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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the Transition Period from to
Commission File No. 0-50106
LEGENDS FINANCIAL HOLDINGS, INC.
TENNESSEE
32-0008963
310 North First Street, Clarksville, TN 37050
(931) 503-1234
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:
Common stock, $1.00 par value, outstanding: 1,397,717 shares at May 6, 2004
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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PART I - FINANCIAL INFORMATION | ||||||||
Item 1. Financial Statements | ||||||||
The unaudited financial statements of the registrant are as follows: | ||||||||
Consolidated Statements of Operations - For the three months ended March 31, 2004 and 2003. | ||||||||
EX-31.1 SECTION 302 CEO CERTIFICATION | ||||||||
EX-31.2 SECTION 302 CFO CERTIFICATION | ||||||||
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO | ||||||||
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO |
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LEGENDS FINANCIAL HOLDINGS, INC.
March 31, | December 31, | |||||||
2004 | 2003 | |||||||
(In Thousands) | ||||||||
Assets | ||||||||
Loans, less allowance for possible loan losses of $1,345,000 and $1,225,000, respectively | $ | 111,132 | 103,794 | |||||
Securities available-for-sale, at market (amortized cost of $31,476,000 and $32,259,000, respectively) | 31,483 | 31,944 | ||||||
Restricted equity securities | 483 | 480 | ||||||
Loans held for sale | — | 274 | ||||||
Federal funds sold | 3,688 | 3,195 | ||||||
Total earning assets | 146,786 | 139,687 | ||||||
Cash and due from banks | 5,185 | 3,401 | ||||||
Bank premises and equipment, net | 5,551 | 5,488 | ||||||
Accrued interest receivable | 608 | 632 | ||||||
Other real estate owned | 92 | 92 | ||||||
Deferred tax asset, net | 185 | 306 | ||||||
Other assets | 235 | 276 | ||||||
Goodwill | 153 | 153 | ||||||
Total assets | $ | 158,795 | 150,035 | |||||
Liabilities and Stockholders’ Equity | ||||||||
Deposits | $ | 136,729 | 129,816 | |||||
Securities sold under repurchase agreements | 817 | 651 | ||||||
Advances from Federal Home Loan Bank | 5,985 | 4,991 | ||||||
Accrued interest payable | 262 | 316 | ||||||
Income taxes payable | 47 | |||||||
Accounts payable and other liabilities | 149 | 121 | ||||||
Total liabilities | 143,989 | 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, 1,397,717 and 1,381,749 shares issued and outstanding, respectively | 1,398 | 1,382 | ||||||
Additional paid-in capital | 12,404 | 12,287 | ||||||
Retained earnings | 1,000 | 666 | ||||||
Net unrealized gains (losses) on available-for-sale securities, net of income taxes of $3,000 and $120,000, respectively | 4 | (195 | ) | |||||
Total stockholders’ equity | 14,806 | 14,140 | ||||||
Total liabilities and stockholders’ equity | $ | 158,795 | 150,035 | |||||
See accompanying notes to consolidated financial statements (unaudited).
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LEGENDS FINANCIAL HOLDINGS, INC.
Consolidated Statements of Earnings
Three Months Ended March 31, 2004 and 2003
(Unaudited)
2004 | 2003 | |||||||
(In Thousands | ||||||||
Except Per Share Amount) | ||||||||
Interest income: | ||||||||
Interest and fees on loans | $ | 1,714 | 1,328 | |||||
Interest and dividends on taxable securities | 239 | 275 | ||||||
Interest and dividends on non-taxable securities | 78 | — | ||||||
Interest on Federal funds sold | 2 | 5 | ||||||
Total interest income | 2,033 | 1,608 | ||||||
Interest expense: | ||||||||
Interest on negotiable order of withdrawal accounts | 93 | 80 | ||||||
Interest on money market and savings accounts | 59 | 69 | ||||||
Interest on certificates of deposit | 299 | 263 | ||||||
Interest on Federal funds purchased | 2 | 4 | ||||||
Interest on advances from Federal Home Loan Bank | 24 | 12 | ||||||
Total interest expense | 477 | 428 | ||||||
Net interest income before provision for possible loan losses | 1,556 | 1,180 | ||||||
Provision for possible loan losses | 120 | 86 | ||||||
Net interest income after provision for possible loan losses | 1,436 | 1,094 | ||||||
Non-interest income: | ||||||||
Service charges on deposit accounts | 147 | 90 | ||||||
Other fees and commissions | 179 | 157 | ||||||
Security gains | 56 | — | ||||||
Total non-interest income | 382 | 247 | ||||||
Non-interest expense: | ||||||||
Employee salaries and benefits | 667 | 526 | ||||||
Occupancy expenses, net | 99 | 67 | ||||||
Furniture and equipment expense | 113 | 98 | ||||||
Data processing expense | 95 | 69 | ||||||
Advertising expense | 46 | 22 | ||||||
Other operating expenses | 310 | 256 | ||||||
Total non-interest expense | 1,330 | 1,038 | ||||||
Earnings before income taxes | 488 | 303 | ||||||
Income taxes | 154 | 127 | ||||||
Net earnings | $ | 334 | 176 | |||||
Basic earnings per common share | $ | .24 | .13 | |||||
Diluted earnings per common share | $ | .23 | .12 | |||||
See accompanying notes to consolidated financial statements (unaudited).
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LEGENDS FINANCIAL HOLDINGS, INC.
Consolidated Statements of Comprehensive Earnings
Three Months Ended March 31, 2004 and 2003
(Unaudited)
2004 | 2003 | |||||||
(In Thousands) | ||||||||
Net earnings | $ | 334 | 176 | |||||
Other comprehensive earnings (loss): | ||||||||
Unrealized gains (losses) on available-for-sale securities arising during period, net of taxes of $144,000 and $15,000, respectively | 233 | (24 | ) | |||||
Less: reclassification adjustment for gains included in net earnings, net of taxes of $21,000 | (35 | ) | — | |||||
Other comprehensive earnings (loss) | 198 | (24 | ) | |||||
Comprehensive earnings | $ | 532 | 152 | |||||
See accompanying notes to consolidated financial statements (unaudited).
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LEGENDS FINANCIAL HOLDINGS, INC.
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2004 and 2003
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
2004 | 2003 | |||||||
(In Thousands) | ||||||||
Cash flows from operating activities: | ||||||||
Interest received | $ | 2,051 | 1,548 | |||||
Fees received | 326 | 247 | ||||||
Interest paid | (484 | ) | (406 | ) | ||||
Cash paid to suppliers and employees | (1,280 | ) | (1,043 | ) | ||||
Proceeds from sale of loans | 1,207 | 2,940 | ||||||
Originations on loans held for sale | (933 | ) | (1,346 | ) | ||||
Income taxes received (paid) | 12 | (53 | ) | |||||
Net cash provided by operating activities | 899 | 1,887 | ||||||
Cash flows from investing activities: | ||||||||
Purchase of available-for-sale securities | (3,012 | ) | (8,125 | ) | ||||
Proceeds from maturities, calls and principal payments of available-for-sale securities | 3,807 | 3,406 | ||||||
Loans made to customers, net of repayments | (7,458 | ) | (3,051 | ) | ||||
Purchase of bank premises and equipment | (165 | ) | (261 | ) | ||||
Proceeds from acquisition of NBC, net | — | 1,328 | ||||||
Net cash used in investing activities | (6,828 | ) | (6,703 | ) | ||||
Cash flows from financing activities: | ||||||||
Net increase in non-interest bearing, savings and NOW deposit Accounts | 6,491 | 6,816 | ||||||
Net increase in time deposits | 422 | 1,139 | ||||||
Increase of federal funds purchased | 994 | — | ||||||
Proceeds from sale of common stock | 133 | — | ||||||
Increase (decrease) in repurchase agreements | 166 | (1,039 | ) | |||||
Net cash provided by financing activities | 8,206 | 6,916 | ||||||
Net increase in cash and cash equivalents | 2,277 | 2,100 | ||||||
Cash and cash equivalents at beginning of period | 6,596 | 6,512 | ||||||
Cash and cash equivalents at end of period | $ | 8,873 | 8,612 | |||||
See accompanying notes to consolidated financial statements (unaudited).
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LEGENDS FINANCIAL HOLDINGS, INC.
Consolidated Statement of Cash Flows, Continued
Three Months Ended March 31, 2004 and 2003
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
2004 | 2003 | |||||||
(In Thousands) | ||||||||
Reconciliation of net earnings to net cash provided by operating activities: | ||||||||
Net earnings | $ | 334 | 176 | |||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
Depreciation, amortization and accretion | 146 | 139 | ||||||
Federal Home Loan Bank stock dividends | (3 | ) | — | |||||
Security gains related to available-for-sale securities | (56 | ) | — | |||||
Provision for possible loan losses | 120 | 86 | ||||||
Decrease (increase) in accrued interest receivable | 24 | (55 | ) | |||||
Increase in other assets | (80 | ) | (63 | ) | ||||
Decrease in accrued interest payable | (54 | ) | (44 | ) | ||||
Increase (decrease) in other liabilities | 28 | (20 | ) | |||||
Decrease in loans held for sale | 274 | 1,594 | ||||||
Decrease in deferred taxes | 166 | 74 | ||||||
Total adjustments | 565 | 1,711 | ||||||
Net cash provided by operating activities | $ | 899 | 1,887 | |||||
Supplemental Schedule of Non-Cash Activities: | ||||||||
Unrealized loss in values of securities available-for-sale | $ | 332 | $ | (24 | ) | |||
See accompanying notes to consolidated financial statements (unaudited).
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LEGENDS FINANCIAL HOLDINGS, INC.
Notes to Financial Statements
(Unaudited)
Basis of Presentation
The unaudited consolidated financial statements include the accounts of Legends Financial Holdings, Inc. (“Legends Financial”) or (“the Company”), Legends Bank (“the Bank”), its wholly-owned subsidiary, and Legends Financial Services, Inc., a wholly-owned subsidiary of Legends Bank. On February 27, 2002, the stockholders of Legends Bank voted to exchange their stock for stock in Legends Financial. Effective July 1, 2002, Legends Financial became a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended. The transaction has been treated as a reorganization for accounting purposes. For comparative purposes all financial information of Legends Bank prior to the reorganization has been presented or included in the financial information of Legends Financial.
The accompanying consolidated financial statements have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Certain prior period financial information has been reclassified to conform with current period presentation.
In the opinion of management, the consolidated financial statements contain all adjustments and disclosures necessary to summarize fairly the financial position of Legends Financial as of March 31, 2004 and December 31, 2003 and the results of operations for the three months ended March 31, 2004 and 2003, comprehensive earnings for the three months ended March 31, 2004 and 2003 and changes in cash flows for the three months ended March 31, 2004 and 2003. All significant intercompany transactions have been eliminated. The interim consolidated financial statements should be read in conjunction with the notes to the December 31, 2003 financial statements presented in Legends Bank’s December 31, 2003 Annual Report to Stockholders. The results for interim periods are not necessarily indicative of results to be expected for the complete fiscal year.
Allowance for Loan Losses
Transactions in the allowance for loan losses were as follows:
2004 | 2003 | |||||||
(In Thousands) | ||||||||
Balance, January 1, 2004 and 2003, respectively | $ | 1,225 | 879 | |||||
Add (deduct): | ||||||||
Losses charged to allowance | (2 | ) | — | |||||
Recoveries credited to allowance | 2 | 1 | ||||||
Provision for loan losses | 120 | 86 | ||||||
Balance, March 31, 2004 and 2003, respectively | $ | 1,345 | 966 | |||||
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LEGENDS FINANCIAL HOLDINGS, INC.
Notes to Financial Statements, Continued
(Unaudited)
Allowance for Loan Losses, Continued
The provision for loan losses was $120,000 and $86,000 for the first three months of 2004 and 2003, respectively. The provision for loan losses is based on past loan experience and other factors which, in management’s judgment, deserve current recognition in estimating possible loan losses. Such factors include growth and composition of the loan portfolio, review of specific loan problems, the relationship of the allowance for loan losses to outstanding loans, and current economic conditions that may affect the borrower’s ability to repay. Management has in place a system designed to identify and monitor problems on a timely basis.
The Company maintains an allowance for loan losses which management believes is adequate to absorb losses inherent in the loan portfolio. A formal review is prepared quarterly to assess the risk in the portfolio and to determine the adequacy of the allowance for loan losses. The review includes analysis of historical performance, the level of non-performing and adversely rated loans, specific analysis of certain problem loans, loan activity since the previous assessment, reports prepared by the Loan Review Committee, consideration of current economic conditions, and other pertinent information. The level of the allowance to net loans outstanding will vary depending on the overall results of this quarterly assessment. The review is presented to and subsequently approved by the Board of Directors.
Acquisition
Effective March 24, 2003, the Company acquired certain assets and liabilities of NBC Bank in the Clarksville, Tennessee area. The acquisition was accounted for as a purchase summarized as follows:
(In Thousands) | ||||
Loans including overdrafts assumed | $ | 1,243 | ||
Deposits assumed | $ | (2,718 | ) | |
Accrued interest payable | $ | (6 | ) | |
Cash received from NBC | $ | 1,328 | ||
Goodwill | $ | 153 |
Goodwill arising from this transaction will be evaluated on an annual basis.
Stock Option Arrangement
In December, 1998, the Board of Directors of Legends Bank approved the Legends Bank 1998 Stock Option Arrangement (the “1998 Arrangement”). The 1998 Arrangement provides for the granting of stock options, and authorizes the issuance of common stock upon the exercise of such options, for up to 74,400 shares of common stock to officers of Legends Bank and up to 33,600 shares of common stock to the Directors of Legends Bank. At March 31, 2004, 108,000 shares have been granted at $8.33 per share (no shares have been forfeited and 41,734 shares have been exercised). At March 31, 2004, 66,266 shares have been granted and not exercised. Of these shares 66,266 are exercisable as of March 31, 2004.
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LEGENDS FINANCIAL HOLDINGS, INC.
Notes to Financial Statements, Continued
(Unaudited)
Stock Option Arrangement, Continued
Under the Stock Option Arrangement, stock option awards may be granted in the form of incentive stock options or nonstatutory stock options, and are generally exercisable for up to five years following the date such option award are granted. Exercise prices of incentive stock options must be equal to or greater than 100% of the fair market value of the common stock on the grant date.
In April of 2001 the Board of Directors of Legends Bank approved the 2001 Stock Option Plan (the “2001 Plan”). The 2001 Plan provides for the granting of 215,998 shares of stock available for options. Under the 2001 Plan, stock option awards may be granted in the form of incentive stock options or nonstatutory stock options and are exercisable over three to six years. At March 31, 2004, 176,520 shares of the options had been granted at $18.75 per share (6,840 shares have been forfeited and no shares have been exercised). At March 31, 2004, 176,520 shares had been granted and not exercised of which 118,259 were exercisable.
Legends Financial’s stockholders approved Legends Bank 1998 Stock Option Arrangement and 2001 Stock Option Plan. Legends Financial agreed with Legends Bank that it would exchange its options to the holders of stock options under the 1998 Arrangement and the 2001 Plan on an option-for-option basis. Thus options that were outstanding under the 1998 Arrangement and the 2001 Plan have been exchanged for options under Legends Financial’s Stock Option Plan.
On September 17, 2002, the Board of Directors of Legends Financial approved a stock-split effected in the form of a one-for-five stock dividend. The stock dividend also applied to all option arrangements and as such the number of options, exercise prices and related earnings per share disclosures have been retroactively adjusted to reflect the stock-split effected in the form of a dividend.
Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure” sets forth the methods for recognition of cost of arrangements similar to those of Legends Financial. As is permitted, management has elected to continue accounting for the arrangement under APB Opinion 25 and related Interpretations in accounting for its arrangement. However, under SFAS No. 123, Legends Financial is required to make proforma disclosures as if cost had been recognized in accordance with the pronouncement. Had compensation cost for Legends Financial’s stock option arrangement been determined based on the fair value at the grant dates for awards under the arrangement consistent with the method of SFAS No. 123, Legends Financial’s net earnings and basic earnings per common share and diluted earnings per common share would have been reduced to the proforma amounts indicated below.
In Thousands, | ||||||||||
Except Per Share Amounts | ||||||||||
Three Months Ended March 31, | ||||||||||
2004 | 2003 | |||||||||
Net earnings | As Reported | $ | 334 | $ | 176 | |||||
Proforma | $ | 317 | $ | 152 | ||||||
Basic earnings | As Reported | $ | .24 | $ | .13 | |||||
per common share | Proforma | $ | .23 | $ | .11 | |||||
Diluted earnings | As Reported | $ | .24 | $ | .12 | |||||
per common share | Proforma | $ | .22 | $ | .11 |
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LEGENDS FINANCIAL HOLDINGS, INC.
Notes to Financial Statements, Continued
(Unaudited)
Stock Option Arrangement, Continued
The Company uses the fair value method to calculate the compensation reported in the proforma earnings. The fair value of options granted in 2003 was $1.55 for each option. The 2003 respective weighted average assumptions used to calculate the minimum value were as follows: risk free rate at 4.05%; expected life of five years; volatility of .01%; and dividend yield of 2.88%. The dividend yield was computed assuming an 18% return on equity with a 30% dividend to earnings payout ratio.
Earnings Per Share
Statement of Financial Accounting Standards (SFAS) No. 128 “Earnings Per Share” establishes uniform standards for computing and presenting earnings per share. SFAS No. 128 replaces the presentation of primary earnings per share with the presentation of basic earnings per share and diluted earnings per share. The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the period. For the Bank the computation of diluted earnings per share begins with the basic earnings per share plus the effect of common shares contingently issuable from stock options.
The following is a summary of the components comprising basic and diluted earnings per share (EPS) for the three months ended March 31, 2004 and 2003:
In Thousands, | ||||||||
Except Share and | ||||||||
Per Share Amounts | ||||||||
2004 | 2003 | |||||||
Basic EPS Computation: | ||||||||
Numerator – Net earnings for the period | $ | 334 | 176 | |||||
Denominator – Weighted average number of common shares outstanding | 1,397,717 | 1,379,083 | ||||||
Basic earnings per common share | $ | .24 | .13 | |||||
Diluted EPS Computation: | ||||||||
Numerator – Net earnings for the period | $ | 334 | 176 | |||||
Denominator: | ||||||||
Weighted average number of common shares outstanding | 1,397,717 | 1,379,083 | ||||||
Effect of stock options | 35,721 | 32,075 | ||||||
1,433,438 | 1,411,158 | |||||||
Diluted earnings per common share | $ | .23 | .12 | |||||
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LEGENDS FINANCIAL HOLDINGS, INC.
Form 10-QSB
Item 2. Management’s Discussion and Analysis or Plan of Operation
The purpose of this discussion is to provide insight into the financial condition and results of operations of the Company. This discussion should be read in conjunction with the financial statements. Reference should also be made to the Company’s December 31, 2003 financial statements for a more complete discussion of factors that impact liquidity, capital and the results of operations.
Forward-Looking Statements
Management’s discussion of the Company and management’s analysis of the Company’s operations and prospects, and other matters, may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of federal and state securities laws. Although management believes that the assumptions underlying such forward-looking statements contained in this Report are reasonable, any of the assumptions could be inaccurate and, accordingly, there can be no assurance that the forward-looking statements included herein will prove to be accurate. The use of such words as expect, anticipate, forecast, and comparable terms should be understood by the reader to indicate that the statement is “forward-looking” and thus subject to change in a manner that can be unpredictable. Factors that could cause actual results to differ from the results anticipated, but not guaranteed, in this Report, include (without limitation) economic and social conditions, competition for loans, mortgages, and other financial services and products, changes in interest rates, unforeseen changes in liquidity, results of operations, and financial conditions affecting the Company’s customers, as well as other risks that cannot be accurately quantified or completely identified. Many factors affecting the Company’s financial condition and profitability, including changes in economic conditions, the volatility of interest rates, political events and competition from other providers of financial services simply cannot be predicted. Because these factors are unpredictable and beyond the Company’s control, earnings may fluctuate from period to period. The purpose of this type of information (such as in Item 2, as well as other portions of this Report) is to provide Form 10-QSB readers with information relevant to understanding and assessing the financial condition and results of operations of the Company, and not to predict the future or to guarantee results. Management is unable to predict the types of circumstances, conditions, and factors that can cause anticipated results to change. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of changes or unanticipated events, circumstances, or results.
Results of Operations
The Company achieved net earnings of $334,000 and $176,000 for the three months ended March 31, 2004 and 2003, respectively. The increase in earnings is the result of continued growth in the assets of the Company. Basic earnings per common share was $.24 and $.13 for the three months ended March 31, 2004 and 2003, respectively, and diluted earnings per common share was $.23 and $.13 for the three months ended March 31, 2004 and 2003, respectively.
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LEGENDS FINANCIAL HOLDINGS, INC.
Form 10-QSB, CONTINUED
Item 2. Management’s Discussion and Analysis or Plan of Operation, Continued
Net Interest Income
Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest-bearing liabilities and is the most significant component of the Company’s earnings. Total interest income for the three months ended March 31, 2004 and 2003 was $2,033,000 and $1,608,000, respectively, an increase of $425,000 or 26.4% and total interest expense was $477,000 and $428,000, respectively, an increase of $49,000 or 11.4%. Net interest income for the first three months of 2004 and 2003 totaled $1,556,000 and $1,180,000, respectively. The increase in net interest income was $376,000 or 31.9% for the quarter ended March 31, 2004 over the first three months of 2003 primarily due to continued growth of the Bank and a decrease in the yield on deposits as higher yielding time deposits matured during 2003. Interest rates are expected to increase or remain relatively stable in 2004. Management believes that a satisfactory level of loans and deposits can be booked or repriced during the remainder of 2004 to maintain a satisfactory net interest margin.
Provision for Possible Loan Losses
The provision for loan losses represents a charge to earnings necessary to establish an allowance for possible loan losses that, in management’s evaluation, is adequate to provide coverage for estimated losses on outstanding loans and to provide for uncertainties in the economy. The provision for loan losses during the three month period ended March 31, 2004 was $120,000. The provision for loan losses raised the allowance for possible loan losses to $1,345,000 at March 31, 2004, an increase of 9.8% from $1,225,000 at December 31, 2003. The level of the allowance and the amount of the provision involve evaluation of uncertainties and matters of judgment. Management believes the allowance for possible loan losses at March 31, 2004 to be adequate (see discussion in notes to financial statements). The allowance for loan losses was 1.20% and 1.17% of loans outstanding at March 31, 2004 and December 31, 2003, respectively.
Non-Interest Income
The Company’s non-interest income consists of service charges on deposit accounts, other fees and commissions and security gains. Non-interest income increased $79,000 or 32.0% exclusive of any security gains during the three months ended March 31, 2004 as compared to the same period in 2003. There were security gains of $56,000 for the three months ended March 31, 2004 versus no security gains for the three months ended March 31, 2003. The increase in non-interest income was due primarily to increases in service charges on deposit accounts and other fees and commissions resulting from the growth of the Company’s loan portfolio and deposit base. Management projects that other fees and commissions and service charges on deposit accounts will continue to increase during the remainder of 2004 due to growth of the Company.
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LEGENDS FINANCIAL HOLDINGS, INC.
Form 10-QSB, CONTINUED
Item 2. Management’s Discussion and Analysis or Plan of Operation, Continued
Non-Interest Expense (continued)
Non-interest expenses consist primarily of employee costs, occupancy expenses, furniture and equipment expenses, data processing expense, advertising expense, losses on other real estate and other operating expenses. Non-interest expense excluding securities transactions increased $292,000 or 28.1% during the three months ended March 31, 2004 as compared to the same period in 2003. There were no security losses for the three months ended March 31, 2004 the Company had one loan approximating $252,00, the of which had been modified under a trouble debt restructuring, and as of 2003. The increases in non-interest expenses are attributable primarily to increases in salaries and benefits, an increase in occupancy expenses due to continued growth of the Company. Other operating expenses for the three months ended March 31, 2004 increased to $310,000 from $256,000 for the first quarter of 2004. These expenses include taxes, supplies, communications and general operating costs which increased as a result of continued growth of the Company.
Financial Condition
Balance Sheet Summary. The Company’s total assets increased 5.84% to $158,795,000 at March 31, 2004 from $150,035,000 at December 31, 2003. Loans, net of allowance for possible loan losses, totaled $111,132,000 at March 31, 2004, a 7.07% increase compared to $103,794,000 at December 31, 2003. Investment securities decreased $511,000 or 1.60% from December 31, 2003 to $31,483,000 at March 31, 2004. There were $3,688,000 in Federal funds sold at March 31, 2004 as compared to $3,195,000 at December 31, 2003. The Federal funds sold were used primarily to provide funding for loan growth and security purchases.
Total liabilities increased by 5.96% to $143,989,000 for the three months ended March 31, 2004 compared to $135,895,000 at December 31, 2003. This increase was composed primarily of a $6,913,000 increase in total deposits during the three months ended March 31, 2004.
The Company follows the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan” and SFAS No. 118, “Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures”. These pronouncements apply to impaired loans except for large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment including credit card, residential mortgage, and consumer installment loans.
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LEGENDS FINANCIAL HOLDINGS, INC.
Form 10-QSB, CONTINUED
Item 2. Management’s Discussion and Analysis or Plan of Operation, Continued
A loan is impaired when it is probable that the Company will be unable to collect the scheduled payments of principal and interest due under the contractual terms of the loan agreement. Impaired loans are measured at the present value of expected future cash flows discounted at the loan’s effective interest rate, at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, the Company shall recognize an impairment by creating a valuation allowance with a corresponding charge to the provision for loan losses or by adjusting an existing valuation allowance for the impaired loan with a corresponding charge or credit to the provision for loan losses.
The Company’s first mortgage single family residential and consumer loans which total approximately $23,146,000 and $5,120,000, respectively at March 31, 2004, are divided into various groups of smaller-balance homogeneous loans that are collectively evaluated for impairment and thus are not subject to the provisions of SFAS Nos. 114 and 118. Substantially all other loans of the Company are evaluated for impairment under the provisions of SFAS Nos. 114 and 118.
The Company considers all loans subject to the provisions of SFAS Nos. 114 and 118 that are on nonaccrual status to be impaired. Loans are placed on nonaccrual status when doubt as to timely collection of principal or interest exists, or when principal or interest is past due 90 days or more unless such loans are well-secured and in the process of collection. Delays or shortfalls in loan payments are evaluated with various other factors to determine if a loan is impaired. Generally, delinquencies under 90 days are considered insignificant unless certain other factors are present which indicate impairment is probable. The decision to place a loan on nonaccrual status is also based on an evaluation of the borrower’s financial condition, collateral, liquidation value, and other factors that affect the borrower’s ability to pay.
Generally, at the time a loan is placed on nonaccrual status, all interest accrued on the loan in the current fiscal year is reversed from income, and all interest accrued and uncollected from the prior year is charged off against the allowance for loan losses. Thereafter, interest on nonaccrual loans is recognized as interest income only to the extent that cash is received and future collection of principal is not in doubt. If the collectibility of outstanding principal is doubtful, such interest received is applied as a reduction of principal. A nonaccrual loan may be restored to accruing status when principal and interest are no longer past due and unpaid and future collection of principal and interest on a timely basis is not in doubt. At March 31, 2004 and December 31, 2003, the Company had $68,000 and $305,000, respectively, of loans on nonaccrual status.
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LEGENDS FINANCIAL HOLDINGS, INC.
Form 10-QSB, CONTINUED
Item 2. Management’s Discussion and Analysis or Plan of Operation, Continued
Other loans may be classified as impaired when the current net worth and financial capacity of the borrower or of the collateral pledged, if any, is viewed as inadequate. In those cases, such loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt, and if such deficiencies are not corrected, there is a probability that the Company will sustain some loss. In such cases, interest income continues to accrue as long as the loan does not meet the Company’s criteria for nonaccrual status.
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LEGENDS FINANCIAL HOLDINGS, INC.
Form 10-QSB, CONTINUED
Item 2. Management’s Discussion and Analysis or Plan of Operation, Continued
Generally the Company also classifies as impaired any loans the terms of which have been modified in a troubled debt restructuring. Interest is accrued on such loans that continue to meet the modified terms of their loan agreements. At March 31, 2004 the Company had one loan approximating $252,000, the terms of which had been modified under a trouble debt restructuring, and as of 2003, the Company had no loans that have had the terms modified in a troubled debt restructuring.
The Company’s charge-off policy for impaired loans is similar to its charge-off policy for all loans in that loans are charged-off in the month when they are considered uncollectible.
As of March 31, 2004, the Company had impaired loans totaling $1,323,000. A specific reserve of $129,000 has been established by management related to these loans. The total amount of interest recognized during the period on impaired loans approximated $20,000 and the average recorded investment for the three months ended March 31, 2004 was $1,609,000. At December 31, 2003, impaired loans totaled $1,832,000 and had specific allowance for possible loan losses of $163,000 allocated. The impaired loans are generally commercial loans and have been classified as substandard by management’s internal grading system. The total collateral of these loans approximates $1,350,000.
The following schedule details selected information as to non-performing loans of the Company at March 31, 2004 and December 31, 2003:
March 31, 2004 | December 31, 2003 | |||||||||||||||
Past Due | Past Due | |||||||||||||||
90 Days | Non-Accrual | 90 Days | Non-Accrual | |||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||
Real estate | $ | — | — | $ | — | — | ||||||||||
Installment loans | — | 23 | — | 39 | ||||||||||||
Commercial | — | 45 | — | 266 | ||||||||||||
$ | — | 68 | $ | — | 305 | |||||||||||
Renegotiated loans | $ | — | $ | — | ||||||||||||
Liquidity and Asset Management
The Company’s management seeks to maximize net interest income by managing the Company’s assets and liabilities within appropriate constraints on capital, liquidity and interest rate risk. Liquidity is the ability to maintain sufficient cash levels necessary to fund operations, meet the requirements of depositors and borrowers and fund attractive investment opportunities. Higher levels of liquidity bear corresponding costs, measured in terms of lower yields on short-term more liquid earning assets and higher interest expense involved in extending liability maturities.
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LEGENDS FINANCIAL HOLDINGS, INC.
Form 10-QSB, CONTINUED
Item 2. Management’s Discussion and Analysis or Plan of Operation, Continued
Liquidity and Asset Management, Continued
The Company maintains a formal asset and liability management process to quantify, monitor and control interest rate risk and to assist management in maintaining stability in the net interest margin under varying interest rate environments. The Company accomplishes this process through the development and implementation of lending, funding and pricing strategies designed to maximize net interest income under varying interest rate environments subject to specific liquidity and interest rate risk guidelines.
Analysis of rate sensitivity and rate gap analysis are the primary tools used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Included in the analysis are cash flows and maturities of financial instruments held for purposes other than trading, changes in market conditions, loan volumes and pricing and deposit volume and mix. These assumptions are inherently uncertain, and, as a result, net interest income cannot be precisely estimated nor can the impact of higher or lower interest rates on net interest income be precisely predicted. Actual results will differ due to timing, magnitude and frequency of interest rate changes and changes in market conditions and managements strategies, among other factors.
The Company’s primary source of liquidity is expected to be a stable core deposit base. In addition, short-term investments, loan payments and investment security maturities provide a secondary source.
The Company’s securities portfolio consists of earning assets that provide interest income. Securities classified as available-for-sale include securities intended to be used as part of the Company’s asset/liability strategy and/or securities that may be sold in response to changes in interest rate, prepayment risk, the need or desire to increase capital and similar economic factors. Securities totaling $2.4 million mature or will be subject to rate adjustments within the next twelve months.
The Company has entered into an interest rate swap agreement. The swap instrument totals $500,000 and has a fixed rate yield of 6.65% through January 28, 2009. The underlying security used in the swap transaction is a trust preferred security which yields LIBOR plus three hundred fifty basis points. As of March 31, 2004 the transaction has resulted in an unrealized loss of approximately $4,000.
A secondary source of liquidity is the Company’s loan portfolio. At March 31, 2004, loans of approximately $38.7 million either will become due or will be subject to rate adjustments within twelve months from the respective date.
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LEGENDS FINANCIAL HOLDINGS, INC.
Form 10-QSB, CONTINUED
Item 2. Management’s Discussion and Analysis or Plan of Operation, Continued
Liquidity and Asset Management, Continued
As for liabilities, certificates of deposit of $100,000 or greater of approximately $21.2 million will become due during the next twelve months. Management anticipates that there will be no significant reductions from withdrawable accounts such as negotiable order of withdrawal accounts, money market demand accounts, demand deposit and regular savings accounts in the future.
At the present time, there are no known trends or any known commitments, demands, events or uncertainties that will result in or that are reasonably likely to result in the Company’s liquidity changing in any material way.
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LEGENDS FINANCIAL HOLDINGS, INC.
Form 10-QSB, CONTINUED
Item 2. Management’s Discussion and Analysis or Plan of Operation, Continued
Capital Position
At March 31, 2004, total stockholders’ equity was $14,806,000 or 9.3% of total assets, which compares with $14,140,000 or 9.4% of total assets at December 31, 2003. The dollar increase in stockholders’ equity during the three months ended March 31, 2004 results from the Company’s income of $334,000, a net $199,000 unrealized gain on available-for-sale securities and proceeds from the issuance of common stock totaling $133,000.
The Company’s principal regulators have established minimum risk-based capital requirements and leverage capital requirements for the Company. These guidelines classify capital into two categories of Tier I and Total risk-based capital. Total risk-based capital consists of Tier I (or core) capital (essentially common equity less intangible assets) and Tier II capital (essentially qualifying long-term debt, of which the Company has none, and a part of the allowance for possible loan losses). In determining risk-based capital requirements, assets are assigned risk-weights of 0% to 100%, depending on regulatory assigned levels of credit risk associated with such assets. The risk-based capital guidelines require the Company to have a total risk-based capital ratio of 8.0% and a Tier I risk-based capital ratio of 4.0%. At March 31, 2004, the Company’s total risk-based capital ratio was 12.9% and its Tier I risk-based capital ratio was 11.8%. At December 31, 2003, the Company’s total risk-based capital ratio was 15.6% and its Tier I risk-based capital ratio was 12.5%. The required Tier I leverage capital ratio (Tier I capital to average assets for the most recent quarter) for the Company is 4%. At March 31, 2004, the Company had a leverage ratio of 9.4% compared to 9.9% at December 31, 2003. It is management’s objective to leverage the Bank to approximately a 8.0% capital ratio. The emphasis will be on asset quality and growth in core deposits both of which should be aided by the large stockholder base.
There is no established trading market for the Company’s stock. From time to time the Company may acquire shares of its stock to provide some liquidity in the shares. During the quarters ended March 31, 2004 and 2003, the Company issued 15,968 and 0 shares, respectively, of its voting common stock in connection with the exercise of options and no shares were redeemed. No shares of the Company’s common voting stock were redeemed for the year ending December 31, 2003. Privately negotiated trades may involve the Company, its directors and officers and, accordingly, may not be reliable indicators of value.
On February 17, 2004, the Board of Directors recommended a dividend be declared at the Annual Shareholders meeting on April 20, 2004. The recommendation was to set the dividend rate for 2004 at 33% of 2003 earnings which will approximate $277,000. The dividend will be paid on or about May 28, 2004 to shareholders of record on March 31, 2004.
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LEGENDS FINANCIAL HOLDINGS, INC.
Form 10-QSB, CONTINUED
Item 2. Management’s Discussion and Analysis or Plan of Operation, Continued
Impact of Inflation
Although interest rates are significantly affected by inflation, the inflation rate is immaterial when reviewing the Company’s results of operations.
Item 3. Controls and Procedures
As of March 31, 2004, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and the Chief Financial Officer, of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information that we are required to disclose in the reports we file under the Securities and Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms. Our Chief Executive Officer and Chief Financial Officer also concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to our Company required to be included in our periodic SEC filings. In connection with the new rules, we are in the process of further reviewing and documenting our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes designed to enhance their effectiveness and to ensure that our systems evolve with our business.
During the quarter ended March 31, 2004, there have been no significant changes in our internal controls or in other factors that have materially affected, or is reasonably likely to affect, internal controls.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) | Not applicable. |
(b) | Not applicable. |
(c) | Since December 31, 2003, Legends Financial has not sold any securities without registration under the Securities Act of 1933, except for that on March 25, 2004, Director David Nussbaumer exercised the option to purchase 2,548 shares of common stock at an exercise price of $8.33 per share. The Company relied on the exemption provided by Section 4(2) of the Securities Act of 1933. |
(d) | Not applicable. |
(e) | No repurchases for our securities were made during the quarter ended March 31, 2004. The only restrictions on working capital and/or dividends are those reported in Part I of this Quarterly Report on Form 10-QSB. |
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) | Rule 13a-14(a) Certifications Section 1350 Certifications. |
(b) | No reports on Form 8-K have been filed during the quarter for which this report is filed. |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LEGENDS FINANCIAL HOLDINGS, INC.
(Registrant)
DATE: May 11, 2004 | /s/ Billy P. Atkins | |
Billy Atkins, President and Chief Executive Officer | ||
DATE: May 11, 2004 | /s/ Thomas Bates, Jr. | |
Thomas Bates, Jr., Executive Vice President and Chief Financial Officer |
LEGENDS FINANCIAL HOLDINGS, INC.
INDEX TO EXHIBITS FOR FORM 10-QSB
FOR QUARTER ENDED MARCH 31, 2004
EXHIBIT NO. | EXHIBIT DESCRIPTION | |
Exhibit 31.1 and 31.2 | Rule 13a-14(a) Certifications | |
Exhibit 32.1 and 32.2 | Section 1350 Certifications |
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