**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q/A**

 

**Amendment No. 1**

 

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

 

**For the quarterly period ended:**

 

**September 30, 2002**

 

**Commission File Number:  2-95114**

 

**LOGAN COUNTY BANCSHARES, INC.**

(Exact name of Registrant as specified 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 by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.                                  Yes   ý          No   o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).                                                                                                                                                                              Yes   o         No   ý

 

Indicate the number of shares outstanding of each of the registrant’sclasses of common stock as of the latest practicable date:

Class Outstanding at February 28, 2005

 
| 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, 2002 (unaudited) and December 31, 2001                                                       |   |
|                                     |                                                                                                                                          |   |
|                                     | Consolidated  Statements of Income for the Nine-Month Periods Ended September 30, 2002  and 2001 (unaudited)                             |   |
|                                     |                                                                                                                                          |   |
|                                     | Consolidated  Statements of Income for the Three-Month Periods Ended September 30,  2002 and 2001 (unaudited)                            |   |
|                                     |                                                                                                                                          |   |
|                                     | Consolidated  Statement of Changes in Stockholders’ Equity for the Nine-Month Period Ended September 30,  2002 and 2001 (unaudited) |   |
|                                     |                                                                                                                                          |   |
|                                     | Consolidated  Statements of Cash Flows for the Nine-Month Periods Ended September 30,  2002 and 2001                                     |   |
|                                     |                                                                                                                                          |   |
|                                     | 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                                                                    |   |
|                                     |                                                                                                                                          |   |
|                                     |                                                                                                                                          |   |
| PART II – OTHER  INFORMATION   |                                                                                                                                          |   |
|                                     |                                                                                                                                          |   |
| ITEM  1.                                 | LEGAL PROCEEDINGS                                                                                                                             | None   |
|                                     |                                                                                                                                          |   |
| ITEM  2.                                 | UNREGISTERED SALES OF  EQUITY SECURITIES                                                                                                      | None   |
|                                     |                                                                                                                                          |   |
| ITEM  3.                                 | DEFAULTS UPON SENIOR  SECURITIES                                                                                                              | None   |
|                                     |                                                                                                                                          |   |
| ITEM  4.                                 | SUBMISSION OF MATTERS TO A  VOTE OF SECURITY HOLDERS                                                                                          | None   |
|                                     |                                                                                                                                          |   |
| ITEM  5.                                 | OTHER INFORMATION                                                                                                                             | None   |
|                                          |                                                                                                                                               |        |  |

 

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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**EXPLANATORY NOTE**

 

ThisAmendment No. 1 on Form 10-Q/A amends the Company’s 10-Q for theperiod ending September 30, 2002, by adding Item 3, which was notpreviously addressed in the Company’s 10-Q for the period ending September 30,2002, and making additional disclosures in Management’s Discussion and Analysisof Financial Condition and Results of Operation in Item 2.

 

Asdisclosed on Form 8-K filed with the Securities and Exchange Commission(the “Commission”) on July 23, 2004, Logan County BancShares, Inc. (the“Company”), working with its outside auditors and specially retained securitiescounsel, learned that it was subject to the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”).  The addition of Items 3 and 4 and theadditional disclosures in Management’s Discussion and Analysis of FinancialCondition and Results of Operation in Item 2 were made to bring the 10-Q intocompliance with Sarbanes-Oxley.  

 

ThisAmendment No. 1 on Form 10-Q/A also revises the consolidated balancesheet to eliminate intercompany balances, restates the consolidated statementof cash flows to reflect federal funds sold as cash equivalents and makes otherrevisions in format to conform to standard presentation for financialinstitutions.  As disclosed on Form 8-Kfiled with the Commission on August 4, 2004, the Company was informed byits independent auditor, McNeal, Williamson & Co. (“McNeal Williamson”)that McNeal Williamson was no longer permitted to issue audit reports for theCompany and was no longer permitted to perform interim reviews in accordancewith SAS 100 for the Company as a result of McNeal Williamson’s failure toregister with the Public 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 interimperiods that were reviewed by McNeal Williamson after the adoption ofSarbanes-Oxley; (ii) re-audit the financial statements for the periodended December 31, 2003; and (iii) review the audit for the periodended December 31, 2002.  As aresult of S. R. Snodgrass, A.C.’s re-audit of 2003, certain adjustments to 2002financial information were made as discussed in Note 3 to the unauditedfinancial statements herein.  McNealWilliamson concurred with the adjustments.

 

1

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**PART 1**

 

**ITEM 1 – FINANCIALINFORMATION**

 

**LoganCounty BancShares, Inc. and Subsidiary**

**CONSOLIDATED STATEMENT OF CONDITION**

**(InThousands)**

 
| ** **                                                                          | ** ** | **September 30,  2002** | ** ** | **December 31,  2001** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                          | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                          |       |                         |       |                        |       |
| **CASH AND CASH EQUIVALENTS**                                                       |       |                         |       |                        |       |
| Cash and due from banks                                                             |       | $                            | 6,604      |                        | $          | 7,072 |   |
| Federal funds sold                                                                  |       | 8,860                        |       | 7,150                       |       |
| Total cash and cash equivalents                                                     |       | 15,464                       |       | 14,222                      |       |
|                                                                                |       |                         |       |                        |       |
| **INVESTMENT SECURITIES**                                                           |       |                         |       |                        |       |
| Available-for-sale                                                                  |       | 46,433                       |       | 36,335                      |       |
|                                                                                |       |                         |       |                        |       |
| **LOANS**                                                                           |       | 108,532                      |       | 116,908                     |       |
| Allowance for loan losses                                                           |       | (1,293                       | )          | (1,153                      | )          |
| Net loans                                                                           |       | 107,239                      |       | 115,755                     |       |
|                                                                                |       |                         |       |                        |       |
| **BANK PREMISES AND EQUIPMENT**                                                     |       | 3,231                        |       | 3,384                       |       |
| ** **                                                                          |       |                         |       |                        |       |
| **ACCRUED INTEREST AND OTHER ASSETS**                                               |       | 1,614                        |       | 1,883                       |       |
| ** **                                                                          |       |                         |       |                        |       |
| **TOTAL ASSETS**                                                                    |       | $                            | 173,981    |                        | $          | 171,579 |   |
|                                                                                |       |                         |       |                        |       |
| **LIABILITIES**                                                                     |       |                         |       |                        |       |
| **DEPOSITS**                                                                        |       |                         |       |                        |       |
| Non-interest                                                                        |       | $                            | 24,366     |                        | $          | 27,571 |   |
| Interest-bearing                                                                    |       | 24,827                       |       | 21,371                      |       |
| Savings                                                                             |       | 42,786                       |       | 39,804                      |       |
| Time                                                                                |       | 60,134                       |       | 63,282                      |       |
| **TOTAL DEPOSITS**                                                                  |       | 152,113                      |       | 152,028                     |       |
| ** **                                                                          |       |                         |       |                        |       |
| Securities repurchase agreements                                                    |       | 3,000                        |       | 2,000                       |       |
|                                                                                |       |                         |       |                        |       |
| Accrued interest and other liabilities                                              |       | 514                          |       | 653                         |       |
|                                                                                |       |                         |       |                        |       |
| **INCOME TAXES PAYABLE**                                                            |       |                         |       |                        |       |
| Current                                                                             |       | 15                           |       | (18                         | )          |
| Deferred                                                                            |       | 369                          |       | 116                         |       |
| **TOTAL LIABILITIES**                                                               |       | 156,011                      |       | 154,779                     |       |
| ** **                                                                          |       |                         |       |                        |       |
| **STOCKHOLDERS’  EQUITY**                                                      |       |                         |       |                        |       |
|                                                                                |       |                         |       |                        |       |
| Common stock - 780,000 shares authorized at $1.67 per value; 716,991  shares issued |       | 1,300                        |       | 1,300                       |       |
| Treasury Stock - 63,000 shares at cost                                              |       | (860                         | )          | (860                        | )          |
| Surplus                                                                             |       | 2,408                        |       | 2,408                       |       |
| Retained earnings                                                                   |       | 14,750                       |       | 13,917                      |       |
| Accumulated other comprehensive income                                              |       | 372                          |       | 35                          |       |
| Total stockholders’ equity                                                     |       | 17,970                       |       | 16,800                      |       |
|                                                                                |       |                         |       |                        |       |
| Total liabilities and stockholders’ equity                                     |       | $                            | 173,981    |                        | $          | 171,579 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

2

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**LoganCounty BancShares, Inc. and Subsidiary**

**CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)**

**For theNine Month Periods Ended September 30, 2002 and 2001**

**(InThousands)**

 
| ** **                                          | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                          | ** ** | **2002**                                  | ** ** | **2001** | ** ** |
| **INTEREST INCOME**                                 |       |                                      |       |   |   |
| Interest and fees on loans - taxable                |       | $                                         | 6,491      |   | $ | 7,667 |   |
| Investment securities:                              |       |                                      |       |   |   |
| Available-for-sale                                  |       | 1,039                                     |       | 1,033 |   |
| Interest on federal funds sold                      |       | 153                                       |       | 652 |   |
| Total interest income                               |       | 7,683                                     |       | 9,352 |   |
|                                                |       |                                      |       |   |   |
| **INTEREST EXPENSE**                                |       |                                      |       |   |   |
| Deposits                                            |       | 2,013                                     |       | 3,775 |   |
| Other borrowings                                    |       | 120                                       |       | 105 |   |
| Total interest expense                              |       | 2,133                                     |       | 3,880 |   |
|                                                |       |                                      |       |   |   |
| Net interest income                                 |       | 5,550                                     |       | 5,472 |   |
|                                                |       |                                      |       |   |   |
| **PROVISION FOR LOAN LOSSES**                       |       | 180                                       |       | 170 |   |
| Net interest income after provision for loan losses |       | 5,370                                     |       | 5,302 |   |
|                                                |       |                                      |       |   |   |
| **NON-INTEREST INCOME**                             |       |                                      |       |   |   |
| Service charges and other fees                      |       | 486                                       |       | 460 |   |
| Other operating income                              |       | 84                                        |       | 75 |   |
| Total non-interest income                           |       | 570                                       |       | 535 |   |
|                                                |       |                                      |       |   |   |
| **NON-INTEREST EXPENSES**                           |       |                                      |       |   |   |
| Salary and benefits                                 |       | 1,696                                     |       | 1,598 |   |
| Expense of bank premises and equipment              |       | 440                                       |       | 432 |   |
| Other operating expenses                            |       | 1,220                                     |       | 1,393 |   |
| Total non-interest expense                          |       | 3,356                                     |       | 3,423 |   |
|                                                |       |                                      |       |   |   |
| Income before income taxes                          |       | 2,584                                     |       | 2,414 |   |
|                                                |       |                                      |       |   |   |
| **INCOME TAXES**                                    |       | 981                                       |       | 899 |   |
|                                                |       |                                      |       |   |   |
| **NET INCOME**                                      |       | $                                         | 1,603      |   | $ | 1,515 |   |
|                                                |       |                                      |       |   |   |
| **WEIGHTED-AVERAGE SHARES OUTSTANDING**             |       | 716,991                                   |       | 716,991 |   |
|                                                |       |                                      |       |   |   |
| **EARNINGS PER COMMON SHARE**                       |       | $                                         | 2.24       |   | $ | 2.11 |   |

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

3

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**LoganCounty BancShares, Inc. and Subsidiary**

**CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)**

**For theThree Month Periods Ended September 2002 and 2001**

**(InThousands)**

 
| ** **                                          | ** ** | **Three Months Ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                          | ** ** | **2002**                                   | ** ** | **2001** | ** ** |
| **INTEREST INCOME**                                 |       |                                       |       |   |   |
| Interest and fees on loans - taxable                |       | $                                          | 2,124      |   | $ | 2,448 |   |
| Investment securities:                              |       |                                       |       |   |   |
| Available-for-sale                                  |       | 343                                        |       | 243 |   |
| Interest on federal funds sold                      |       | 53                                         |       | 270 |   |
| Total interest income                               |       | 2,520                                      |       | 2,961 |   |
|                                                |       |                                       |       |   |   |
| **INTEREST EXPENSE**                                |       |                                       |       |   |   |
| Deposits                                            |       | 634                                        |       | 1,209 |   |
| Other borrowings                                    |       | 41                                         |       | 36 |   |
| Total interest expense                              |       | 675                                        |       | 1,245 |   |
|                                                |       |                                       |       |   |   |
| Net interest income                                 |       | 1,845                                      |       | 1,716 |   |
|                                                |       |                                       |       |   |   |
| **PROVISION FOR LOAN LOSSES**                       |       | 60                                         |       | 30 |   |
| Net interest income after provision for loan losses |       | 1,785                                      |       | 1,686 |   |
|                                                |       |                                       |       |   |   |
| **NON-INTEREST INCOME**                             |       |                                       |       |   |   |
| Service charges and other fees                      |       | 174                                        |       | 142 |   |
| Other operating income                              |       | 18                                         |       | 34 |   |
| Total non-interest income                           |       | 192                                        |       | 176 |   |
|                                                |       |                                       |       |   |   |
| **NON-INTEREST EXPENSES**                           |       |                                       |       |   |   |
| Salaries and benefits                               |       | 561                                        |       | 558 |   |
| Expense of bank premises and equipment              |       | 150                                        |       | 147 |   |
| Other operating expenses                            |       | 397                                        |       | 415 |   |
| Total non-interest expenses                         |       | 1,108                                      |       | 1,120 |   |
|                                                |       |                                       |       |   |   |
| Income before income taxes                          |       | 869                                        |       | 742 |   |
|                                                |       |                                       |       |   |   |
| **INCOME TAXES**                                    |       | 327                                        |       | 267 |   |
|                                                |       |                                       |       |   |   |
| Net income                                          |       | $                                          | 542        |   | $ | 475 |   |
|                                                |       |                                       |       |   |   |
| **WEIGHTED-AVERAGE SHARES OUTSTANDING**             |       | 716,991                                    |       | 716,991 |   |
|                                                |       |                                       |       |   |   |
| **EARNINGS PER COMMON SHARE**                       |       | $                                          | 0.76       |   | $ | 0.67 |   |

 

The accompanying notes are an integral partof the 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** | ** ** | **Surplus** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Comprehensive  Income** | ** ** | **Treasury  Stock** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------|------------|-------------------|------------|-------------|------------|------------------------|------------|------------------------------------------------------|------------|---------------------------|------------|---------------------|------------|------------|------------|
| ** **                                                   | ** ** | ** **        | ** ** | ** **  | ** ** | ** **             | ** ** | ** **                                           | ** ** | ** **                | ** ** | ** **          | ** ** | ** ** | ** ** |
| **BALANCE DECEMBER 31, 2001**                           |       | $                 | 1,300      |        | $          | 2,408                  |       | $                                                    | 13,917     |                      | $          | 35                  |       |       |       | $ | (860 | ) | $ | 16,800 |   |
|                                                         |       |              |       |        |       |                   |       |                                                 |       |                      |       |                |       |       |       |
| Correction of an error                                       |       | —            |       | —      |       | (32                    | )          | —                                               |       |                      |       | —              |       | (32        | )          |
|                                                         |       |              |       |        |       |                   |       |                                                 |       |                      |       |                |       |       |       |
| Comprehensive Income:                                        |       |              |       |        |       |                   |       |                                                 |       |                      |       |                |       |       |       |
| Net income for the nine months ended September 30, 2002 |       | —            |       | —      |       | 1,603                  |       | —                                               |       | $                         | 1,603      |                | —     |       | 1,603      |   |
|                                                         |       |              |       |        |       |                   |       |                                                 |       |                      |       |                |       |       |       |
| Net unrealized gains on available-for-sale securities        |       | —            |       | —      |       | —                 |       | 337                                                  |       | 337                       |       | —              |       | 337        |       |
| Total comprehensive income                                   |       |              |       |        |       |                   |       |                                                 |       | 1,940                     |       |                |       |       |       |
|                                                         |       |              |       |        |       |                   |       |                                                 |       |                      |       |                |       |       |       |
| Dividends on 716,991 shares common stock @ $1.03             |       | —            |       | —      |       | (738                   | )          | —                                               |       |                      |       | —              |       | (738       | )          |
|                                                         |       |              |       |        |       |                   |       |                                                 |       |                      |       |                |       |       |       |
| **BALANCE SEPTEMBER 30, 2002**                          |       | $                 | 1,300      |        | $          | 2,408                  |       | $                                                    | 14,750     |                      | $          | 372                 |       |       |       | $ | (860 | ) | $ | 17,970 |   |
|                                                              |            |                   |            |             |            |                        |            |                                                      |            |                           |            |                     |            |            |            |  |  |  |  |  |  |  |

 

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

 

5

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**LoganCounty BancShares, Inc. and Subsidiary**

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

**(InThousands)**

 
| ** **                                                                               | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                               | ** ** | **2002**                                  | ** ** | **2001** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                                 |       |                                      |       |   |   |
| Net income                                                                               |       | $                                         | 1,603      |   | $ | 1,515 |   |
| Adjustments to reconcile net income to net cash  provided  by operating activities: |       |                                      |       |   |   |
| Depreciation                                                                             |       | 201                                       |       | 200 |   |
| Deferred tax on investments                                                              |       | (254                                      | )          | — |   |
| Premium amortization and accretion on investment securities                              |       | (3                                        | )          | (3 | ) |
| Provision for loan losses                                                                |       | 180                                       |       | 170 |   |
| (Increase) decrease in interest receivable and other assets                              |       | 237                                       |       | 784 |   |
| Increase (decrease) in interest payable and other liabilities                            |       | 147                                       |       | (112 | ) |
| Net cash provided by operating activities                                                |       | 2,111                                     |       | 2,554 |   |
|                                                                                     |       |                                      |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                                 |       |                                      |       |   |   |
| Proceeds from sales of securities available-for-sale                                     |       | 20,820                                    |       | 34,900 |   |
| Proceeds from maturities of securities available-for-sale                                |       | 4,487                                     |       | 7,400 |   |
| Purchases of securities available-for-sale                                               |       | (34,811                                   | )          | (33,435 | ) |
| Net (increase) decrease in loans                                                         |       | 8,336                                     |       | (1,850 | ) |
| Purchase of bank premises and equipment                                                  |       | (48                                       | )          | (39 | ) |
| Net cash used in investing activities                                                    |       | (1,216                                    | )          | 6,976 |   |
|                                                                                     |       |                                      |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                                 |       |                                      |       |   |   |
| Net increase in demand deposits                                                          |       | 251                                       |       | 9,266 |   |
| Net increase in savings deposits                                                         |       | 2,982                                     |       | 5,634 |   |
| Net increase (decrease) in time deposits                                                 |       | (3,148                                    | )          | 616 |   |
| Net increase in Federal Funds purchased/repurchased                                      |       | 1,000                                     |       | — |   |
| Dividends paid                                                                           |       | (738                                      | )          | (724 | ) |
| Net cash provided by financing activities                                                |       | 347                                       |       | 14,792 |   |
|                                                                                     |       |                                      |       |   |   |
| **NET INCREASE IN CASH AND  CASH  EQUIVALENTS**                                     |       | 1,242                                     |       | 24,322 |   |
| ** **                                                                               |       |                                      |       |   |   |
| **CASH AND CASH EQUIVALENTS,  BEGINNING  OF PERIOD**                                |       | 14,222                                    |       | 8,966 |   |
| ** **                                                                               |       |                                      |       |   |   |
| **CASH AND CASH EQUIVALENTS,  END  OF PERIOD**                                      |       | $                                         | 15,464     |   | $ | 33,288 |   |
| ** **                                                                               |       |                                      |       |   |   |
| **Supplemental Disclosures:**                                                            |       |                                      |       |   |   |
| Cash paid for interest                                                                   |       | $                                         | 2,184,185  |   | $ | 3,988,513 |   |
| Cash paid for income taxes                                                               |       | $                                         | 693,183    |   | $ | 799,983 |   |

 

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

 

6

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**LOGANCOUNTY BANCSHARES, INC. AND SUBSIDIARIES**

**Notesto Consolidated Financial Statements (Unaudited)**

 

**NOTE 1 - CRITICAL ACCOUNTINGPOLICIES**

 

The accounting and reporting policies of LoganCounty BancShares, Inc. and subsidiary (the “Company”) and its subsidiarywere prepared in accordance with accounting principles generally accepted inthe United States of America, (“US GAAP”) and to general practices within thefinancial services industry.  Thepreparation of financial statements in conformity with US GAAP requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes.  Actual results could differ from thoseestimates.  Management has identified theaccounting policies described below as those that, due to the judgments,estimates and assumptions inherent in those policies, are critical to anunderstanding of the Company’s consolidated financial statements and management’sdiscussion and analysis. 

 

The consolidated financial statements of theCompany include its wholly-owned subsidiary, Logan Bank and Trust (the “Bank”).  All significant intercompany balances andtransactions have been eliminated.

 

The accompanying unaudited consolidatedfinancial statements have been prepared in accordance with the instructions to Form 10-Qand Article 10 of Regulation X and, therefore, do not necessarily includeall information that would be included in audited financial statements requiredby U. S. GAAP.  The informationfurnished reflects all adjustments which are, in the opinion of management,necessary for a fair statement of the results of operations.  All such adjustments are of a normal recurringnature.  The results of operations forthe interim periods may not necessarily be indicative of the results to beexpected for the fiscal year ended December 31, 2002.

 

These statements should be read inconjunction with the audited consolidated statements as of and for the fiscalyear ended December 31, 2001, and related notes which are included in theCompany’s Annual Report on Form 10-K (file no. 2-95114).

 

**Income Recognition**

 

The Company recognizes interest income by methodsconforming to U. S. GAAP that include general accounting practices withinthe financial services industry. 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 allor a portion of contractual interest on a loan has become doubtful, whichgenerally occurs after the loan is 90 days past due, the accrual of interest isdiscontinued.  In addition, previouslyaccrued interest deemed uncollectible that was recognized in income isreversed.  Interest received on nonaccrualloans is included in income only if principal recovery is reasonablyassured.  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, is well secured, andthe collectibility of the total contractual principal and interest is no longerdoubtful. 

 

**Allowance for Loan Losses******

 

In general, determining the amount of the allowancefor loan losses requires significant judgment and the use of estimates bymanagement.  The Company maintains anallowance for loan losses to absorb probable losses in the loan portfolio basedon a quarterly analysis of the portfolio. This formal analysis 

 

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determines an appropriate level and allocation ofthe allowance for loan losses among loan types and resulting provision for loanlosses by considering factors affecting loan losses, including specific losses,levels and trends in impaired and nonperforming loans, historical loan lossexperience, current national and local economic conditions, volume, growth andcomposition of the portfolio, regulatory guidance and other relevantfactors.  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.  The internal loan review function providesfor an independent review to evaluate the adequacy of the allowance.  The provision could increase or decrease eachquarter based upon the results of management’s formal analysis.  In addition, adequacy of the allowance isreviewed on a regular basis by the Bank’s primary regulator and by the Company’sindependent accountants.

 

The amount of the allowance for loan losses for thevarious loan types represents management’s estimate of expected losses fromexisting loans based upon specific allocations for individual lendingrelationships and historical loss experience for each category of homogeneousloans.  Impaired loans are commercial andcommercial real estate loans for which it is probable the Company will not beable to collect all amounts due according to the contractual terms of the loanagreement.  The Company individuallyevaluates such loans for impairment and does not aggregate these loans by majorrisk classifications.  The definition of “impairedloans” is not the same as the definition of “nonaccrual loans,” although thetwo categories overlap.  The Company maychoose to place a loan on nonaccrual status due to payment delinquency oruncertain collectibility while not classifying the loan as impaired, providedthe loan is not a commercial or commercial real estate classification.  Factors considered by management in determiningimpairment include payment status and collateral value.  The amount of impairment for these types ofloans is determined by the difference between the present value of the expectedcash flows related to the loan, using the original loan interest rate, and itsrecorded 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 isprobable, impairment is measured based on the fair value of thecollateral.  While allocations are madeto specific loans and pools of loans, the allowance is available for all loanlosses. 

 

Mortgage loans secured by one-to-four familyproperties and all consumer loans are large groups of smaller-balancehomogeneous loans and are measured for impairment collectively based onhistorical experience of the group. Loans that experience insignificant payment delays, which are defined as90 days or less past due, generally are not classified as impaired.  Management determines the significance ofpayment delays on a case-by-case basis taking into consideration allcircumstances concerning the loan, the credit worthiness and payment history ofthe borrower, the length of the payment delay, and the amount of shortfall inrelation to the principal and interest owed. 

 

Individual loan reviews are based upon specificquantitative and qualitative criteria, including the size of the loan, loanquality ratings, value of collateral, repayment ability of borrowers, andhistorical experience factors.  The historicalexperience factors utilized for individual loan reviews are based upon pastloss experience, known trends in losses and delinquencies, the growth of loansin particular markets and industries, and known changes in economic conditionsin the particular lending markets. Allowances for homogeneous loans (such as residential mortgage loans,personal loans, etc.) are evaluated based upon historical loss experience,trends in losses and delinquencies, growth of loans in particular markets, andknown changes in economic conditions in each lending market.  There can be no assurance the allowance forloan losses will be adequate to cover all losses, but management believes theallowance for loan losses in the amount of $1,293,000 at September 30,2002, was adequate to provide for probable losses from existing loans based oninformation currently available.  Whilemanagement uses available information to provide for loan losses, the ultimatecollectibility of a substantial portion of the loan portfolio and the need forfuture additions to the allowance will be based on changes in economicconditions and other relevant factors. As such, an adverse change in economic activity could reduce cash flowsfor both 

 

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commercial and individual borrowers, which couldcause the Company to experience increases in problem assets, delinquencies, andlosses on loans. 

 

**Investment Securities**

 

Investment securities are classified at the time ofpurchase, based on management’s intention and ability, as securitiesavailable-for-sale or held-to-maturity. All debt and equity securities have been classified asavailable-for-sale to serve principally as a source of liquidity.  Until realized, unrealized holding gains andlosses for available-for-sale securities are reported as a separate componentof 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 ofavailable-for-sale securities are not recognized in earnings, a decline in fairvalue below amortized cost deemed to be other-than-temporary results in anadjustment to the cost basis of the investment, with a corresponding losscharged against earnings.  Managementevaluates the investment securities for other-than-temporary declines inestimated fair value on a quarterly basis. This analysis requires management to consider various factors in orderto determine if a decline in estimated fair value is temporary orother-than-temporary.  These factorsinclude duration and magnitude of the decline in value, expectations aboutmarket interest rates, the financial condition of the issuer, and the company’sability and intent to continue holding the investment for a period of timesufficient to allow for any anticipated recovery in market value.  At September 30, 2002, there were noinvestment securities identified by management to be other-than-temporarilyimpaired.  If investments decline in fairvalue due to adverse changes in the financial markets, charges to income couldoccur in future periods unless the investments are held to maturity. 

 

**Income Taxes**

 

The Company and its subsidiary file consolidatedfederal and state income tax returns. Deferred tax assets and liabilities are reflected at currently enactedincome tax rates applicable to the period in which the deferred tax assets andliabilities are expected to be realized or settled.  As changes in tax laws or rates are enacted,deferred tax assets and liabilities are adjusted through the provision forincome taxes. Deferred income tax expenses or benefits are based on the changesin the deferred tax asset or liability from period to period.  The provision for income taxes during thecurrent period is at a rate which management believes will approximate theeffective rate for the year. 

 

**Cash Flows**

 

Cash and cash equivalents consist of cash and duefrom banks and federal funds sold. 

 

**EarningsPer Share**

 

The Company currently maintains a simple capital structure; thus, thereare no dilutive effects on earnings per share. Earnings per share are calculated by dividing net income by theweighted-average number of shares outstanding for the periods.

 

**NOTE 2 - RECENT ACCOUNTINGPRONOUNCEMENTS**

 

TheFASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” whichaddresses financial accounting and reporting for acquired goodwill and otherintangible assets and supersedes APB Opinion No. 17, “Intangible Assets,”but it does carry forward some guidance from that statement.  This statement requires that an intangibleasset that is acquired either individual or with a group of other assets (butnot 

 

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thoseacquired in a business combination) shall be initially recognized and measuredbased on its fair value.  Under SFAS No. 142,goodwill is not amortized and intangible assets with a finite useful life areamortized and those intangible assets with an infinite life are notamortized.  This statement is generallyeffective for fiscal years beginning after December 15, 2001, to allgoodwill and other intangible assets recognized in an entity’s statement offinancial position at the beginning of that fiscal year, regardless of whenthose previously recognized assets were initially recognized.  The provisions of this statement shall beinitially applied at the beginning of a fiscal year; retroactive application isnot permitted.  The adoption of SFAS No. 142did not have a material impact on the Company.

 

TheFASB recently issued SFAS No. 143, “Accounting for Asset RetirementObligations,” which addresses financial accounting and reporting forobligations associated with the retirement of tangible long-lived assets andthe associated asset retirement costs. This statement requires an entity to recognize the fair value of aliability for an asset retirement obligation in the period in which it isincurred if a reasonable estimate of fair value can be made.  This statement is effective for financialstatements issued for fiscal years beginning after June 15, 2002.  Initial application of this statement is asof the beginning of an entity’s fiscal year. Management does not believe the adoption of SFAS No. 143 will havea material impact on the Company.

 

TheFASB issued SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets.”  SFAS No. 144supercedes SFAS No. 121, “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to be Disposed,” and the Accounting PrinciplesBoard Opinion No. 30, “Reporting the Results of Operations-Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions,” and amends Accounting ResearchBulletin No. 51, “Consolidated Financial Statements.”  This statement is generally effective forfinancial statements issued for fiscal years beginning after December 31,2001, and interim periods within those fiscal years.  The adoption of SFAS No. 144 did nothave a material impact on the Company. 

 

TheFASB also issued SFAS No. 145, “Rescission of SFAS No. 4, 44, and 64,Amendment of SFAS No. 13, and Technical Corrections.”  This Statement rescinds SFAS No. 4, “ReportingGains and Losses from Extinguishments of Debt,” and an amendment of thatStatement, SFAS No. 64, “Extinguishments of Debt made to SatisfySinking-Fund Requirements.”  ThisStatement also rescinds SFAS No. 44, “Accounting for Intangible Assets ofMotor Carriers.”  This Statement amendsSFAS No. 13, “Accounting for Leases,” to eliminate the inconsistencybetween the required accounting for sale-leaseback transactions and therequired accounting for certain lease modifications that have economic effectsthat are similar to sale-leaseback transactions.  This Statement also amends other existingauthoritative pronouncements to make various technical corrections, clarifymeanings, or describe their applicability under changed conditions.  This statement is generally effective forfinancial statements issued on or after May 15, 2002.  The adoption of SFAS No. 145 did nothave a material impact on the Company.

 

TheFASB issued SFAS No. 146, “Accountingfor Costs Associated with Exit of 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 anexit cost at the date of an entity’s commitment to an exit plan.  The effective date of this Statement is forexit or disposal activities that are initiated after December 31, 2002,with early application encouraged. Management believes the adoption of this Statement will not have amaterial impact on the Company. 

 

**NOTE 3 – COMPREHENSIVE INCOME**

 

The components of comprehensive incomeconsist exclusively of unrealized gains and losses on available-for-salesecurities and current earnings.  For thenine months ended September 30, 2002, this 

 

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activity is shown under the headingComprehensive Income as presented in the Consolidated Statement of Changes inStockholders’ Equity (Unaudited).  Forthe nine months ended September 30, 2002, comprehensive income totaled$1,940,000.

 

**NOTE 4 - RESTATEMENT OF PREVIOUSLY REPORTEDFINANCIAL 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 permitted toissue 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-auditthe financial statements for the period ended December 31, 2003; and (iii) reviewthe audit 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 of McNeal Williamson,the following adjustments were made to previously reported financialinformation as of September 30, 2002: 

 

Cash and non-interest bearing demand deposits were decreased by $280,000as the result of the elimination of intercompany account balances as of September 30,2002.  Total assets and total liabilitieseach decreased by $280,000 as the result of these eliminations.  Previously reported net income and net incomeper share remained unchanged.

 

The consolidated statement of cash flows has been restated to includefederal funds sold as cash and cash equivalents.  The statement has also been restated toinclude the effects of the above changes.

 

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**LOGAN COUNTY BANCSHARES, INC.**

 

**ITEM 2****-MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

This narrative will assist readers in their analysis of theaccompanying consolidated financial statements. It should be read in conjunction with the unaudited consolidatedfinancial statements and the notes. Management is not aware of any market or institutional trends, events oruncertainties that will have or are reasonably likely to have a material effecton the liquidity, capital resources or operations of the Company, except asdiscussed herein. Management is also not aware of any current recommendationsby any regulatory authorities, which would have such a material effect ifimplemented.

 

# **Comparison of the Results of Operations forthe Three Months ended September 30, 2002 and 2001**

 

Net income increased by $67,000, or 14%, fromnet income of $475,000 for the three months ended September 30, 2001, tonet income for the three months ended September 30, 2002, of $542,000.

 

Interest and dividend income decreased $441,000,or 15%, from $2,961,000 at September 30, 2001, to $2,520,000 at September 30,2002.  The decrease is attributed to thedecrease in interest on loans of $324,000, or 13%, and the increase in interestand dividends on investments of $100,000, or 41%.  The decrease in interest on loans was due tothe combination of the decrease in the average balance of loans of $6,042,000and the decrease of 72 basis points in the average yield on loans.  Interest on available-for-sale securities increaseddue to interest rates earned and an increase of $4,265,500 in the averagebalance invested.  The yield oninvestment securities dropped by 60 basis points due to the general decrease inrates from 2001 and management’s decision to invest in securities with shortermaturities.

 

Interest expense on deposits decreased by $575,000,or 48%, from $1,209,000 for the three months ended September 30, 2001, to$634,000 for the three months ended September 30, 2002.  The decrease in interest expense on depositswas the direct result of the 145 basis point decrease in the cost of funds from3.14% for the three months ended September 30, 2001, to 1.69% for the sameperiod in 2002.

 

Management regularly performs an analysis toidentify the inherent risk of loss in the loan portfolio.  This analysis includes evaluation ofconcentrations of credit, past loss experience, current economic conditions,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 possible losses that may be incurred in the Bank’sportfolio.  The provision for loanlosses increased by $30,000 for the three months ended September 30,2002, as compared to the same three months ended September 30, 2001, as aresult of such an analysis by management.

 

The Bank will continue to monitor its allowance for loan losses andmake future additions to the allowance through the provision for loan losses aseconomic conditions dictate.  Althoughthe Bank maintains its allowance for loan losses at a level that it considersto be adequate to provide for the inherent risk of loss in its loan portfolio,there can be no assurance that future losses will not exceed estimated amountsor that additional provisions for loan losses will not be required in futureperiods.  In addition, the Bank’sdetermination as to the amount of its allowance for loan losses is subject toreview by regulators, as part of their examination process, which may result inthe establishment of an additional allowance based on the judgment of theregulators after a review of the information available at the time 

 

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of their examination.  Inaddition, the Company’s independent accountants reviewed the allowance as partof their audit.

 

Noninterest income increased by $16,000 or 9%,to $192,000 for the three-month period ended September 30, 2002, from $176,000for the same period in 2001 due to an increase in service charge income andother operating income.  The increase inservice charge income was the direct result of a fee increase instituted in2002.

 

Noninterest expense decreased by $12,000, or 1%, from $1,120,000 forthe three months ended September 30, 2001, to $1,108,000 in September 30,2002.  Compensation and employeebenefits, the largest component of non-interest expense, remained essentiallyat the same level for the three months ended September 30, 2002, comparedto the same three months ended September 30, 2001.

 

Income tax expense increased by $60,000 or 22%,from $267,000 for the three months ended September 30, 2001, to $327,000for the three months ended September 30, 2002.

 

**Comparison of Results of Operations for the NineMonths ended September 30, 2002 and 2001**

 

The Company reported net income of $1,603,000for the nine months ended September 30, 2002, compared to $1,515,000 forthe nine months ended September 30, 2001, representing a 5.8% increase or$88,000.  The primary component, netinterest income, for the nine-month period ended September 30, 2002, was $5,550,000,an increase of $78,000, or 1.4%, as compared to $5,472,000 for the thirdquarter of 2001.  Management continues toactively monitor interest rate risk using asset and liability managementtechniques.  Net interest margins for thethree months ended September 30, 2002 and 2001, were 4.65% and 4.72%,respectively.

 

Interest income amounted to $7,683,000 at September 30, 2002, adecrease of $1,669,000, from $9,352,000 for the same nine-month period of 2001.  Interest income reflected a weighted-averageyield of 6.39% for the quarter ended September 30, 2002, compared to 7.96%for the same nine-month period in 2001. Average interest earning assets were $162,690 and $157,613,000 duringthe three months ended September 30, 2002 and 2001, respectively.

 

Interest expense decreased to $2,133,000 for the nine month periodended September 30, 2002, or $1,747,000, from $3,880,000 for thenine-month period ended September 30, 2001.  This reflected an average cost of funds of 1.69%and 3.14% respectively, for the nine-month periods ended September 30,2002 and 2001.  Average interest bearingliabilities were $126,102,000 and $120,069,000 during the nine months ended September 30,2002 and 2001, respectively.

 

The provisions for loan losses amounted to $60,000 and $30,000 for thenine-month periods ended September 30, 2002 and 2001, respectively.  The decreased provision resulted primarilyfrom successful collection activity and slower loan growth.  

 

Earnings per weighted-average common share, for the nine-month periodsended September 30, 2002 and 2001, were $2.24 and $2.11,respectively.  Earnings through September 30,2002, reflect an annualized return on average assets (ROAA) of 1.86% comparedto 1.83% for the period ended September 30, 2001.  Also, these earnings reflect an annualizedreturn on average equity (ROAE) of 18.44% and 18.36%, respectively, for theperiods ending September 30, 2002 and 2001.  Dividends for the nine months ended September 30,2002, increased to $1.03 per share, or 2%, from $1.01 per share paid for thesame period in 2001.

 

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FINANCIAL CONDITION AND ASSET QUALITY

 

Total assets at September 30, 2002, were approximately $173,981,000as compared to approximately $171,579,000 at December 31, 2001, or anincrease of $2,402,000, or 1.4%.  Theloan portfolio decreased by $8,376,000 at September 30, 2002, or 7.2%,during this nine-month period, from $116,908,000 at December 31,2001.  As the economy began to show signsof improvement during the first quarter, loan demand began to improve.  However, management continues to adhere toits policy of not extending long-term fixed rate financing in this low interestrate environment.  By investing short-term,management believes it is better positioned to manage the interest margin asinterest rates are beginning to increase. The investment portfolio increased by $10,098,000, or 27.8% during thissame period; at the same time, federal funds sold increased $1,710,000.  Total deposits increased by $85,000 to $152,113,000at September 30, 2002, from $152,028,000 at December 31, 2001.

 

The continuing stagnation in the local and national economies placesongoing emphasis on the Company’s methodology in determining the adequacy ofthe allowance for loan losses.  TheCompany periodically evaluates the adequacy of the allowance for loan losses inorder to maintain the allowance at a level that is sufficient to absorbprobable credit losses.  This evaluationis based on a review of the Company’s historical loss experience, known andinherent risks in the loan portfolio, including adverse circumstances that mayaffect the ability of the borrower to repay interest and/or principal, theestimated value of collateral, and an analysis of the levels and trends ofdelinquencies, charge-offs, and the risk ratings of the various loancategories.  Such factors as the leveland trend of interest rates and the condition of the national and localeconomies are also considered.  As aresult of management’s analysis of the allowance for loan losses, at September 30,2002, and December 31, 2001, the allowance for loan losses was $1,293,000and $1,153,000, respectively.  Thisresulted in the ratio of the allowance for loan losses to total loans increasedslightly from 1.19% at September 30, 2002, compared to 0.99% at September 30,2002.  Estimates may change at some pointin the future.

 

Financial instruments include commitments to extend credit and standbyletters of credit.  These commitmentsinclude standby letters of credit of approximately $800,000 at September 30,2002, and $990,000 at December 31, 2001. These instruments contain various elements of credit and interest raterisk in excess of the amount recognized in the consolidated statements offinancial condition.  Additionally,certain off-balance-sheet items of approximately $9,867,000 at September 30,2002, and $10,281,000 at December 31, 2001, were comprised primarily ofunfunded loan commitments.

 

LIQUIDITY AND CAPITAL RESOURCES

 

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 $2,111,000 of liquidity for the nine-monthperiod ended September 30, 2002, compared to $2,554,000 for the same ninemonths in 2001.  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 30,2002 and 2001, due to the low interest rate environment, maturities and callsof investment securities amounted to $25,307,000 and $42,300,000, respectively.  As of September 30, 2002, the Companyhad approximately $8,553,000 of investment securities that mature within 12months.  Interest rates are beginning tostabilize and the rapidity of calls in investment securities is expected todecline.  Relatively flat loan demandresulted in a net decrease in loans of $8,376,000 for the first nine months of2002 following an increase of $1,851,000 for the same period in 2001.  These decreases in loans are consistent withmanagement’s strategy of investing short-term and not competing for fixed rateloans.

 

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This report may contain certain forward-looking statements, includingcertain plans, expectations, goals and projections, which are subject tonumerous assumptions, risks and uncertainties. Actual results could differ materially from those contained in orimplied by such statements for a variety of factors including: changes ineconomic conditions which may affect the Company’s primary market area; rapidmovements in interest rates; competitive pressures on product pricing andservices; success and timing of business strategies; the nature and extent ofgovernment actions and reforms; and rapidly changing technology and evolvingfinancial industry standards.

 

**ITEM 3- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Asset and liability management is responsible for the planning,implementation, and control process for determining asset mix and maturityfeatures relative to liability maturities in such a way that net interestmargin will be maximized.  A major toolfor such a process is gap management of the Company’s interest-sensitive assetsto interest-sensitive liabilities.

 

The negative gap position as presented in the following table formaturities of one year or less is offset by the substantial positive gapposition for maturities greater than one year. The earnings of the Company are sufficient to withstand the short-termnegative gap position.  Should a largefluctuation occur, increasing the costs of funds, management would considerincreasing service charges and non-interest fees which management determinesthe market would bear in order to negate increased rate costs.  An additional response, at the option ofmanagement, would be liquidation of certain long-term investments, andconversion of those funds into short-term securities.

 

The Company’s management recognized the concentration of largecertificates of deposit.  The Company’spolicy of asset-liability management matches both rates and maturities so theCompany will not have a liquidity problem or allow income to be affected by achange in rates.

 

All demand and savings deposits are considered highly volatile,although experience has shown these accounts to be stable regardless ofeconomic cycles.  Interest on savings andother transactional accounts have generally remained constant over periods ofinterest rate changes.  Therefore,deposits and savings are classified as “over one year” to represent a morerealistic rate sensitive gap.

 

Management believes there has been no material change to either theinterest rate risk or material market risk since December 31, 2001.

 

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TABLE XIII. - INTEREST RATE SENSITIVE ANALYSIS

 

(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                                                                     |       | $        | 19,461     |       | $          | 3,060       |       | $                    | 4,552      |                | $          | 27,073    |       | $ | 89,834 |   | $ | 116,907 |   |
| Investments                                                               |       | 3,489    |       | —     |       | —      |       | 3,489                |       | 32,616              |       | 36,105    |       |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Federal Funds Sold                                                        |       | 7,150    |       | —     |       | —      |       | 7,150                |       | —              |       | 7,150     |       |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Total Earning Assets                                                      |       | 30,100   |       | 3,060      |       | 4,552       |       | 37,712               |       | 122,450             |       | 160,162   |       |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Interest Bearing Liabilities                                              |       |     |       |       |       |        |       |                 |       |                |       |      |       |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Demand Deposits                                                           |       | 21,571   |       | —     |       | —      |       | 21,571               |       | —              |       | 21,571    |       |
| Savings                                                                   |       | 11,941   |       | 8,927      |       | 18,936      |       | 39,804               |       | —              |       | 39,804    |       |
| CD’s of $100,000 and Over                                            |       | 4,679    |       | 6,625      |       | 4,055       |       | 15,359               |       | 4,456               |       | 19,815    |       |
| Other Time                                                                |       | 10,978   |       | 10,125     |       | 7,735       |       | 28,838               |       | 14,629              |       | 43,467    |       |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Total Interest Bearing Liability                                          |       | 49,169   |       | 25,677     |       | 30,726      |       | 105,572              |       | 19,085              |       | 124,657   |       |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Interest Sensitivity Gap                                                  |       | ($19,069 | )          | ($22,617   | )          | ($26,174    | )          | ($67,860             | )          | $                   | 103,365    |      | $          | 35,505 |   |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Cumulative Gap                                                            |       | ($19,069 | )          | ($41,686   | )          | ($67,860    | )          | ($67,860             | )          | $                   | 35,505     |      | $          | 35,505 |   |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Rate Sensitive Assets/Rate Sensitive Liabilities (Cumulative  Percentage) |       | 61.12    | %          | 44.30      | %          | 35.72       | %          | 35.72                | %          | 128.48              | %          | 128.48    | %          |
|                                                                           |            |          |            |            |            |             |            |                      |            |                     |            |           |            |  |  |  |  |  |  |

 

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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 of2002 by Chief Executive Officer 

 

Certificationas Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of2002 by Chief 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 requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                          |   | LOGAN COUNTY BANCSHARES,  INC. |
|-------------------------------|--------|--------------------------------|
|                          |   | (Registrant)                   |
|                          |   |                           |
| Date: February 28,  2005 |   | /s/ Eddie Canterbury           |   |
|                          |   | Eddie Canterbury               |
|                          |   | Chief Executive Officer        |
|                          |   |                           |
| Date: February 28,  2005 |   | /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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