | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                              |       |       |       |                                   |       |       |       |   |   |   |   |   |   |
| Outstanding  at beginning of year |       | 258,754    |       | $                                      | 15.42      |       | 259,860    |   | $ | 15.38 |   | 265,740 |   | $ | 15.13 |   |
| Granted                           |       | —     |       | —                                 |       | 6,720      |       | 16.98 |   | 4,200 |   | 18.75 |   |
| Exercised                         |       | (26,748    | )          | 8.80                                   |       | (2,666     | )          | 8.33 |   | (8,400 | ) | 8.33 |   |
| Forfeited                         |       | —     |       | —                                 |       | (5,160     | )          | 18.75 |   | (1,680 | ) | 18.75 |   |
| Outstanding  at end of year       |       | 232,006    |       | $                                      | 16.19      |       | 258,754    |   | $ | 15.42 |   | 259,860 |   | $ | 15.38 |   |
|                              |       |       |       |                                   |       |       |       |   |   |   |   |   |   |
| Options  exercisable at year end  |       | 193,317    |       |                                   |       | 198,952    |       |   |   | 141,952 |   |   |   |

 

The following tablesummarizes information about fixed stock options outstanding at December 31,2004:

 
| ** **                     | ** ** | **Options Outstanding**              | ** ** | **Options Exercisable**                | ** ** |
|--------------------------------|------------|--------------------------------------|------------|----------------------------------------|------------|
| **Range of  Exercise  Prices** | ** ** | **Number  Outstanding  at 12/31/04** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Number  Exercisable  at 12/31/04** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                           |       |                                 |       |                                   |       |   |   |   |   |   |   |
| $ 8.33                    |       | 56,686                               |       | $                                      | 8.33       |   | 4.0 years |   | 56,686 |   | $ | 8.33 |   |
| $ 17 - $ 18.75       |       | 175,320                              |       | $                                      | 18.73      |   | 6.3 years |   | 136,631 |   | $ | 18.74 |   |
|                           |       |                                 |       |                                   |       |   |   |   |   |   |   |
|                           |       | 232,006                              |       |                                   |       |   |   | 193,317 |   |   |   |

 

83

----

 

Certain forfeited optionswere reallocated to remaining plan participants during 2004.

 

The fair value of optionsgranted in 2003 and 2002 was $1.55 and $1.41, respectively, for eachoption.  The fair value was estimatedusing the Black-Scholes option-pricing model using the followingassumptions:  risk free rate of 4.05% and4.70%; expected life of ten years; volatility of .01%; and dividend yield of2.88%.  The dividend yield was computedassuming an 18% return on equity with a 30% dividend to earnings payout ratio.

 

***(19)******                          EarningsPer Share***

 

Statement of FinancialAccounting Standards (SFAS) No. 128 “Earnings Per Share” establishes uniformstandards for computing and presenting earnings per share.  The computation of basic earnings per shareis based on the weighted average number of common shares outstanding during theperiod.  For the Company, the computationof diluted earnings per share begins with the basic earnings per share plus theeffect of common shares contingently issuable from stock options andwarrants.  The weighted average number ofshares used in the computation of earnings per share have been retroactivelyadjusted to reflect the effects of a stock-split effected in the form of a onefor five stock dividend declared on September 17, 2002.

 

The following is a summaryof the components comprising basic and diluted earnings per common share (EPS):

 
| ** **                                                               | ** ** | **In Thousands,**                       | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                               | ** ** | **Except Share and Per Share  Amounts** | ** ** |
| ** **                                                               | ** ** | **2004**                                | ** ** | **2003** | ** ** | **2002** | ** ** |
| Basic EPS  Computation:                                                  |       |                                    |       |   |   |   |   |
| Numerator –  Net earnings for the year                              |       | $                                       | 1,606      |   | 829 |   | 594 |   |
|                                                                     |       |                                    |       |   |   |   |   |
| Denominator  – Weighted average number of common shares outstanding |       | 1,399,524                               |       | 1,379,764 |   | 1,374,200 |   |
| Basic  earnings per common share                                         |       | 1.15                                    |       | .60 |   | .43 |   |
|                                                                     |       |                                    |       |   |   |   |   |
| Diluted EPS  Computation:                                                |       |                                    |       |   |   |   |   |
| Numerator –  Net earnings for the year                              |       | $                                       | 1,606      |   | 829 |   | 594 |   |
|                                                                     |       |                                    |       |   |   |   |   |
| Denominator:                                                             |       |                                    |       |   |   |   |   |
| Weighted  average number of common shares outstanding                    |       | 1,399,524                               |       | 1,379,764 |   | 1,374,200 |   |
|                                                                     |       |                                    |       |   |   |   |   |
| Effect of  stock options                                                 |       | 33,148                                  |       | 31,967 |   | 15,376 |   |
|                                                                     |       | 1,432,672                               |       | 1,411,731 |   | 1,389,576 |   |
|                                                                     |       |                                    |       |   |   |   |   |
| Diluted  earnings per common share                                       |       | $                                       | 1.12       |   | .59 |   | .43 |   |

 

84

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***(20)******                          DisclosuresAbout Fair Value of Financial Instruments***

 

Statement of FinancialAccounting Standards (SFAS) No. 107, “Disclosures about Fair Value of FinancialInstruments” requires that the Company disclose estimated fair values for itsfinancial instruments.  Fair valueestimates, methods, and assumptions are set forth below for the Company’sfinancial instruments.

 

*Cash and short-terminvestments*

 

For those short-terminstruments, the carrying amount is a reasonable estimate of fair value.

 

*Federal Funds Sold*

 

Federal funds sold clear ona daily basis.  For this reason, thecarrying amount is a reasonable estimate of fair value.

 

*Investments andMortgage-Backed Securities*

 

The carrying amounts forshort-term securities approximate fair value because they mature in 90 days orless and do not present unanticipated credit concerns.  The fair value of longer-term securities andmortgage-backed securities, except certain state and municipal securities, isestimated based on bid prices published in financial newspapers or bidquotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sourcesother than dealer quotations, so fair value estimates are based on quotedmarket prices of similar instruments, adjusted for differences between thequoted instruments and the instruments being valued.

 

SFAS No. 107 specifies thatfair values should be calculated based on the value of one unit without regardto any premium or discount that may result from concentrations of ownership ofa financial instrument, possible tax ramifications, or estimated transactioncosts.  Accordingly, these considerationshave not been incorporated into the fair value estimates.

 

*Loans*

 

Fair values are estimatedfor portfolios of loans with similar financial characteristics.  Loans are segregated by type such ascommercial, mortgage, credit card and other consumer.  Each loan category is further segmented intofixed and adjustable rate interest terms.

 

The fair value of thevarious categories of loans is estimated by discounting the future cash flowsusing the current rates at which similar loans would be made to borrowers withsimilar credit ratings and for the same remaining average estimated maturities.

 

85

----

 

The estimated maturity formortgages is modified from the contractual terms to give consideration tomanagement’s experience with prepayments. Management has made estimates of fair value discount rates that itbelieves to be reasonable.  However,because there is no market for many of these financial instruments, managementhas no basis to determine whether the fair value presented below would beindicative of the value negotiated in an actual sale.

 

The value of the loanportfolio is also discounted in consideration of the credit quality of the loanportfolio as would be the case between willing buyers and sellers.  Particular emphasis has been given to loanson the subsidiary bank’s internal watch list. Valuation of these loans is based upon borrower performance, collateralvalues (including external appraisals), etc.

 

*Deposit Liabilities*

 

The fair value of demanddeposits, savings accounts and certain money market deposits is the amountpayable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimatedusing the rates currently offered for deposits of similar remainingmaturities.  Under the provision of SFASNo. 107 the fair value estimates for deposits does not include the benefit thatresults from the low cost funding provided by the deposit liabilities comparedto the cost of borrowing funds in the market.

 

*Advances fromFederal Home Loan Bank*

 

The fair value of theseadvances is estimated by discounting the future payments using the currentrates at which similar advances could be obtained for the same remainingaverage maturities.

 

*Securities SoldUnder Repurchase Agreements*

 

The securities sold underrepurchase agreements are payable upon demand. For this reason the carrying amount is a reasonable estimate of fairvalue.

 

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*Commitments toExtend Credit, Standby Letters of Credit and Financial Guarantees Written*

 

Loan commitments are made tocustomers generally for a period not to exceed one year and at the prevailinginterest rates in effect at the time the loan is closed.  Commitments to extend credit related toconstruction loans are made for a period not to exceed six months with interestrates at the current market rate at the date of closing.  In addition, standby letters of credit areissued for periods up to three years with rates to be determined at the datethe letter of credit is funded.  Fees areonly charged for the construction loans and the standby letters of credit andthe amounts unearned at December 31, 2004 and 2003 are insignificant.  Accordingly, these commitments have nocarrying value and management estimates the commitments to have no significantfair value.

 

The carrying value andestimated fair values of the Company’ financial instruments at December 31,2004 and 2003 are as follows:

 
| ** **                                   | ** ** | **In Thousands**     | ** ** |
|----------------------------------------------|------------|----------------------|------------|
| ** **                                   | ** ** | **2004**             | ** ** | **2003** | ** ** |
| ** **                                   | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
| Financial  assets:                           |       |                 |       |   |   |   |   |   |   |
| Cash and  short-term investments             |       | $                    | 11,052     |   | 11,052 |   | 3,401 |   | 3,401 |   |
| Securities                                   |       | 37,580               |       | 37,580 |   | 31,944 |   | 31,944 |   |
| Restricted  equity securities                |       | 655                  |       |   |   | 480 |   |   |   |
| Federal  funds sold                          |       | —               |       | — |   | 3,195 |   | 3,195 |   |
| Loans                                        |       | 129,851              |       |   |   | 105,019 |   |   |   |
| Less:  allowance for loan losses             |       | (1,517               | )          |   |   | (1,225 | ) |   |   |
| Loans, net  of allowance                     |       | 128,334              |       | 127,895 |   | 103,794 |   | 103,047 |   |
|                                         |       |                 |       |   |   |   |   |   |   |
| Loans held  for sale                         |       | —               |       | — |   | 274 |   | 274 |   |
|                                         |       |                 |       |   |   |   |   |   |   |
| Financial  liabilities:                      |       |                 |       |   |   |   |   |   |   |
| Deposits                                     |       | 154,975              |       | 155,136 |   | 129,816 |   | 130,213 |   |
| Securities  sold under repurchase agreements |       | 636                  |       | 636 |   | 651 |   | 651 |   |
| Advances  from FHLB                          |       | 8,919                |       | 8,761 |   | 4,991 |   | 4,991 |   |
| Federal  funds purchased                     |       | 3,804                |       | 3,804 |   | — |   | — |   |
|                                         |       |                 |       |   |   |   |   |   |   |
| Unrecognized  financial instruments:         |       |                 |       |   |   |   |   |   |   |
| Commitments  to extend credit                |       | —               |       | — |   | — |   | — |   |
| Standby  letters of credit                   |       | —               |       | — |   | — |   | — |   |
|                                              |            |                      |            |  |  |  |  |  |  |  |

 

87

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*Limitations*

 

Fair value estimates aremade at a specific point in time, based on relevant market information andinformation about the financial instruments. These estimates do not reflect any premium or discount that could resultfrom offering for sale at one time the Company’s entire holdings of aparticular financial instrument.  Becauseno market exists for a significant portion of the Company’s financialinstruments, fair value estimates are based on judgments regarding futureexpected loss experience, current economic conditions, risk characteristics ofvarious financial instruments, and other factors.  These estimates are subjective in nature andinvolve uncertainties and matters of significant judgment and therefore cannotbe determined with precision.  Changes inassumptions could significantly affect the estimates.

 

Fair value estimates arebased on estimating on-and-off-balance sheet financial instruments without attemptingto estimate the value of anticipated future business and the value of assetsand liabilities that are not considered financial instruments.  For example, the Company has a mortgagedepartment that contributes net fee income annually.  The mortgage department is not considered afinancial instrument, and its value has not been incorporated into the fairvalue estimates.  Other significantassets and liabilities that are not considered financial assets or liabilitiesinclude deferred tax assets and liabilities and property, plant andequipment.  In addition, the taxramifications related to the realization of the unrealized gains and losses canhave a significant effect on fair value estimates and have not been consideredin the estimates.

 

***(21)******                          QuarterlyFinancial Data (Unaudited)***

 

Selected quarterly resultsof operations for the four quarters ended December 31 are as follows:

 
| ** **                          | ** ** | **(In Thousands, except per share  data)** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **2004**                                   | ** ** | **2003** | ** ** |
| ** **                          | ** ** | **Fourth  Quarter**                        | ** ** | **Third  Quarter** | ** ** | **Second  Quarter** | ** ** | **First  Quarter** | ** ** | **Fourth  Quarter** | ** ** | **Third  Quarter** | ** ** | **Second  Quarter** | ** ** | **First  Quarter** | ** ** |
|                                |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  income                    |       | $                                          | 2,469      |   | 2,250 |   | 2,102 |   | 2,033 |   | 1,896 |   | 1,720 |   | 1,730 |   | 1,608 |   |
|                                |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                |       | 1,849                                      |       | 1,692 |   | 1,595 |   | 1,556 |   | 1,433 |   | 1,302 |   | 1,291 |   | 1,180 |   |
|                                |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision  for possible loan losses |       | 120                                        |       | 110 |   | 90 |   | 120 |   | 166 |   | 60 |   | 49 |   | 86 |   |
|                                |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings  before income taxes       |       | 735                                        |       | 551 |   | 528 |   | 488 |   | 256 |   | 315 |   | 364 |   | 303 |   |
|                                |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net earnings                        |       | 488                                        |       | 422 |   | 362 |   | 334 |   | 278 |   | 166 |   | 209 |   | 176 |   |
|                                |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic  earnings per common share    |       | .35                                        |       | .30 |   | .26 |   | .24 |   | .20 |   | .12 |   | .15 |   | .13 |   |
|                                |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted  earnings per common share  |       | .34                                        |       | .29 |   | .26 |   | .23 |   | .20 |   | .12 |   | .15 |   | .12 |   |
|                                     |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

88

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## **ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE**

## ** **

There have been nodisagreements with Legends Financial’s independent auditors on any matters ofaccounting principles or practices or financial statement disclosure.

 

## **ITEM 8A. CONTROLS AND PROCEDURES.**

## ** **

### **Evaluationof Disclosure Controls and Procedures**

### ** **

Legends Financial maintainsdisclosure controls and procedures, as defined in Rule 13a-15(a) promulgatedunder the Securities Exchange Act of 1934 (the “Exchange Act”), that aredesigned to ensure that information required to be disclosed by it in thereports 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 andforms and that such information is accumulated and communicated to LegendsFinancial’s management, including its Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure. Legends Financial carried out an evaluation, under the supervisionand with the participation of its management, including its Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the design andoperation of its disclosure controls and procedures as of the end of the periodcovered by this report. Based on the evaluation of these disclosure controlsand procedures, the Chief Executive Officer and Chief Financial Officerconcluded that Legends Financial’s disclosure controls and procedures wereeffective.

 

### **Changesin Internal Controls**

### ** **

There were no changes inLegends Financial’s internal control over financial reporting during LegendsFinancial’s fiscal quarter ended December 31, 2004 that have materiallyaffected, or are reasonably likely to materially affect, its internal controlover financial reporting.

 

## **ITEM8B.  OTHER INFORMATION**

## ** **

None.

 

# **PART III**

# ** **

## **ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

## ** **

Information with respect tothe directors and executive officers is incorporated herein by reference to theProxy Statement relating to the Annual Meeting of Shareholders to be held April 19,2005.

 

## **ITEM 10. EXECUTIVE COMPENSATION**

## ** **

Information with respect toexecutive compensation is incorporated herein by reference to the ProxyStatement relating to the Annual Meeting of Shareholders to be held April 19,2005.

 

## **ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSAND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

## ** **

Information with respect tothe security ownership of certain beneficial owners and management isincorporated herein by reference to the Proxy Statement relating to the AnnualMeeting of Shareholders to be held April 19, 2005.

 

89

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## **ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

## ** **

Information with respect tocertain relationships and related transactions is incorporated herein byreference to the Proxy Statement relating to the Annual Meeting of Shareholdersto be held April 19, 2005.

 

## **ITEM 13.EXHIBITS**

## ** **

List of Exhibits Filed.None.

 

## **ITEM 14.  PRINCIPALACCOUNTANT FEES AND SERVICES**

## ** **

Information with respect tocertain relationships and related transactions is incorporated herein byreference to the Proxy Statement relating to the Annual Meeting of Shareholdersto be held April 19, 2005.

 

# **INDEX OFEXHIBITSDESCRIPTION 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 2002                                                  |
| 32.2             |       | Certification pursuant to  Rule 18 USC Section 1350-Sarbanes-Oxley Act of 2002                                                  |

 

----

* Incorporated by referenceto Form 10-SB filed by Legends Financial with the Commission on November 22,2002.

 

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# **SIGNATURES**

# ** **

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

 
|   | LEGENDS FINANCIAL HOLDINGS, INC. |
|--------|----------------------------------|
|   | (Registrant)                     |
|   |                             |   |
|   |                             |   |
|   | By:                              | /s/ Billy P. Atkins |   |
|   |                             | Billy P. Atkins, President and Chief |
|   |                             | Executive Officer |
|   |                             |   |
|   | Date:                            | March 30, 2005 |   |
|        |                                  |  |  |  |  |  |  |

 

In accordance with theExchange Act, this report has been signed below by the following persons onbehalf of the Registrant and in the capacities and on the dates indicated.

 

 
|   | By:    | /s/ Billy P. Atkins                  |   |
|--------|--------|--------------------------------------|--------|
|   |   | Billy P. Atkins, President and Chief |
|   |   | Executive Officer, Director          |
|   |   |                                 |
|   | Date:  | March 30, 2005                  |   |
|        |        |                                      |        |  |  |

 

 
|   | By:    | /s/ Thomas E. Bates, Jr.               |   |
|--------|--------|----------------------------------------|--------|
|   |   | Thomas E. Bates, Jr., Executive Vice   |
|   |   | President and Chief Financial Officer, |
|   |   | Director                               |
|   |   |                                   |
|   | Date:  | March 30, 2005                    |   |
|        |        |                                        |        |  |  |

 

 
|   | By:    | /s/ James D. Amos       |   |
|--------|--------|-------------------------|--------|
|   |   | James D. Amos, Director |
|   |   |                    |
|   | Date:  | March 30, 2005     |   |
|        |        |                         |        |  |  |

 

 
|   | By:    |                       |   |
|--------|--------|----------------------------|--------|
|   |   | Mark Ray Barnett, Director |
|   |   |                       |
|   | Date:  |                       |   |
|        |        |                            |        |  |  |

 

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|   | By:    |                              |   |
|--------|--------|-----------------------------------|--------|
|   |   | William D. Dickson, Sr., Director |
|   |   |                              |
|   | Date:  |                              |   |
|        |        |                                   |        |  |  |

 

 
|   | By:    |                       |   |
|--------|--------|----------------------------|--------|
|   |   | Ronald Alan Goad, Director |
|   |   |                       |
|   | Date:  |                       |   |
|        |        |                            |        |  |  |

 

 
|   | By:    |                            |   |
|--------|--------|---------------------------------|--------|
|   |   | Dick Wright Littleton, Director |
|   |   |                            |
|   | Date:  |                            |   |
|        |        |                                 |        |  |  |

 

 
|   | By:    | /s/ David P. Nussbaumer       |   |
|--------|--------|-------------------------------|--------|
|   |   | David P. Nussbaumer, Director |
|   |   |                          |
|   | Date:  | March 30, 2005           |   |
|        |        |                               |        |  |  |

 

 
|   | By:    | /s/ Pravin Chhagan Patel       |   |
|--------|--------|--------------------------------|--------|
|   |   | Pravin Chhagan Patel, Director |
|   |   |                           |
|   | Date:  | March 30, 2005            |   |
|        |        |                                |        |  |  |

 

 
|   | By:    |                       |   |
|--------|--------|----------------------------|--------|
|   |   | Jimmy Terry, Sr., Director |
|   |   |                       |
|   | Date:  |                       |   |
|        |        |                            |        |  |  |

 

 
|   | By:    | /s/ Francis Gene Washer       |   |
|--------|--------|-------------------------------|--------|
|   |   | Francis Gene Washer, Director |
|   |   |                          |
|   | Date:  | March 30, 2005           |   |
|        |        |                               |        |  |  |

 

 
|   | By:    | /s/ Ralph D. Weiland       |   |
|--------|--------|----------------------------|--------|
|   |   | Ralph D. Weiland, Director |
|   |   |                       |
|   | Date:  | March 30, 2005        |   |
|        |        |                            |        |  |  |

 

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