**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q/A**

 

**Amendment No. 1**

 

----

 

**Quarterly Report Pursuant to Section 13or 15(d) ofthe Securities Exchange Act of 1934**

 

**For the quarterly period ended:**

 

**September 30, 2003**

 

**Commission File Number:  2-95114**

 

**LOGAN COUNTYBANCSHARES, INC.**

(Exact name of Registrant asspecified in its Charter)

 
| **West Virginia**                                               | ** ** | **55-0660015**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of Incorporation or organization) | ** ** | (I.R.S. Employer  Identification No.) |
|                                                            | ** ** |                                  |
| **P. O. Box 597, Logan, West Virginia**                         | ** ** | **25601**                             |
| (Address of principal  executive offices)                       | ** ** | (Zip Code)                            |
|                                                            | ** ** |                                  |
| **(304) 752-1166**                                              |
| (Registrant’s telephone  number, including area code)      |

 

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Indicate bycheck mark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.                 Yes **ý****     **No o

 

Indicate by check mark whether theregistrant is an accelerated filer (as defined in Rule 12b-2 of the ExchangeAct). 

|   | Yes **o****     **No ý |
|--------|----------------------------------------------------------------|

 

Indicate the number of sharesoutstanding of each of the registrant’s classes of common stock as of thelatest practicable date:

 

Class Outstanding at November 24,2004

 
| Common Stock ($1.67 Par Value) |   | 703,991 Shares |
|--------------------------------|--------|----------------|

 

 

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**LOGAN COUNTY BANCSHARES, INC.**

 

**Table of Contents**

 
| EXPLANATORY  NOTE                    |                                                                                                                                 |
|--------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------|
|                                 |                                                                                                                                 |
| PART 1 – FINANCIAL  INFORMATION |                                                                                                                                 |
|                                 |                                                                                                                                 |   |
| ITEM 1.                              | FINANCIAL STATEMENTS:                                                                                                                |   |
|                                 |                                                                                                                                 |   |
|                                 | Consolidated Balance  Sheets as of September 30, 2003 (unaudited) and December 31, 2002                                    |   |
|                                 |                                                                                                                                 |   |
|                                 | Consolidated  Statements of Income For the Nine-Month Periods Ended September 30, 2003  and 2002 (unaudited)                    |   |
|                                 |                                                                                                                                 |   |
|                                 | Consolidated  Statements of Income For the Three-Month Periods Ended September 30,  2003 and 2002 (unaudited)                   |   |
|                                 |                                                                                                                                 |   |
|                                 | Consolidated  Statement of Changes in Stockholders’ Equity for the Nine-Month Period Ended September 30,  2003 (unaudited) |   |
|                                 |                                                                                                                                 |   |
|                                 | Consolidated  Statements of Cash Flows for the Nine-Month Periods Ended September 30,  2003 and 2002                            |   |
|                                 |                                                                                                                                 |   |
|                                 | Notes to  Consolidated Financial Statements                                                                                          |   |
|                                 |                                                                                                                                 |   |
| ITEM  2.                             | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.                                         |   |
|                                 |                                                                                                                                 |   |
| ITEM 3.                              | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                          |   |
|                                 |                                                                                                                                 |   |
| ITEM 4.                              | CONTROLS AND  PROCEDURES                                                                                                             |   |
|                                 |                                                                                                                                 |   |
| PART II – OTHER INFORMATION     |                                                                                                                                 |
|                                 |                                                                                                                                 |   |
| ITEM 1.                              | LEGAL PROCEEDINGS                                                                                                                    |   |
|                                 |                                                                                                                                 |   |
| ITEM 2.                              | UNREGISTERED SALES OF EQUITY SECURITIES                                                                                              |   |
|                                 |                                                                                                                                 |   |
| ITEM 3.                              | DEFAULTS UPON SENIOR SECURITIES                                                                                                      |   |
|                                 |                                                                                                                                 |   |
| ITEM 4.                              | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                                  |   |
|                                 |                                                                                                                                 |   |
| ITEM 5.                              | OTHER INFORMATION                                                                                                                    |   |
|                                 |                                                                                                                                 |   |

 

i

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| ITEM 6. | EXHIBITS AND  REPORTS ON FORM 8-K |   |
|---------|-----------------------------------|--------|

 
|   | EXHIBITS            |                                                                           |   |
|--------|---------------------|--------------------------------------------------------------------------------|--------|
|   |                |                                                                           |   |
|   | Exhibit 31.1        | Sarbanes-Oxley Act, Section 302 Certification of Chief Executive  Officer |   |
|   |                |                                                                           |   |
|   | Exhibit 31.2        | Sarbanes-Oxley Act, Section 302 Certification of Chief Financial  Officer |   |
|   |                |                                                                           |   |
|   | Exhibit 32.1        | Sarbanes-Oxley Act, Section 906 Certification of Chief Executive  Officer |   |
|   |                |                                                                           |   |
|   | Exhibit 32.2        | Sarbanes-Oxley Act, Section 906 Certification of Chief Financial  Officer |   |
|   |                |                                                                           |   |
|   | Reports on Form 8-K |                                                                           |
|   |                |                                                                           |   |
|   | Signatures          |                                                                           |

 

ii

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**EXPLANATORYNOTE**

 

This Amendment No. 1 on Form 10-Q/A amends the Company’s10-Q for the period ending September 30, 2003, by adding Items 3 and 4,which were not previously addressed in the Company’s 10-Q for the period endingSeptember 30, 2003, and making additional disclosures in Management’sDiscussion and Analysis of Financial Condition and Results of Operation in Item2.

 

As disclosed on Form 8-K filed with the Securities andExchange Commission (the “Commission”) on July 23, 2004, Logan BancShares,Inc. (the “Company”), working with its outside auditors and specially retainedsecurities counsel, learned that it was subject to the Sarbanes-Oxley Act of2002 (“Sarbanes-Oxley”).  The addition ofItems 3 and 4 and the additional disclosures in Management’s Discussion andAnalysis of Financial Condition and Results of Operation in Item 2 were made tobring the 10-Q into compliance with Sarbanes-Oxley.

 

This Amendment No. 1 on Form 10-Q/A also revises theconsolidated balance sheet to eliminate intercompany balances, restates theconsolidated statement of cash flows to reflect federal funds sold as cashequivalents and makes other revisions in format to conform to standardfinancial institution presentation. As disclosed on Form 8-K filed with theCommission on August 4, 2004, the Company was informed by its independentauditor, McNeal, Williamson & Co. (“McNeal Williamson”) that McNealWilliamson was no longer permitted to issue audit reports for the Company andwas no longer permitted to perform interim reviews in accordance with SAS 100for the Company as a result of McNeal Williamson’s failure to register with thePublic Company Accounting Oversight Board (“PCAOB”).  McNeal Williamson advised the Company that itshould obtain independent accountants. Accordingly, the Company retained S. R. Snodgrass, A.C. on August 10,2004, to:  (i) review all interim periodsthat were reviewed by McNeal Williamson after the adoption of Sarbanes-Oxley;(ii) re-audit the audit report for the period ended December 31, 2003; and(iii) review the audit report for the period ended December 31, 2002.  As a result of S. R. Snodgrass, A.C.’sre-audit of 2003 certain adjustments to 2002 financial information were made asdiscussed in Note 3 to the unaudited financial statements herein.  McNeal Williamson concurred with theadjustments.

 

1

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**PART 1**

 

**ITEM 1 –FINANCIAL INFORMATION**

 

**LoganCounty BancShares, Inc. and Subsidiary**

**CONSOLIDATEDBALANCE SHEETS****(UNAUDITED)**

**(In Thousands)**

 
| ** **                                                    | ** ** | **September 30,  2003** | ** ** | **December 31,  2002** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **ASSETS**                                                    |       |                         |       |                        |       |
| Cash and  cash equivalents:                                   |       |                         |       |                        |       |
| Cash and due  from banks                                      |       | $                            | 5,930      |                        | $          | 5,598 |   |
| Federal  funds sold                                           |       | 15,670                       |       | 11,370                      |       |
| Total cash  and cash equivalents                              |       | 21,600                       |       | 16,968                      |       |
|                                                          |       |                         |       |                        |       |
| Investment  securities:                                       |       |                         |       |                        |       |
| Available-for-sale  (at fair value)                           |       | 51,788                       |       | 41,305                      |       |
|                                                          |       |                         |       |                        |       |
| Loans                                                         |       | 102,018                      |       | 107,933                     |       |
| Less  allowance for possible loan losses                      |       | (1,567                       | )          | (1,619                      | )          |
| Net loans                                                     |       | 100,451                      |       | 106,314                     |       |
|                                                          |       |                         |       |                        |       |
| Premises and  equipment, net                                  |       | 3,069                        |       | 3,217                       |       |
| Accrued  interest and other assets                            |       | 1,841                        |       | 1,526                       |       |
|                                                          |       |                         |       |                        |       |
| Total assets                                                  |       | $                            | 178,749    |                        | $          | 169,330 |   |
|                                                          |       |                         |       |                        |       |
| **LIABILITIES**                                               |       |                         |       |                        |       |
| Noninterest  bearing deposits:                                |       |                         |       |                        |       |
| Demand                                                        |       | $                            | 29,961     |                        | $          | 24,707 |   |
| Interest  bearing deposits:                                   |       |                         |       |                        |       |
| Demand                                                        |       | 25,672                       |       | 21,851                      |       |
| Savings                                                       |       | 43,417                       |       | 44,864                      |       |
| Time                                                          |       | 58,341                       |       | 58,652                      |       |
| Total  deposits                                               |       | 157,391                      |       | 150,074                     |       |
| Repurchase  agreements                                        |       | 3,000                        |       | 1,000                       |       |
| Accrued and  deferred income taxes                            |       | 197                          |       | 17                          |       |
| Accrued  interest and other liabilities                       |       | 397                          |       | 1,046                       |       |
| Total  liabilities                                            |       | 160,985                      |       | 152,137                     |       |
|                                                          |       |                         |       |                        |       |
| **STOCKHOLDERS’  EQUITY**                                |       |                         |       |                        |       |
|                                                          |       |                         |       |                        |       |
| Common stock  - 780,000 shares authorized at $1.67 par value: |       |                         |       |                        |       |
| 703,991  shares issued                                        |       | 1,300                        |       | 1,300                       |       |
| Treasury  Stock - 76,000 shares at cost                       |       | (1,406                       | )          | (1,406                      | )          |
| Surplus                                                       |       | 2,408                        |       | 2,408                       |       |
| Retained  earnings                                            |       | 15,398                       |       | 14,631                      |       |
| Accumulated  other comprehensive income                       |       | 64                           |       | 260                         |       |
| Total  stockholders’ equity                              |       | 17,764                       |       | 17,193                      |       |
|                                                          |       |                         |       |                        |       |
| Total  liabilities and stockholders’ equity              |       | $                            | 178,749    |                        | $          | 169,330 |   |

 

The accompanying notes are an integral part of theunaudited consolidated financial statements.

 

2

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**Logan County BancShares, Inc. and Subsidiary**

**CONSOLIDATEDSTATEMENTS OF INCOME****(UNAUDITED)**

**(In Thousands)**

 
| ** **                                                    | ** ** | **NIne Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                    | ** ** | **2003**                                  | ** ** | **2002** | ** ** |
| **INTEREST  AND DIVIDEND INCOME**                             |       |                                      |       |   |   |
| Interest and  fees on loans                                   |       |                                      |       |   |   |
| Taxable                                                       |       | $                                         | 5,725      |   | $ | 6,491 |   |
| Investment  securities:                                       |       |                                      |       |   |   |
| Available-for-sale                                            |       | 741                                       |       | 1,039 |   |
| Interest on  federal funds sold                               |       | 150                                       |       | 153 |   |
| Total  interest income                                        |       | 6,616                                     |       | 7,683 |   |
|                                                          |       |                                      |       |   |   |
| **INTEREST  EXPENSE**                                         |       |                                      |       |   |   |
| Deposits                                                      |       | 1,529                                     |       | 2,013 |   |
| Other borrowings                                              |       | 73                                        |       | 120 |   |
| Total  interest expense                                       |       | 1,602                                     |       | 2,133 |   |
|                                                          |       |                                      |       |   |   |
| Net interest  income                                          |       | 5,014                                     |       | 5,550 |   |
|                                                          |       |                                      |       |   |   |
| **PROVISION  FOR POSSIBLE LOAN LOSSES**                       |       | 3                                         |       | 180 |   |
|                                                          |       |                                      |       |   |   |
| Net interest  income after provision for possible loan losses |       | 5,011                                     |       | 5,370 |   |
|                                                          |       |                                      |       |   |   |
| **NONINTEREST  INCOME**                                       |       |                                      |       |   |   |
| Service  charges and other fees                               |       | 661                                       |       | 486 |   |
| Other  operating income                                       |       | 106                                       |       | 84 |   |
| Total  noninterest income                                     |       | 767                                       |       | 570 |   |
|                                                          |       |                                      |       |   |   |
| **NONINTEREST  EXPENSE**                                      |       |                                      |       |   |   |
| Salary and  employee benefits                                 |       | 1,721                                     |       | 1,696 |   |
| Occupancy  and equipment expense                              |       | 465                                       |       | 440 |   |
| Other  operating expenses                                     |       | 1,215                                     |       | 1,220 |   |
| Total  noninterest expense                                    |       | 3,401                                     |       | 3,356 |   |
|                                                          |       |                                      |       |   |   |
| Income  before income taxes                                   |       | 2,377                                     |       | 2,584 |   |
|                                                          |       |                                      |       |   |   |
| **INCOME  TAXES**                                             |       | 864                                       |       | 981 |   |
|                                                          |       |                                      |       |   |   |
| Net income                                                    |       | $                                         | 1,513      |   | $ | 1,603 |   |
|                                                          |       |                                      |       |   |   |
| **WEIGHTED  AVERAGE SHARES OUTSTANDING**                      |       | 703,991                                   |       | 703,991 |   |
|                                                          |       |                                      |       |   |   |
| **EARNINGS  PER COMMON SHARE**                                |       | $                                         | 2.15       |   | $ | 2.24 |   |

 

The accompanying notes are an integral part of theunaudited consolidated financial statements.

 

3

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**Logan County BancShares, Inc. and Subsidiary**

**CONSOLIDATEDSTATEMENTS OF INCOM****E (UNAUDITED)**

**(In Thousands)**

 
| ** **                                                    | ** ** | **Three Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                    | ** ** | **2003**                                   | ** ** | **2002** | ** ** |
| **INTEREST  AND DIVIDEND INCOME**                             |       |                                       |       |   |   |
| Interest and  fees on loans                                   |       |                                       |       |   |   |
| Taxable                                                       |       | $                                          | 1,888      |   | $ | 2,124 |   |
| Investment  securities:                                       |       |                                       |       |   |   |
| Available-for-sale                                            |       | 237                                        |       | 343 |   |
| Interest on  federal funds sold                               |       | 42                                         |       | 53 |   |
| Total  interest income                                        |       | 2,167                                      |       | 2,520 |   |
|                                                          |       |                                       |       |   |   |
| **INTEREST  EXPENSE**                                         |       |                                       |       |   |   |
| Deposits                                                      |       | 492                                        |       | 634 |   |
| Other  borrowings                                             |       | 27                                         |       | 41 |   |
| Total interest  expense                                       |       | 519                                        |       | 675 |   |
|                                                          |       |                                       |       |   |   |
| Net interest  income                                          |       | 1,648                                      |       | 1,845 |   |
|                                                          |       |                                       |       |   |   |
| **PROVISION  FOR POSSIBLE LOAN LOSSES**                       |       | —                                     |       | 60 |   |
|                                                          |       |                                       |       |   |   |
| Net interest  income after provision for possible loan losses |       | 1,648                                      |       | 1,785 |   |
|                                                          |       |                                       |       |   |   |
| **NONINTEREST  INCOME**                                       |       |                                       |       |   |   |
| Service  charges and other fees                               |       | 231                                        |       | 174 |   |
| Other  operating income                                       |       | 21                                         |       | 18 |   |
| Total  noninterest income                                     |       | 252                                        |       | 192 |   |
|                                                          |       |                                       |       |   |   |
| **NONINTEREST  EXPENSE**                                      |       |                                       |       |   |   |
| Salary and  employee benefits                                 |       | 561                                        |       | 561 |   |
| Occupancy  and equipment expense                              |       | 155                                        |       | 150 |   |
| Other  operating expenses                                     |       | 371                                        |       | 397 |   |
| Total  noninterest expense                                    |       | 1,087                                      |       | 1,108 |   |
|                                                          |       |                                       |       |   |   |
| Income  before income taxes                                   |       | 813                                        |       | 869 |   |
|                                                          |       |                                       |       |   |   |
| **INCOME  TAXES**                                             |       | 329                                        |       | 327 |   |
|                                                          |       |                                       |       |   |   |
| Net income                                                    |       | $                                          | 484        |   | $ | 542 |   |
|                                                          |       |                                       |       |   |   |
| **WEIGHTED  AVERAGE SHARES OUTSTANDING**                      |       | 703,991                                    |       | 703,991 |   |
|                                                          |       |                                       |       |   |   |
| **EARNINGS  PER COMMON SHARE**                                |       | $                                          | 0.69       |   | $ | 0.76 |   |

 

The accompanying notes are an integral partof the unaudited consolidated financial statements.

 

4

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**Logan County BancShares, Inc. and Subsidiary**

**CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS****’ EQUITY (UNAUDITED)**

**(In Thousands)**

 
| ** **                                                        | ** ** | **Common Stock** | ** ** | ** ** | ** ** | **Retained** | ** ** | **Treasury** | ** ** | **Accumulated  Other  Compre-  hensive  Income** | ** ** | **Compre-  hensive** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------|------------|------------------|------------|------------|------------|--------------|------------|--------------|------------|--------------------------------------------------|------------|----------------------|------------|------------|------------|
| ** **                                                        | ** ** | **Shares**       | ** ** | **Stock**  | ** ** | **Surplus**  | ** ** | **Earnings** | ** ** | **Stock**                                        | ** ** | **(Loss)**           | ** ** | **Income** | ** ** | **Total** | ** ** |
| ** **                                                        | ** ** | ** **       | ** ** | ** ** | ** ** | ** **   | ** ** | ** **   | ** ** | ** **                                       | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **BALANCE DECEMBER 31,  2002**                               |       | 703,991          |       | $          | 1,300      |         | $          | 2,408        |       | $                                                | 14,631     |                 | $          | (1,406     | )          | $ | 260 |   |   |   | $ | 17,193 |   |
|                                                              |       |             |       |       |       |         |       |         |       |                                             |       |                 |       |       |       |   |   |
| Comprehensive  income:                                            |       |             |       |       |       |         |       |         |       |                                             |       |                 |       |       |       |   |   |
| Net income  for the the nine months ended September 31, 2003 |       | —           |       | —     |       | —       |       | 1,513        |       | —                                           |       | —               |       | $          | 1,513      |   | 1,513 |   |
| Other  comprehensive income, net of tax                           |       |             |       |       |       |         |       |         |       |                                             |       |                 |       |       |       |   |   |
|                                                              |       |             |       |       |       |         |       |         |       |                                             |       |                 |       |       |       |   |   |
| Unrealized  loss on securities available-for-sale                 |       | —           |       | —     |       | —       |       | —       |       | —                                           |       | (196                 | )          | (196       | )          | (196 | ) |
|                                                              |       |             |       |       |       |         |       |         |       |                                             |       |                 |       |       |       |   |   |
| Comprehensive  income                                             |       |             |       |       |       |         |       |         |       |                                             |       |                 |       | $          | 1,317      |   |   |   |
|                                                              |       |             |       |       |       |         |       |         |       |                                             |       |                 |       |       |       |   |   |
| Cash  dividend  ($1.06 per share)                                 |       | —           |       | —     |       | —       |       | (746         | )          | —                                           |       | —               |       |       |       | (746 | ) |
|                                                              |       |             |       |       |       |         |       |         |       |                                             |       |                 |       |       |       |   |   |
| **BALANCE,  SEPTEMBER 30, 2003**                             |       | 703,991          |       | $          | 1,300      |         | $          | 2,408        |       | $                                                | 15,398     |                 | $          | (1,406     | )          | $ | 64 |   |   |   | $ | 17,764 |   |

 

The accompanying notes are an integral part of the unauditedconsolidated financial statements.

 

5

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**LoganCounty BancShares, Inc. and Subsidiary**

**CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

**(InThousands)**

 
| ** **                                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                         | ** ** | **2003**                                  | ** ** | **2002** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                          |       |                                      |       |   |   |
| Net income                                                                         |       | $                                         | 1,513      |   | $ | 1,603 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                                      |       |   |   |
| Allowance  for loan losses                                                         |       | 3                                         |       | 180 |   |
| Depreciation  and amortization                                                     |       | 198                                       |       | 201 |   |
| Amortization/accretion  on securities                                              |       | 189                                       |       | (3 | ) |
| (Increase)  decrease in interest receivable and other assets                       |       | (315                                      | )          | (859 | ) |
| (Increase)  decrease in interest payable and other liabilities                     |       | (469                                      | )          | 127 |   |
| Other, net                                                                         |       | (16                                       | )          | — |   |
| Net cash  provided by operating activities                                         |       | 1,103                                     |       | 1,249 |   |
|                                                                               |       |                                      |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                          |       |                                      |       |   |   |
| Proceeds  from calls of securities available-for-sale                              |       | 45,332                                    |       | 20,820 |   |
| Proceeds  from maturities of securities available-for-sale                         |       | —                                    |       | 4,487 |   |
| Purchases of  securities available-for-sale                                        |       | (56,239                                   | )          | (33,935 | ) |
| Net decrease  in loans                                                             |       | 5,915                                     |       | 8,336 |   |
| Purchase of  bank premises and equipment                                           |       | (50                                       | )          | (48 | ) |
| Net cash  used in investing activities                                             |       | (5,042                                    | )          | (340 | ) |
|                                                                               |       |                                      |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                          |       |                                      |       |   |   |
| Net increase  in demand deposits                                                   |       | 9,075                                     |       | 532 |   |
| Net increase  (decrease) in savings deposits                                       |       | (1,447                                    | )          | 2,982 |   |
| Net decrease  in time deposits                                                     |       | (311                                      | )          | (3,148 | ) |
| Net increase  in repurchase agreements                                             |       | 2,000                                     |       | 1,000 |   |
| Dividends  paid                                                                    |       | (746                                      | )          | (752 | ) |
| Net cash  provided by financing activities                                         |       | 8,571                                     |       | 614 |   |
|                                                                               |       |                                      |       |   |   |
| **INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS**                              |       | 4,632                                     |       | 1,523 |   |
|                                                                               |       |                                      |       |   |   |
| **CASH AND  CASH EQUIVALENTS, BEGINNING OF PERIOD**                                |       | 16,968                                    |       | 14,222 |   |
|                                                                               |       |                                      |       |   |   |
| **CASH AND  CASH EQUIVALENTS, END OF PERIOD**                                      |       | $                                         | 21,600     |   | $ | 15,745 |   |
|                                                                               |       |                                      |       |   |   |
| **Supplemental  Disclosures:**                                                     |       |                                      |       |   |   |
| Cash paid  for interest                                                            |       | $                                         | 1,536      |   | $ | 2,140 |   |
| Cash paid  for income taxes                                                        |       | $                                         | 878        |   | $ | 995 |   |

 

The accompanying notes are an integral part of the unauditedconsolidated financial statements.

 

6

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**LOGANCOUNTY BANCSHARES, INC. AND SUBSIDIARIES**

**Notesto Consolidated Financial Statements**

 

**NOTE 1 - CRITICAL ACCOUNTINGPOLICIES**

 

The accounting and reporting policies of LoganCounty BancShares, Inc. and subsidiary ( the “Company”)and its subsidiary were prepared in accordance with accounting principlesgenerally accepted in the United States of America, (“US GAAP”) and to generalpractices within the financial services industry. The preparation of financialstatements in conformity with US GAAP requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.Management has identified the accounting policies described below as thosethat, due to the judgments, estimates and assumptions inherent in thosepolicies, are critical to an understanding of the Company’s consolidated financialstatements and management’s discussion and analysis.

 

Theconsolidated financial statements of the Company include its wholly-ownedsubsidiary, Logan Bank and Trust (the “Bank”). All significant intercompany balances and transactions have been eliminated.

 

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with the instructions to Form 10-Q and Article 10 of RegulationX and, therefore, do not necessarily include all information that would beincluded in audited financial statements required by US GAAP.  The information furnished reflects alladjustments which are, in the opinion of management, necessary for a fairstatement of the results of operations. All such adjustments are of a normal recurring nature.  The results of operations for the interimperiods are not necessarily indicative of the results to be expected for thefiscal year ended December 31, 2003.

 

Thesestatements should be read in conjunction with the consolidated statements as ofand for the fiscal year ended December 31, 2002, and related notes whichare included in the Company’s Annual Report on Form 10-K (file no.2-95114).

 

**Income Recognition**

 

The Company recognizes interest income by methods conforming to US GAAPthat include general accounting practices within the financial servicesindustry. Interest income on loans and investment securities is recognized bymethods that result in level rates of return on principal amounts outstanding,including yield adjustments resulting from the amortization of loan costs andpremiums on investment securities and accretion of loan fees and discounts oninvestment securities.

 

In the event management believes collection of all or a portion ofcontractual interest on a loan has become doubtful, which generally occursafter the loan is 90 days past due, the accrual of interest is discontinued. Inaddition, previously accrued interest deemed uncollectible that was recognizedin income is reversed. Interest received on nonaccrual loans is included in incomeonly if principal recovery is reasonably assured. A nonaccrual loan is restoredto accrual status when it is brought current or has performed in accordancewith contractual terms for a reasonable period of time, and the collectibilityof the total contractual principal and interest is no longer doubtful.

 

**Allowance for Loan Losses**

 

In general, determining the amount of the allowance for loan lossesrequires significant judgment and the use of estimates by management. TheCompany maintains an allowance for loan losses to absorb probable losses in theloan portfolio based on a quarterly analysis of the portfolio. This formalanalysis determines

 

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an appropriate level and allocation of the allowance for loan lossesamong loan types and resulting provision for loan losses by considering factorsaffecting loan losses, including specific losses, levels and trends in impairedand nonperforming loans, historical loan loss experience, current national andlocal economic conditions, volume, growth and composition of the portfolio,regulatory guidance and other relevant factors. Management continually monitorsthe loan portfolio through reviews of past due loans and all significant loanswhich are considered to be potential problem loans on a monthly basis. Theinternal loan review function provides for an independent review to evaluatethe adequacy of the allowance. The provision could increase or decrease eachquarter based upon the results of management’s formal analysis.

 

The amount of the allowance for loan losses for the various loan typesrepresents management’s estimate of expected losses from existing loans basedupon specific allocations for individual lending relationships and historicalloss experience for each category of homogeneous loans. Impaired loans arecommercial and commercial real estate loans for which it is probable theCompany will not be able to collect all amounts due according to thecontractual terms of the loan agreement. The Company individually evaluatessuch loans for impairment and does not aggregate these loans by major riskclassifications. The definition of “impaired loans” is not the same as thedefinition of “nonaccrual loans,” although the two categories overlap. TheCompany may choose to place a loan on nonaccrual status due to paymentdelinquency or uncertain collectibility while not classifying the loan asimpaired, provided the loan is not a commercial or commercial real estateclassification. Factors considered by management in determining impairmentinclude payment status and collateral value. The amount of impairment for thesetypes of loans is determined by the difference between the present value of theexpected cash flows related to the loan, using the original interest rate, andits recorded value, or as a practical expedient in the case of collateralizedloans, the difference between the fair value of the collateral and the recordedamount of the loans. When foreclosure is probable, impairment is measured basedon the fair value of the collateral. While allocations are made to specificloans and pools of loans, the allowance is available for all loan losses.

 

Mortgage loans secured by one-to-four family properties and allconsumer loans are large groups of smaller-balance homogeneous loans and aremeasured for impairment collectively. Loans that experience insignificantpayment delays, which are defined as 90 days or less, generally are notclassified as impaired. Management determines the significance of paymentdelays on a case-by-case basis taking into consideration all circumstancesconcerning the loan, the credit worthiness and payment history of the borrower,the length of the payment delay, and the amount of shortfall in relation to theprincipal and interest owed.

 

Individual loan reviews are based upon specific quantitative andqualitative criteria, including the size of the loan, loan quality ratings,value of collateral, repayment ability of borrowers, and historical experiencefactors. The historical experience factors utilized for individual loan reviewsare based upon past loss experience, known trends in losses and delinquencies,the growth of loans in particular markets and industries, and known changes ineconomic conditions in the particular lending markets. Allowances forhomogeneous loans (such as residential mortgage loans, personal loans, etc.)are evaluated based upon historical loss experience, trends in losses anddelinquencies, growth of loans in particular markets, and known changes ineconomic conditions in each lending market. There can be no assurance theallowance for loan losses will be adequate to cover all losses, but managementbelieves the allowance for loan losses in the amount of $1,567,000 at September 30,2003, was adequate to provide for probable losses from existing loans based oninformation currently available. While management uses available information toprovide for loan losses, the ultimate collectibility of a substantial portionof the loan portfolio and the need for future additions to the allowance willbe based on changes in economic conditions and other relevant factors. As such,an adverse change in economic activity could reduce cash flows for both

 

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commercial andindividual borrowers, which would likely cause the Company to experienceincreases in problem assets, delinquencies, and losses on loans.

 

**Investment Securities**

 

Investment securities are classified at the time of purchase, based onmanagement’s intention and ability, as securities available-for-sale orheld-to-maturity. All debt and equity securities have been classified asavailable-for-sale to serve principally as a source of liquidity. Untilrealized, unrealized holding gains and losses for available-for-sale securitiesare reported as a separate component of stockholders’ equity, net of tax.Realized securities gains and losses are computed using the specificidentification method. Interest and dividends on investment securities arerecognized as income when earned.

 

While temporary changes in the market value of available-for-salesecurities are not recognized in earnings, a decline in fair value belowamortized cost deemed to be other-than-temporary results in an adjustment tothe cost basis of the investment, with a corresponding loss charged againstearnings. Management evaluates the investment securities forother-than-temporary declines in estimated fair value on a quarterly basis.This analysis requires management to consider various factors in order todetermine if a decline in estimated fair value is temporary orother-than-temporary. These factors include duration and magnitude of thedecline in value, expectations about market interest rates, the financialcondition of the issuer, and the company’s ability and intent to continueholding the investment for a period of time sufficient to allow for anyanticipated recovery in market value. At September 30, 2004, there were noinvestment securities identified by management to be other-than-temporarilyimpaired. If investments decline in fair value due to adverse changes in thefinancial markets, charges to income could occur in future periods unless theinvestments are held to maturity.

 

**Income Taxes**

 

The Company and its subsidiary file consolidated federal and stateincome tax returns. Deferred tax assets and liabilities are reflected atcurrently enacted income tax rates applicable to the period in which thedeferred tax assets and liabilities are expected to be realized or settled. Aschanges in tax laws or rates are enacted, deferred tax assets and liabilitiesare adjusted through the provision for income taxes. Deferred income taxexpenses or benefits are based on the changes in the deferred tax asset orliability from period to period. The provision for income taxesduring the current period is at a rate which management believes willapproximate the effective rate for the year.

 

**Cash Flows**

 

Cash and cash equivalents consist of cash and due from banks andfederal funds sold.

 

**Earnings Per Share**

 

The Company currentlymaintains a simple capital structure; thus, there are no dilutive effects onearnings per share.  Earnings per shareare calculated by dividing net income by the weighted-average number of sharesoutstanding for the periods.

 

**NOTE 2 - RECENT ACCOUNTING STANDARDS**

The Financial Accounting Standards Board  (“FASB”) issuedStatement on Financial Accounting Standard (“SFAS”) No. 146, “Accounting forCosts Associated with Exit or Disposal Activities.”  This Statement requires that a liability fora cost associated with an exit or disposal activity be recognized and measuredinitially at fair value when the liability is incurred.  This statement nullifies Emerging Issues TaskForce Issue No. 94-3, which required the recognition of a liability for an exitcost at the date of an

 

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entity’scommitment to an exit plan.  Theeffective date of this statement is for exit or disposal activities that areinitiated after December 31, 2002, with early application encouraged.  The adoption of this Statement did not have amaterial impact on the Company.

 

On December 31, 2002, the FASB issued SFASNo. 148, “Accounting for Stock-BasedCompensation - Transition and Disclosure,” which amends SFAS No. 123, “Accounting forStock-Based Compensation.”  SFASNo. 148 amends the disclosure requirements of SFAS No. 123 to require moreprominent and more frequent disclosures in financial statements about theeffects of stock-based compensation. Under the provisions of SFAS No. 123, companies that adopted thepreferable, fair value based method were required to apply that methodprospectively for new stock option awards. This contributed to a “ramp-up” effect on stock-based compensationexpense in the first few years following adoption, which caused concern forcompanies and investors because of the lack of consistency in reportedresults.  To address that concern, SFASNo. 148 provides two additional methods of transition that reflect an entity’sfull complement of stock-based compensation expense immediately upon adoption,thereby eliminating the ramp-up effect. SFAS No. 148 also improves the clarity and prominence of disclosuresabout the pro forma effects of using the fair value based method of accountingfor stock-based compensation for all companies—regardless of the accountingmethod used—by requiring that the data be presented more prominently and in amore user-friendly format in the footnotes to the financial statements.  In addition, the statement improves thetimeliness of those disclosures by requiring that this information be includedin interim as well as annual financial statements.  The transition guidance and annual disclosureprovisions of SFAS No. 148 are effective for fiscal years ending after December 15,2002, with earlier application permitted in certain circumstances.  The interim disclosure provisions areeffective for financial reports containing financial statements for interimperiods beginning after December 15, 2002. The adoption of SFAS No. 148 did not have a material impact on theCompany.

 

On April 30, 2003, the FASB issued SFAS No.149, “Amendment of Statement No. 133 on Derivative Instruments and HedgingActivities.”  The statement amends andclarifies accounting for derivative instruments embedded in other contracts andfor hedging activities under Statement No. 133. The amendments improve financial reporting by requiring that contractswith comparable characteristics be accounted for similarly.  The statement also clarifies under whatcircumstances a contract with an initial net investment meets thecharacteristic of a derivative.  Inaddition, it clarifies when a derivative contains a financing component thatwarrants special reporting in the statement of cash flows.  The statement is generally effective forcontracts entered into or modified after June 30, 2003.  Adoption of SFAS No. 149 did not have amaterial impact on the Company.

 

In May 2003, the FASB issued SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity.”  The statement improves theaccounting for certain financial instruments that, under previous guidance,could be accounted for as equity and requires that those instruments beclassified as liabilities.  Thisstatement affects accounting for three types of freestanding financialinstruments.  One type is mandatorilyredeemable shares, which the issuing company is obligated to buy back inexchange for cash or other assets.  Asecond type, which includes put options and forward purchase contracts,involves instruments that do or may require the issuer to buy back some of itsshares in exchange for cash or other assets. The third type, are instruments whose obligations can be settled withshares, the monetary value is fixed, tied solely or predominately to a variablesuch as a market index, or varies inversely with the value of the issuers’shares.  SFAS No. 150 does not apply tofeatures embedded in a financial instrument that is not a derivative in itsentirety.  Most of the guidance is effectivefor all financial instruments entered into or modified after May 31, 2003, andotherwise is effective at the beginning of the first interim period beginningafter June 15, 2003.  The adoptionof SFAS No. 150 did not have a material impact on the Company.

 

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In November 2002, the FASB issuedInterpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others*.*”  This interpretation elaborates on thedisclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under certain guarantees that it hasissued.  This interpretation clarifiesthat a guarantor is required to disclose (a) the nature of the guarantee,including the approximate term of the guarantee, how the guarantee arose, andthe events or circumstances that would require the guarantor to perform underthe guarantee; (b) the maximum potential amount of future payments under theguarantee; (c) the carrying amount of the liability, if any, for the guarantor’sobligations under the guarantee; and (d) the nature and extent of any recourseprovisions or available collateral that would enable the guarantor to recoverthe amounts paid under the guarantee. This interpretation also clarifies that a guarantor is required torecognize, at the inception of a guarantee, a liability for the obligations ithas undertaken in issuing the guarantee, including its ongoing obligation tostand ready to perform over the term of the guarantee in the event that thespecified triggering events or conditions occur.  The objective of the initial measurement ofthat liability is the fair value of the guarantee at its inception.  The initial recognition and initialmeasurement provisions of this interpretation are applicable on a prospectivebasis to guarantees issued or modified after December 31, 2002,irrespective of the guarantor’s fiscal year end.  The disclosure requirements in thisinterpretation are effective for financial statements of interim or annualperiods ending after December 15, 2002. Adoption did not have a material impact on the Company.

 

In January 2003, the FASB issuedInterpretation No. 46, “Consolidation of Variable Interest Entities,” in aneffort to expand upon and strengthen existing accounting guidance thataddresses when a company should include in its financial statements the assets,liabilities, and activities of another entity. The objective of this interpretation is not to restrict the use ofvariable interest entities, but to improve financial reporting by companiesinvolved with variable interest entities. Until now, one company generally has included another entity in itsconsolidated financial statements only if it controlled the entity throughvoting interests.  This interpretationchanges that by requiring a variable interest entity to be consolidated by acompany if that company is subject to a majority of the risk of loss from thevariable interest entity’s activities or entitled to receive a majority of theentity’s residual returns or both.  Theconsolidation requirements of this interpretation apply immediately to variableinterest entities created after January 31, 2003.  The consolidation requirements apply to olderentities in the first fiscal year or interim period beginning after June 15,2003.  Certain of the disclosurerequirements apply in all financial statements issued after January 31,2003, regardless of when the variable interest entity was established.  In October 2003, the FASB decided todefer to the fourth quarter from the third quarter the implementation date forInterpretation No. 46.  This deferralonly applies to variable interest entities that existed prior to February 1,2003.  The adoption of thisinterpretation has not and is not expected to have a material effect on theCompany’s financial position or results of operations.

 

NOTE 3 -RESTATEMENT OF PREVIOUSLY REPORTED FINANCIAL INFORMATION

 

As disclosed on Form 8-K filed with the Commission on August 4,2004, the Company was informed by its independent auditor, McNeal, Williamson& Co. (“McNeal Williamson”) that McNeal Williamson was no longer permittedto issue audit reports for the Company and was no longer permitted to performinterim reviews in accordance with SAS 100 for the Company as a result ofMcNeal Williamson’s failure to register with the Public Company AccountingOversight Board (“PCAOB”).  McNealWilliamson advised the Company that it should obtain independentaccountants.  Accordingly, the Companyretained S. R. Snodgrass, A.C. on August 10, 2004, to:  (i) review all interim periods that werereviewed by McNeal Williamson after the adoption of Sarbanes-Oxley; (ii)re-audit the audit report for the period ended December 31, 2003; and(iii) review the audit report for the period ended December 31, 2002.  As a result of S. R. Snodgrass, A.C.’sre-audit of the 2003 financial statements it was discovered that intercompanyaccount balances had not been eliminated as of December 31, 2002.  With the concurrence

 

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of McNealWilliamson the following adjustments were made to previously reported financialinformation as of December 31, 2002:

 

Cash was and non-interest bearing demand deposits were decreased by$369,000 as the result of the elimination of intercompany account balances asof December 31, 2003.  Total assetsand total liabilities each decreased by $369,000 as the result of theseeliminations.  Previously reported netincome and net income per share remained unchanged.

 

The consolidated statement of cash flows has been restated to includefederal funds sold as cash and cash equivalents.

 

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**LOGAN COUNTY BANCSHARES, INC.**

 

**ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

This narrative will assistreaders in their analysis of the accompanying consolidated financialstatements.  It should be read inconjunction with the unaudited consolidated financial statements and thenotes.  Management is not aware of anymarket or institutional trends, events or uncertainties that will have or arereasonably likely to have a material effect on the liquidity, capital resourcesor operations of the Company, except as discussed herein. Management is alsonot aware of any current recommendations by any regulatory authorities, whichwould have such a material effect if implemented.

 

# **Comparisonof the Results of Operations for the Three Months ended September 30, 2003and 2002**

#  

Netincome decreased by $58,000, or 11%, from net income of $542,000 for the threemonths ended September 30, 2002, to net income for the three months ended September 30,2003, of $484,000.

 

Interestand dividend income decreased $353,000, or 14%, from $2,520,000 at September 30,2002, to $2,167,000 at September 30, 2003. The decrease is attributed to the decrease in interest on loans of$236,000, or 11%, and the decrease in interest and dividends on investments of$106,000, or 31%.  The decrease ininterest on loans was due to the combination of the decrease in the averagebalance of loans of $6,289,000 and the decrease of 44 basis points in theaverage yield on loans.  Interest onavailable-for-sale securities declined due to interest rates earned in spite ofan increase of $5,237,000 in the average balance invested.  The yield on investment securities dropped by125 basis points due to the general decrease in rates from 2002 and management’sdecision to invest in securities with shorter maturities.

 

Interestexpense on deposits decreased by $156,000, or 23%, from $675,000 for the threemonths ended September 30, 2002, to $519,000 for the three months ended September 30,2003.  The decrease in interest expenseon deposits was the direct result of the 45 basis point decrease in the cost offunds from 1.98% for the three months ended September 30, 2002, to 1.54%for the same period in 2003.

 

Managementregularly performs an analysis to identify the inherent risk of loss in itsloan portfolio.  This analysis includesevaluation of concentrations of credit, past loss experience, current economicconditions, amount and composition of the loan portfolio (including loans beingspecifically monitored by management), estimated fair value of underlying collateral,loan commitments outstanding, delinquencies, and other factors.  Based on this analysis, managementestablished an allowance for loan losses. The allowance for loan losses is adjusted periodically by a provisionfor loan losses, which is charged to operations based on management’sevaluation of the probable losses that may be incurred in the Bank’sportfolio.  The provision for loanlosses decreased by $60,000 for the three months ended September 30,2003, as compared to the same three months ended September 30, 2002, as aresult of such an analysis by management.

 

The Bank will continue to monitorits allowance for loan losses and make future additions to the allowancethrough the provision for loan losses as economic conditions dictate.  Although the Bank maintains its allowance forloan losses at a level that it considers to be adequate to provide for theinherent risk of loss in its loan portfolio, there can be no assurance thatfuture losses will not exceed estimated amounts or that additional provisionsfor loan losses will not be required in future periods.  In addition, the Bank’s determination as tothe amount of its allowance for loan losses is subject to review by regulators,as part of their examination process, which may result in the establishment ofan additional allowance based on the judgment of the regulators after a reviewof the information available at the time

 

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of theirexamination.  In addition, the Company’sindependent accountants reviewed the allowance as part of their audit.

 

Noninterestincome increased by $60,000, or 31%, to $252,000 for the three-month periodended September 30, 2003, from $192,000 for the same period in 2002 due toan increase in service charge income and other operating income.  The increase in service charge income was thedirect result of a fee increase instituted in 2003.

 

Noninterest expense decreased by$21,000, or 2%, from $1,108,000 for the three months ended September 30,2002, to $1,087,000 in September 30, 2003. Compensation and employee benefits, the largest component ofnon-interest expense, remained the same for the three months ended September 30,2003, compared to the same three months ended September 30, 2002.

 

Incometax expense increased by $2,000, or 1%, from $327,000 for the three monthsended September 30, 2002, to $329,000 for the three months ended September 30,2003.

 

**Comparisonof Results of Operations for the Nine Months ended September 30, 2003 and2002**

 

The Company reported net income of $1,513,000for the nine months ended September 30, 2003, compared to $1,603,000 forthe nine months ended September 30, 2002, representing a 5.6% decrease or$90,000.  The primary component, netinterest income, for the nine-month period ended September 30, 2003, was$5,014,000, a decrease of $536,000, or 9.6%, as compared to $5,550,000 for thethird quarter of 2002.  The decreasepoints out the decline in interest rates over the two periods.  Management continues to actively monitorinterest rate risk using asset and liability management techniques.  Net interest margins for the three monthsended September 30, 2003 and 2002 were 3.04% and 3.42%, respectively.

 

Interest income amounted to$6,616,000 at September 30, 2003, a decrease of $1,067,000, from$7,683,000 for the same nine-month period of 2002.  Interest income reflected a weighted-averageyield of 5.34% for the quarter ended September 30, 2003, compared to 6.32%for the same nine-month period in 2002. Average interest earning assets were $165,042,000 and $162,109,000during the three months ended September 30, 2003 and 2002, respectively.

 

Interest expense decreasedto $1,602,000 for the quarter ended September 30, 2003, or $531,000, from$2,133,000 for the nine-month period ended September 30, 2002.  This reflected an average cost of funds of1.25% and 1.68% respectively, for the nine-month periods ended September 30,2003 and 2002.  Average interest bearingliabilities were $126,399,000 and $124,457,000 during the nine months ended September 30,2003 and 2002, respectively.

 

The provisions for loanlosses amounted to $3,000 and $180,000 for the nine-month periods ended September 30,2003 and 2002, respectively.  Thedecreased provision resulted primarily from successful collection activity andslower loan growth.

 

Earnings perweighted-average common share, for the nine-month periods ended September 30,2003 and 2002, were $2.15 and $2.24, respectively.  Earnings through September 30, 2003,reflect an annualized return on average assets (ROAA) of 1.16% compared to1.24% for the period ended September 30, 2002.  Also, these earnings reflect an annualizedreturn on average equity (ROAE) of 11.54% and 12.29%, respectively, for theperiods ending September 30, 2003 and 2002.  Dividends for the nine months ended September 30,2003, increased to $1.06 per share, or 2.9%, from $1.03 per share paid for thesame period in 2002.

 

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FINANCIAL CONDITION ANDASSET QUALITY

 

Total assets at September 30,2003, were approximately $178,749,000 as compared to approximately $169,330,000at December 31, 2002, or an increase of $9,419,000, or 5.6%.  The loan portfolio decreased by $5,915,000 atSeptember 30, 2003, or 5.5%, during this nine-month period, from $107,933,000at December 31, 2002.  As theeconomy began to show signs of improvement during the first quarter, loandemand began to improve.  However,management continues to adhere to its policy of not extending long-term fixedrate financing in this low interest rate environment.  By investing short-term, management believesit is better positioned to manage the interest margin as interest rates arebeginning to increase.  The investmentportfolio increased by $10,483,000, or 25.38% duringthis same period; at the same time, federal funds sold increased$4,300,000.  Total deposits increased by$7,317,000 to $157,391,000 at September 30, 2003, from $150,074,000 at December 31,2002.  Although deposits increased bynearly 5%, pricing for deposits is very competitive in the Company’s primarytrade areas among banks and other nontraditional financial service providers,indicating future pressure on the Company’s net interest income.  Management believes that the deposit growthis attributable to the Bank’s service delivery as its deposit rates are in linewith those of competing institutions.

 

The continuing stagnation inthe local and national economies places ongoing emphasis on the Company’smethodology in determining the adequacy of the allowance for loan losses.  The Company periodically evaluates theadequacy of the allowance for loan losses in order to maintain the allowance ata level that is sufficient to absorb probable credit losses.  This evaluation is based on a review of theCompany’s historical loss experience, known and inherent risks in the loanportfolio, including adverse circumstances that may affect the ability of theborrower to repay interest and/or principal, the estimated value of collateral,and an analysis of the levels and trends of delinquencies, charge-offs, and therisk ratings of the various loan categories. Such factors as the level and trend of interest rates and the conditionof the national and local economies are also considered.  As a result of management’s analysis of theallowance for loan losses, at September 30, 2003, and December 31,2002, the allowance for loan losses was $1,567,000 and $1,619,000,respectively.  This resulted in the ratioof the allowance for loan losses to total loans increased slightly from 1.50%at September 30, 2003, compared to 1.53% at September 30, 2003.  Estimates may change at some point in thefuture.

 

Financial instrumentsinclude commitments to extend credit and standby letters of credit.  These commitments include standby letters ofcredit of approximately $1,102,000 at September 30, 2003, and $802,000 at December 31,2002.  These instruments contain variouselements of credit and interest rate risk in excess of the amount recognized inthe consolidated statements of financial condition.  Additionally, certain off-balance-sheet itemsof approximately $12,582,000 at September 30, 2003, and $11,061.00 at December 31,2002, were comprised primarily of unfunded loan commitments.

 

LIQUIDITY AND CAPITALRESOURCES

 

Liquidity management involves the ability tomeet the cash flow requirements of depositors wanting to withdraw funds orborrowers needing assurance that sufficient funds will be available to meettheir credit needs.  Liquidity can bestbe demonstrated by an analysis of the Company’s cash flows.  The primary source of cash flows for theCompany is operating activities. Operating activities provided $1,537,000 of liquidity for the nine-monthperiod ended September 30, 2003, compared to $1,249,000 for the same ninemonths in 2002.  The principal elementsof these operating flows are net income, increased for significant non-cashexpenses and depreciation and amortization. A secondary source of liquidity for the Company comes from investingactivities, principally the maturities of investment securities.  For the nine-month periods ended September 30,2003 and 2002, due to the low interest rate environment, maturities and callsof investment securities amounted to $45,332,000 and $20,820,000,respectively.  As of September 30,2003, the Company had approximately $18,149,000 of investment securities thatmature within 12

 

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months. Interest rates are beginning to stabilize and the rapidity of calls ininvestment securities is expected to decline. Relatively flat loan demand resulted in a net decrease in loans of$5,915,000 for the first nine months of 2003 following a decline of $4,188,000for the same period in 2002.  Thesedecreases in loans are consistent with management’s strategy of investing short-termand not competing for fixed rate loans.

 

This report may containcertain forward-looking statements, including certain plans, expectations,goals and projections, which are subject to numerous assumptions, risks anduncertainties.  Actual results coulddiffer materially from those contained in or implied by such statements for avariety of factors including: changes in economic conditions which may affectthe Company’s primary market area; rapid movements in interest rates;competitive pressures on product pricing and services; success and timing ofbusiness strategies; the nature and extent of government actions and reforms;and rapidly changing technology and evolving financial industry standards.

 

**ITEM 3 - QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Asset and liabilitymanagement is responsible for the planning, implementation, and control processfor determining asset mix and maturity features relative to liabilitymaturities in such a way that net interest margin will be maximized.  A major tool for such a process is gapmanagement of the Company’s interest sensitive assets to interest sensitiveliabilities.

 

The negative gap position aspresented in the following table for maturities of one year or less is offsetby the substantial positive gap position for maturities greater than oneyear.  The earnings of the Company aresufficient to withstand the short-term negative gap position.  Should a large fluctuation occur, increasingthe costs of funds, management would consider increasing service charges andnon-interest fees which management determines the market would bear in order tonegate increased rate costs.  Anadditional response, at the option of management, would be liquidation of certainlong-term investments, and conversion of those funds into short-termsecurities.

 

The Company’s managementrecognized the concentration of large certificates of deposit.  The Company’s policy of asset-liabilitymanagement matches both rates and maturities so the Company will not have aliquidity problem or allow income to be affected by a change in rates.

 

All demand and savingsdeposits are considered highly volatile, although experience has shown theseaccounts to be stable regardless of economic cycles.  Interest on savings and other transactionalaccounts have generally remained constant over periods of interest ratechanges.  Therefore, deposits and savingsare classified as “over one year” to represent a more realistic rate sensitivegap.

 

Management believes therehas been no material change to either the interest rate risk or material marketrisk since December 31, 2002.

 

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INTEREST RATE SENSITIVE ANALYSIS TABLE

 

(In Thousands of Dollars)
| **As of December 31, 2002**                                          | ** ** | **0-90** | ** ** | **91-180** | ** ** | **181-365** | ** ** | **Total  One  Year** | ** ** | **Over  One  Year** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------|------------|----------|------------|------------|------------|-------------|------------|----------------------|------------|---------------------|------------|-----------|------------|
| Earning  Assets                                                           |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Loans                                                                     |       | $        | 6,557      |       | $          | 5,576       |       | $                    | 21,299     |                | $          | 33,432    |       | $ | 74,501 |   | $ | 107,933 |   |
| Investments                                                               |       | 4,003    |       | 2,021      |       | 8,009       |       | 14,033               |       | 26,734              |       | 40,767    |       |
| Federal  Funds Sold                                                       |       | 11,370   |       | 0          |       | 0           |       | 11,370               |       | 0                   |       | 11,370    |       |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Total  Earning Assets                                                     |       | 21,930   |       | 7,597      |       | 29,308      |       | 58,835               |       | 101,235             |       | 160,070   |       |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Interest  Bearing Liabilities                                             |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Demand  Deposits                                                          |       | 21,851   |       | 0          |       | 0           |       | 21,851               |       | 0                   |       | 21,851    |       |
| Savings                                                                   |       | 12,653   |       | 10,062     |       | 22,149      |       | 44,864               |       | 0                   |       | 44,864    |       |
| CD’s of  $100,000 and Over                                           |       | 2,730    |       | 2,604      |       | 4,251       |       | 9,585                |       | 7,282               |       | 16,867    |       |
| Other Time                                                                |       | 5,413    |       | 6,338      |       | 11,093      |       | 22,844               |       | 13,537              |       | 36,381    |       |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Total  Interest Bearing Liability                                         |       | 42,647   |       | 19,004     |       | 37,493      |       | 99,144               |       | 20,819              |       | 119,963   |       |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Interest  Sensitivity Gap                                                 |       | $        | (20,717    | )          | $          | (11,407     | )          | $                    | (8,185     | )                   | $          | (40,309   | )          | $ | 80,416 |   | $ | 40,107 |   |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Cumulative  Gap                                                           |       | $        | (20,717    | )          | $          | 32,124      |       | $                    | (40,309    | )                   | $          | (40,309   | )          | $ | 40,107 |   | $ | 40,107 |   |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Rate  Sensitive Assets/Rate Sensitive Liabilities (Cumulative Percentage) |       | 51.14    | %          | 47.89      | %          | 59.34       | %          | 59.34                | %          | 133.43              | %          | 133.43    | %          |

 

**ITEM 4 - CONTROLS ANDPROCEDURES**

 

Evaluation of disclosure controls andprocedures:

 

As of the end of the periodcovered by this report, the Company’s Chief Executive Officer and ChiefFinancial Officer evaluated the effectiveness of the Company’s disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)).  Based on their evaluation,the Chief Executive Officer and Chief Financial Officer concluded that theCompany’s disclosure controls and procedures (i) enable the Company to record,process, summarize and report in a timely manner the information that theCompany is required to disclose in its Exchange Act reports, and (ii) aredesigned with the objective of ensuring that such information is accumulatedand communicated to management, including the Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regardingdisclosure.

 

Changes in internalcontrols:

 

There were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of the evaluation referredto above.

 

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 

(a) Exhibits requiredby Item 601 of Regulation S-K :

 

(31) Rule 13a-14(a)/15d-14(a)Certifications

 

Certificationas Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 byChief Executive Officer

 

Certificationas Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 byChief Financial Officer

 

(32) Section 1350 Certifications

 

CertificationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer

 

CertificationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer

 

(b) Reports on Form 8-K

 

None

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized. 

 

 
|                         | LOGAN COUNTY BANCSHARES, INC.             |
|------------------------------|-------------------------------------------|
|                         | (Registrant)                              |
|                         |                                      |
| Date: November 24, 2004 | /s/ Eddie Canterbury                      |   |
|                         | Eddie Canterbury  Chief Executive Officer |
|                         |                                      |
| Date: November 24, 2004 | /s/ Mark Mareske                          |   |
|                         | Mark Mareske  Chief Financial Officer     |

 

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**EXHIBITINDEX**

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                               |
|-------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |       |                                                                                                                                                          |
| 31.1                    |       | Certification as Adopted Pursuant to Section 302(a) of the  Sarbanes-Oxley Act of 2002 by Chief Executive Officer                                        |
|                    |       |                                                                                                                                                          |
| 31.2                    |       | Certification as Adopted Pursuant to Section 302(a) of the  Sarbanes-Oxley Act of 2002 by Chief Financial Officer                                        |
|                    |       |                                                                                                                                                          |
| 32.1                    |       | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief  Executive Officer |
|                    |       |                                                                                                                                                          |
| 32.2                    |       | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief  Financial Officer |

 

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