**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q/A**

 

**AmendmentNo. 1**

 

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

 

**For thequarterly period ended:**

 

**June 30,2003**

 

**CommissionFile Number:  2-95114**

 

**LOGAN COUNTY BANCSHARES,INC.**

(Exact name ofRegistrant as specified in its Charter)

** **
| **West Virginia**                                               |
|-----------------------------------------------------------------|
| (State or  other jurisdiction of Incorporation or organization) |
|                                                            |   |   |
| **55-0660015**                                                  |
| (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)      |

 

----

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.                  Yes  ý    No  o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

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

 

Indicate thenumber of shares outstanding of each of the registrant’s classes of common stockas of the latest practicable date:

 

Class Outstanding at February 28, 2005

 

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

 

 

----

 

**LOGAN COUNTY BANCSHARES, INC.**

 

**Table of Contents**

 
| EXPLANATORY  NOTE                   |                                                                                                                        |
|-------------------------------------|-----------------------------------------------------------------------------------------------------------------------------|
|                                |                                                                                                                        |
| PART I – FINANCIAL INFORMATION |                                                                                                                        |
|                                |                                                                                                                        |   |
| ITEM 1.                             | FINANCIAL STATEMENTS:                                                                                                       |   |
|                                |                                                                                                                        |   |
|                                | Consolidated Statements of Condition as of  June 30,  2003 (Unaudited) and December 31, 2002.                               |   |
|                                |                                                                                                                        |   |
|                                | Consolidated Statements of Income For the  Six-Month  Periods Ended June 30, 2003 and 2002 (Unaudited)                      |   |
|                                |                                                                                                                        |   |
|                                | Consolidated Statements of Income For the  Three-Month  Periods Ended June 30, 2003 and 2002 (Unaudited)                    |   |
|                                |                                                                                                                        |   |
|                                | Consolidated Statement of Changes in  Stockholders’  Equity for the Six-Month Period Ended  June 30, 2003 (unaudited). |   |
|                                |                                                                                                                        |   |
|                                | Consolidated Statements of Cash Flows for  the Six-Month  Periods Ended June 30, 2003 and 2002 (Unaudited)                  |   |
|                                |                                                                                                                        |   |
|                                | 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                                                                                                          | None |
|                                |                                                                                                                        |   |
| ITEM 2.                             | CHANGES IN  SECURITIES AND USE OF PROCEEDS                                                                                  | 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 |
|                                |                                                                                                                        |   |
| ITEM 6.                             | EXHIBITS AND REPORTS ON FORM 8-K                                                                                            |   |

 

i

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| 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

----

 

**LOGAN COUNTY BANCSHARES, INC.**

 

**EXPLANATORY NOTE**

 

This Amendment No. 1 on Form 10-Q/A amends the Company’s 10-Q for theperiod ending June 30, 2003, by adding Items 3 and 4, which were not previouslyaddressed in the Company’s 10-Q for the period ending June 30, 2003, andmaking additional disclosures in Management’s Discussion and Analysis of FinancialCondition and Results of Operation in Item 2.

 

As disclosed on Form 8-K filed with the Securities and ExchangeCommission (the “Commission”) on July 23, 2004, Logan County 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 10Q/A also revises the consolidatedbalance sheet to eliminate intercompany balances, restates the consolidatedstatement of cash flows to reflect federal funds sold as cash equivalents andmakes other revisions in format to conform to standard presentation forfinancial institutions.  As disclosed onForm 8-K filed with the Commission on August 4, 2004, the Company was informedby its 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 interim periodsthat were reviewed by McNeal Williamson after the adoption of Sarbanes-Oxley;(ii) re-audit the financial statements for the period ended December 31, 2003;and (iii) review the audit for the period ended December 31, 2002.  As a result of S. R. Snodgrass, A.C.’sre-audit of the financial statements as of and for the year ended December 31,2003, material adjustments were made to the Company’s previously reportedDecember 31, 2003, financial statements. These adjustments are discussed in Note 4 to the financial statementsherein.

 

**PART I**

 

**FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

1

 

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

**CONSOLIDATED STATEMENT OF CONDITION**

**(In Thousands)**

 
| ** **                                                                   | ** ** | **June 30,  2003** | ** ** | **December 31,  2002** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                                   | ** ** | **(Unaudited)**    | ** ** | ** **             | ** ** |
| **ASSETS**                                                                   | ** ** | ** **         | ** ** | ** **             | ** ** |
| **CASH AND CASH EQUIVALENTS**                                                |       |               |       |                   |       |
| Cash and due from banks                                                      |       | $                  | 6,672      |                   | $          | 5,598 |   |
| Federal funds sold                                                           |       | 12,190             |       | 11,370                 |       |
| Total cash and cash equivalents                                              |       | 18,862             |       | 16,968                 |       |
|                                                                         |       |               |       |                   |       |
| **INVESTMENT SECURITIES**                                                    |       |               |       |                   |       |
| Available-for-sale                                                           |       | 46,656             |       | 41,305                 |       |
|                                                                         |       |               |       |                   |       |
| **LOANS**                                                                    |       | 103,913            |       | 107,933                |       |
| Allowance for loan losses                                                    |       | (1,571             | )          | (1,619                 | )          |
| Net loans                                                                    |       | 102,342            |       | 106,314                |       |
|                                                                         |       |               |       |                   |       |
| **BANK PREMISES AND EQUIPMENT**                                              |       | 3,130              |       | 3,217                  |       |
|                                                                         |       |               |       |                   |       |
| **ACCRUED INTEREST AND OTHER ASSETS**                                        |       | 1,962              |       | 1,526                  |       |
|                                                                         |       |               |       |                   |       |
| **TOTAL ASSETS**                                                             |       | $                  | 172,952    |                   | $          | 169,330 |   |
|                                                                         |       |               |       |                   |       |
| **LIABILITIES**                                                              |       |               |       |                   |       |
| **DEPOSITS**                                                                 |       |               |       |                   |       |
| Non-interest                                                                 |       | $                  | 26,375     |                   | $          | 24,707 |   |
| Interest-bearing                                                             |       | 24,111             |       | 21,851                 |       |
| Savings                                                                      |       | 43,027             |       | 44,864                 |       |
| Time                                                                         |       | 58,126             |       | 58,652                 |       |
| **TOTAL DEPOSITS**                                                           |       | 151,639            |       | 150,074                |       |
|                                                                         |       |               |       |                   |       |
| Securities repurchase agreements                                             |       | 3,000              |       | 1,000                  |       |
|                                                                         |       |               |       |                   |       |
| Accrued interest and other liabilities                                       |       | 449                |       | 1,046                  |       |
|                                                                         |       |               |       |                   |       |
| **INCOME TAXES PAYABLE**                                                     |       |               |       |                   |       |
| Current                                                                      |       | (20                | )          | —                 |       |
| Deferred                                                                     |       | 277                |       | 17                     |       |
| **TOTAL LIABILITIES**                                                        |       | 155,345            |       | 152,137                |       |
|                                                                         |       |               |       |                   |       |
| **STOCKHOLDERS’  EQUITY**                                               |       |               |       |                   |       |
|                                                                         |       |               |       |                   |       |
| Common stock - 780,000 shares authorized at  $1.67 per value; 703,991 issued |       | 1,300              |       | 1,300                  |       |
| Treasury Stock - 76,000 shares at cost                                       |       | (1,406             | )          | (1,406                 | )          |
| Surplus                                                                      |       | 2,408              |       | 2,408                  |       |
| Retained earnings                                                            |       | 15,167             |       | 14,631                 |       |
| Accumulated other comprehensive income                                       |       | 138                |       | 260                    |       |
| Total stockholders’ equity                                              |       | 17,607             |       | 17,193                 |       |
|                                                                         |       |               |       |                   |       |
| Total liabilities and stockholders’ equity                              |       | $                  | 172,952    |                   | $          | 169,330 |   |

 

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

 

2

----

 

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

**CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)For the Six Month Periods Ended June 30, 2003 and 2002(In Thousands)**

 
| ** **                                           | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                           | ** ** | **2003**                       | ** ** | **2002** | ** ** |
| **INTEREST INCOME**                                  | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Interest and fees on loans - taxable                 |       | $                              | 3,837      |   | $ | 4,367 |   |
| Investment securities:                               |       | 504                            |       | 696 |   |
| Available-for-sale                                   |       |                           |       |   |   |
| Interest on federal funds sold                       |       | 108                            |       | 100 |   |
| Total interest income                                |       | 4,449                          |       | 5,163 |   |
|                                                 |       |                           |       |   |   |
| **INTEREST EXPENSE**                                 |       |                           |       |   |   |
| Deposits                                             |       | 1,037                          |       | 1,379 |   |
| Other borrowings                                     |       | 46                             |       | 79 |   |
| Total interest expense                               |       | 1,083                          |       | 1,458 |   |
|                                                 |       |                           |       |   |   |
| Net interest income                                  |       | 3,366                          |       | 3,705 |   |
|                                                 |       |                           |       |   |   |
| **PROVISION FOR LOAN LOSSES**                        |       | 3                              |       | 120 |   |
| Net interest income after provision for  loan losses |       | 3,363                          |       | 3,585 |   |
|                                                 |       |                           |       |   |   |
| **NON-INTEREST INCOME**                              |       |                           |       |   |   |
| Service charges and other fees                       |       | 430                            |       | 312 |   |
| Other operating income                               |       | 85                             |       | 66 |   |
| Total non-interest income                            |       | 515                            |       | 378 |   |
|                                                 |       |                           |       |   |   |
| **NON-INTEREST EXPENSES**                            |       |                           |       |   |   |
| Salary and benefits                                  |       | 1,160                          |       | 1,135 |   |
| Expense of bank premises and equipment               |       | 310                            |       | 290 |   |
| Other operating expenses                             |       | 844                            |       | 823 |   |
| Total non-interest expense                           |       | 2,314                          |       | 2,248 |   |
|                                                 |       |                           |       |   |   |
| Income before income taxes                           |       | 1,564                          |       | 1,715 |   |
|                                                 |       |                           |       |   |   |
| **INCOME TAXES**                                     |       | 535                            |       | 654 |   |
| ** **                                           |       |                           |       |   |   |
| **NET INCOME**                                       |       | $                              | 1,029      |   | $ | 1,061 |   |
|                                                 |       |                           |       |   |   |
| **WEIGHTED AVERAGE SHARES OUTSTANDING**              |       | 703,991                        |       | 716,991 |   |
|                                                 |       |                           |       |   |   |
| **EARNINGS PER COMMON SHARE**                        |       | $                              | 1.46       |   | $ | 1.48 |   |

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

3

----

 

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

**CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)For the Three Month Periods Ended June 30, 2003 and 2002(In Thousands)**

 
| ** **                                           | ** ** | **Three Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **2003**                         | ** ** | **2002** | ** ** |
| **INTEREST INCOME**                                  | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Interest and fees on loans - taxable                 |       | $                                | 1,910      |   | $ | 2,149 |   |
| Investment securities:                               |       |                             |       |   |   |
| Available-for-sale                                   |       | 231                              |       | 361 |   |
| Interest on federal funds sold                       |       | 59                               |       | 49 |   |
| Total interest income                                |       | 2,200                            |       | 2,559 |   |
|                                                 |       |                             |       |   |   |
| **INTEREST EXPENSE**                                 |       |                             |       |   |   |
| Deposits                                             |       | 506                              |       | 654 |   |
| Other borrowings                                     |       | 27                               |       | 40 |   |
| Total interest expense                               |       | 533                              |       | 694 |   |
|                                                 |       |                             |       |   |   |
| Net interest income                                  |       | 1,667                            |       | 1,865 |   |
|                                                 |       |                             |       |   |   |
| **PROVISION FOR LOAN LOSSES**                        |       | 1                                |       | 60 |   |
| Net interest income after provision for  loan losses |       | 1,666                            |       | 1,805 |   |
|                                                 |       |                             |       |   |   |
| **NON-INTEREST INCOME**                              |       |                             |       |   |   |
| Service charges and other fees                       |       | 236                              |       | 159 |   |
| Other operating income                               |       | 26                               |       | 23 |   |
| Total non-interest income                            |       | 262                              |       | 182 |   |
|                                                 |       |                             |       |   |   |
| **NON-INTEREST EXPENSES**                            |       |                             |       |   |   |
| Salaries and benefits                                |       | 576                              |       | 563 |   |
| Expense of bank premises and equipment               |       | 161                              |       | 151 |   |
| Other operating expenses                             |       | 459                              |       | 420 |   |
| Total non-interest expenses                          |       | 1,196                            |       | 1,134 |   |
|                                                 |       |                             |       |   |   |
| Income before income taxes                           |       | 732                              |       | 853 |   |
|                                                 |       |                             |       |   |   |
| **INCOME TAXES**                                     |       | 234                              |       | 329 |   |
| ** **                                           |       |                             |       |   |   |
| Net income                                           |       | $                                | 498        |   | $ | 524 |   |
|                                                 |       |                             |       |   |   |
| **WEIGHTED AVERAGE SHARES OUTSTANDING**              |       | 703,991                          |       | 716,991 |   |
|                                                 |       |                             |       |   |   |
| **EARNINGS PER COMMON SHARE**                        |       | $                                | 0.71       |   | $ | 0.73 |   |

 

The accompanying notes arean integral part of the consolidated financial statements.

 

4

----

 

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

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

 
| ** **                                              | ** ** | ** **        | ** **        | ** **  | ** ** | ** **             | ** ** | **Accumulated**                  | ** ** | ** **                    | ** ** | ** **          | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|-------------------|-------------------|-------------|------------|------------------------|------------|----------------------------------|------------|-------------------------------|------------|---------------------|------------|------------|------------|
| ** **                                              | ** ** | ** **        | ** **        | ** **  | ** ** | ** **             | ** ** | **Other**                        | ** ** | ** **                    | ** ** | ** **          | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | **Common  Stock** | ** **        | **Surplus** | ** ** | **Retained  Earnings** | ** ** | **Comprehensive  Income (Loss)** | ** ** | **Compre****hensive  Income** | ** ** | **Treasury  Stock** | ** ** | **Total**  | ** ** |
|                                                    |       |              |              |        |       |                   |       |                             |       |                          |       |                |       |       |       |
| **BALANCE  DECEMBER 31, 2002**                          |       | $                 | 1,300   |        | $          | 2,408                  |       | $                                | 14,631     |                          | $          | 260                 |       |       |       | $ | (1,406 | ) | $ | 17,193 |   |
|                                                    |       |              |              |        |       |                   |       |                             |       |                          |       |                |       |       |       |
| Comprehensive  Income:                                  |       |              |              |        |       |                   |       |                             |       |                          |       |                |       |       |       |
| Net income for  the six months ended June 30, 2003      |       | —            |              | —      |       | 1,029                  |       | —                           |       | $                             | 1,029      |                | —     |       | 1,029      |   |
|                                                    |       |              |              |        |       |                   |       |                             |       |                          |       |                |       |       |       |
| Net unrealized  losses on available-for-sale securities |       | —            |              | —      |       | —                 |       | (122                             | )          | (122                          | )          | —              |       | (122       | )          |
| Total  comprehensive income                             |       |              |              |        |       |                   |       |                             |       | $                             | 907        |                |       |       |       |   |
|                                                    |       |              |              |        |       |                   |       |                             |       |                          |       |                |       |       |       |
| Dividends on  703,991 shares common stock @ $0.70       |       | —            |              | —      |       | (493                   | )          | —                           |       |                          |       | —              |       | (493       | )          |
|                                                    |       |              |              |        |       |                   |       |                             |       |                          |       |                |       |       |       |
| **BALANCE  JUNE 30, 2003**                              |       | $                 | 1,300   |        | $          | 2,408                  |       | $                                | 15,167     |                          | $          | 138                 |       |       |       | $ | (1,406 | ) | $ | 17,607 |   |

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

5

----

 

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

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

**(In Thousands)**

 
| ** **                                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **2003**                       | ** ** | **2002** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                           |       |                           |       |   |   |
| Net income                                                                         |       | $                              | 1,029      |   | $ | 1,061 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                           |       |   |   |
| Depreciation                                                                       |       | 132                            |       | 134 |   |
| Deferred tax related to investments                                                |       | 92                             |       | — |   |
| Premium amortization and accretion on  investment securities                       |       | 55                             |       | 49 |   |
| Provision for loan losses                                                          |       | 3                              |       | 120 |   |
| (Increase) decrease in other assets                                                |       | (436                           | )          | 215 |   |
| Increase (decrease) in other liabilities                                           |       | (357                           | )          | (148 | ) |
| Net cash provided by operating activities                                          |       | 518                            |       | 1,431 |   |
|                                                                               |       |                           |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                           |       |                           |       |   |   |
| Proceeds from sales of securities  available-for-sale                              |       | 31,977                         |       | 15,500 |   |
| Proceeds from maturities of securities  available-for-sale                         |       | —                         |       | 4,487 |   |
| Purchases of securities available-for-sale                                         |       | (37,597                        | )          | (26,427 | ) |
| Net (increase) decrease in loans                                                   |       | 3,969                          |       | 5,990 |   |
| Purchase of bank premises and equipment                                            |       | (45                            | )          | (15 | ) |
| Net cash used in investing activities                                              |       | (1,696                         | )          | (465 | ) |
|                                                                               |       |                           |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                           |       |                           |       |   |   |
| Net increase (decrease) in demand deposits                                         |       | 3,928                          |       | (3,138 | ) |
| Net increase (decrease) in savings deposits                                        |       | (1,837                         | )          | 3,827 |   |
| Net increase (decrease) in time deposits                                           |       | (526                           | )          | (4,097 | ) |
| Net increase (decrease) in Federal Funds  purchased/repurchased                    |       | 2,000                          |       | 1,000 |   |
| Dividends paid                                                                     |       | (493                           | )          | (488 | ) |
| Net cash provided by (used in) financing  activities                               |       | 3,072                          |       | (2,896 | ) |
|                                                                               |       |                           |       |   |   |
| **NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS**                          |       | 1,894                          |       | (1,930 | ) |
| ** **                                                                         |       |                           |       |   |   |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD**                                |       | 16,968                         |       | 14,222 |   |
| ** **                                                                         |       |                           |       |   |   |
| **CASH AND CASH EQUIVALENTS, END OF PERIOD**                                       |       | $                              | 18,862     |   | $ | 12,292 |   |
| ** **                                                                         |       |                           |       |   |   |
| **Supplemental Disclosures:**                                                      |       |                           |       |   |   |
| Cash paid for interest                                                             |       | $                              | 1,088      |   | $ | 1,458 |   |
| Cash paid for income taxes                                                         |       | $                              | 506        |   | $ | 615 |   |

 

Theaccompanying notes are an integral part of the consolidated financial statements.

 

6

----

** **

**LOGANCOUNTY BANCSHARES, INC. AND SUBSIDIARIES**

**Notes To Consolidated Financial Statements (Unaudited)**

 

**NOTE 1 - CRITICAL ACCOUNTING POLICIES**

 

The accounting and reportingpolicies of Logan County BancShares, Inc. (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 U. S. 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 financialstatements of the Company include its wholly-owned subsidiary, Logan Bank andTrust (the “Bank”).  All significantintercompany balances and transactions have been eliminated.

 

The accompanying unauditedconsolidated financial statements have been prepared in accordance with theinstructions to Form 10-Q and Article 10 of Regulation X and, therefore, do notnecessarily include all information that would be included in audited financialstatements required by U. S. GAAP. The information furnished reflects all adjustments which are, in theopinion of management, necessary for a fair statement of the results ofoperations.  All such adjustments are ofa normal recurring nature.  The resultsof operations for the interim periods may not necessarily be indicative of theresults to be expected for the fiscal year ended December 31, 2003.

 

These statements should be readin conjunction with the audited consolidated statements as of and for thefiscal year ended December 31, 2002, and related notes which are included inthe Company’s Annual Report on Form 10-K (file no. 2-95114).

 

**Income Recognition**

 

The Company recognizes interestincome by methods conforming to U. S. GAAP that include general accountingpractices within the financial services industry.  Interest income on loans and investmentsecurities is recognized by methods that result in level rates of return onprincipal amounts outstanding, including yield adjustments resulting from theamortization of loan costs and premiums on investment securities and accretionof loan fees and discounts on investment securities.

 

In the event managementbelieves collection of all or a portion of contractual interest on a loan hasbecome doubtful, which generally occurs after the loan is 90 days past due, theaccrual of interest is discontinued.  Inaddition, previously accrued interest deemed uncollectible that was recognizedin income is reversed.  Interest receivedon nonaccrual loans is included in income only if principal recovery isreasonably assured.  A nonaccrual loan isrestored to accrual status when it is brought current or has performed inaccordance with contractual terms for a reasonable period of time, is wellsecured, and the collectibility of the total contractual principal and interestis no longer doubtful.

 

**Allowance for Loan Losses**

 

In general, determining theamount of the allowance for loan losses requires significant judgment and theuse 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 formal analysis

 

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determines an appropriate leveland allocation of the allowance for loan losses among loan types and resultingprovision for loan losses by considering factors affecting loan losses,including specific losses, levels and trends in impaired and nonperformingloans, historical loan loss experience, current national and local economic conditions,volume, growth and composition of the portfolio, regulatory guidance and otherrelevant factors.  Management continuallymonitors the loan portfolio through reviews of past due loans and allsignificant loans which are considered to be potential problem loans on amonthly basis. The internal loan review function provides for an independentreview 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 forloan losses for the various loan types represents management’s estimate ofexpected losses from existing loans based upon specific allocations forindividual lending relationships and historical loss experience for eachcategory of homogeneous loans.  Impairedloans are commercial and commercial real estate loans for which it is probablethe Company will not be able to collect all amounts due according to thecontractual terms of the loan agreement. The Company individually evaluates such loans for impairment and doesnot aggregate these loans by major risk classifications.  The definition of “impaired loans” is not thesame as the definition of “nonaccrual loans,” although the two categoriesoverlap.  The Company may choose to placea loan on nonaccrual status due to payment delinquency or uncertaincollectibility while not classifying the loan as impaired, provided the loan isnot a commercial or commercial real estate classification.  Factors considered by management indetermining impairment 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 the collateral.While allocations are made to specific loans and pools of loans, the allowanceis available for all loan losses.

 

Mortgage loans secured byone-to-four family properties and all consumer loans are large groups ofsmaller-balance homogeneous loans and are measured for impairment collectivelybased on historical 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 arebased upon specific quantitative and qualitative criteria, including the sizeof the loan, loan quality ratings, value of collateral, repayment ability ofborrowers, and historical experience factors. 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 for homogeneous loans (such asresidential mortgage loans, personal loans, etc.) are evaluated based uponhistorical loss experience, trends in losses and delinquencies, growth of loansin particular markets, and known changes in economic conditions in each lendingmarket.  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 $1,571,000 at June 30,2003, 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 commercial

 

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and individual borrowers,which could cause the Company to experience increases in problem assets,delinquencies, and losses on loans.

 

**Investment Securities**

 

Investment securities areclassified at the time of purchase, based on management’s intention andability, as securities available-for-sale or held-to-maturity.  All debt and equity securities have beenclassified as available-for-sale to serve principally as a source ofliquidity.  Until realized, unrealizedholding gains and losses for available-for-sale securities are reported as aseparate component of stockholders’ equity, net of tax.  Realized securities gains and losses arecomputed using the specific identification method. Interest and dividends oninvestment securities are recognized as income when earned.

 

While temporary changes inthe market value of available-for-sale securities are not recognized inearnings, a decline in fair value below amortized cost deemed to beother-than-temporary results in an adjustment to the cost basis of theinvestment, with a corresponding loss charged against earnings.  Management evaluates the investmentsecurities for other-than-temporary declines in estimated fair value on aquarterly basis.  This analysis requiresmanagement to consider various factors in order to determine if a decline inestimated fair value is temporary or other-than-temporary.  These factors include duration and magnitudeof the decline in value, expectations about market interest rates, thefinancial condition of the issuer, and the Company’s ability and intent tocontinue holding the investment for a period of time sufficient to allow forany anticipated recovery in market value. At June 30, 2003, there were no investment securities identified bymanagement to be other-than-temporarily impaired.  If investments decline in fair value due toadverse changes in the financial markets, charges to income could occur infuture periods unless the investments are held to maturity.

 

**Income Taxes**

 

The Company and itssubsidiary file consolidated federal and state income tax returns.  Deferred tax assets and liabilities arereflected at currently enacted income tax rates applicable to the period inwhich the deferred tax assets and liabilities are expected to be realized orsettled.  As changes in tax laws or ratesare enacted, deferred tax assets and liabilities are adjusted through theprovision for income taxes.  Deferredincome tax expenses or benefits are based on the changes in the deferred taxasset or liability from period to period. The provision for income taxes during the current period is at a rate whichmanagement believes will approximate the effective rate for the year.

 

**Cash Flows**

 

Cash and cash equivalentsconsist of cash and due from 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. 143, “Accounting for Asset Retirement Obligations,” whichaddresses financial accounting and reporting for obligations associated withthe retirement of tangible long-lived assets and the associated assetretirement costs.  This statementrequires an entity to recognize the fair

 

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valueof a liability 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. The adoption of SFAS No. 143 did not have a material impact on theCompany.

 

TheFASB issued SFAS No. 146, “Accounting for Costs Associated with Exit orDisposal Activities.”  This Statementrequires that a liability for a cost associated with an exit or disposalactivity be recognized and measured initially at fair value when the liabilityis incurred.  This statement nullifiesEmerging Issues Task Force Issue No. 94-3, which required the recognition of aliability for an exit cost at the date of an entity’s commitment to an exitplan.  The effective date of thisstatement is for exit or disposal activities that are initiated after December31, 2002, with early application encouraged. The adoption of this Statement did not have a material impact on theCompany.

 

TheFASB issued SFAS No. 147, “Acquisitions of Certain Financial Institutions.”  Except for transactions between two or moremutual enterprises, this Statement removes acquisitions of financialinstitutions from the scope of both SFAS No. 72, “Accounting for CertainAcquisitions of Banking and Thrift Institutions,” and FASB Interpretation No.9, “Applying APB Opinions No. 16 and 17 When a Savings and Loan Association orSimilar Institution Is Acquired in a Business Combination Accounted for by thePurchase Method.”  SFAS No. 147 requiresthat these transactions be accounted for in accordance with FASB Statements No.141, “Business Combinations,” and No. 142, “Goodwill and Other IntangibleAssets.”  This statement also amends SFASNo. 144 to include in its scope long-term customer-relationship intangibleassets of financial institutions such as depositor- and borrower- relationshipintangible assets and credit cardholder intangible assets.  The effective date of this Statement isgenerally for activities on or after October 1, 2002.  The adoption of SFAS No. 147 did not have amaterial impact on the Company.

 

OnDecember 31, 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure,”which amends SFAS No. 123, “Accountingfor Stock-Based Compensation.” SFAS No. 148 amends the disclosure requirements of SFAS No. 123 torequire more prominent and more frequent disclosures in financial statementsabout the effects of stock-based compensation. Under the provisions of SFAS No. 123, companies that adopted the preferable,fair value based method were required to apply that method prospectively fornew stock option awards.  Thiscontributed to a “ramp-up” effect on stock-based compensation expense in thefirst few years following adoption, which caused concern for companies andinvestors because of the lack of consistency in reported results.  To address that concern, SFAS No. 148provides two additional methods of transition that reflect an entity’s fullcomplement 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 December15, 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 the Company.

 

InNovember 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others*.*”  Thisinterpretation elaborates on the disclosures to be made by a guarantor in itsinterim and annual financial statements about its obligations under certainguarantees that it has issued.  Thisinterpretation clarifies

 

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thata guarantor is required to disclose (a) the nature of the guarantee, includingthe approximate term of the guarantee, how the guarantee arose, and the eventsor circumstances that would require the guarantor to perform under theguarantee; (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 ofthe guarantor’s fiscal year end.  Thedisclosure requirements in this interpretation are effective for financialstatements of interim or annual periods ending after December 15, 2002.  Adoption did not have a material impact onthe Company.

 

InJanuary 2003, the FASB issued Interpretation No. 46, “Consolidation of VariableInterest Entities,” which addresses whether certain types of entities, referredto as variable interest entities (“VIE”), should be consolidated in a company’sfinancial statements.  A VIE is an entitythat either (1) has equity investors that lack certain essentialcharacteristics of a controlling financial interest (including the ability tocontrol the entity, the obligation to absorb the entity’s expected losses, andthe right to receive the entity’s expected residual returns) or (2) lackssufficient equity to finance its own activities without financial supportprovided by other entities which, in turn, would be expected to absorb at leastsome of the expected losses of the VIE. An entity should consolidate a VIE if it stands to absorb a majority ofthe VIE’s expected losses or to receive a majority of the VIE’s expectedresidual returns.  The Company adoptedthe Interpretation for relationships with VIE’s that begin on or after February1, 2003.  The implementation of theconsolidation guidance did not have a material effect 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 thesix months ended June 30, 2003, this activity is shown under the headingComprehensive Income as presented in the Consolidated Statement of Changes inStockholders’ Equity (Unaudited).  Forthe six months ended June 30, 2003, comprehensive income totaled $907,000.  For the three months ended June 30, 2003 and2002, comprehensive income totaled $464,000 and $790,000, respectively.

 

**NOTE 4 - RESTATEMENT OF PREVIOUSLY REPORTEDFINANCIAL INFORMATION**

 

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 financial statements for the period ended December 31, 2003;and (iii) review the 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 June 30, 2003.  With the concurrence of

 

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McNeal Williamson, the following adjustmentswere made to previously reported financial information as of June 30, 2003, andDecember 31, 2002:

 

Cash and non-interest bearing demand depositswere decreased by $289,184 as the result of the elimination of intercompanyaccount balances as of June 30, 2003. Total assets and total liabilities each decreased by $289,184 as theresult of these eliminations.  Previouslyreported net income and net income per share remained unchanged.  Cash was decreased by $369,000 andnon-interest bearing demand deposits decreased by $369,000 as the result of theelimination of intercompany account balances as of December 31, 2002.  Total assets and total liabilities eachdecreased by $369,000 as the result of these eliminations and thereclassification of deferred tax balances. Previously reported net income and net income per share remainedunchanged.

 

The Consolidated Statement of Cash Flows hasbeen restated to include federal funds sold as cash and cash equivalents.  The statement has also been restated toinclude the effects of the above changes.

 

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** **

**LOGANCOUNTY BANCSHARES, INC.**

 
| **ITEM 2.** | ** ** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS** |
|-------------|------------|-------------------------------------------------------------------------------------------------|

 

This narrative will assistreaders in their analysis of the accompanying unaudited consolidated financialstatements.  It should be read inconjunction with the unaudited consolidated financial statements and the notes.  Management is not aware of any market orinstitutional trends, events or uncertainties that will have or are reasonablylikely to have a material effect on the liquidity, capital resources oroperations of the Company, except as discussed herein.  Management is also not aware of any currentrecommendations by any regulatory authorities, which would have such a materialeffect if implemented.

 

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

#  

Net income decreased by$26,000, or 5%, from net income of $524,000 for the three months endedJune 30, 2002, to net income for the three months ended June 30, 2003, of$498,000.

 

Interest and dividend incomedecreased $359,000, or 14%, from $2,559,000 at June 30, 2002, to $2,200,000 atJune 30, 2003.  The decrease isattributed to the decrease in interest on loans of $239,000, or 11%, and thedecrease in interest and dividends on investments of $130,000, or 36%.  The decrease in interest on loans was due tothe combination of the decrease in the average balance of loans of $6,442,000and the decrease of 44 basis points in the average yield on loans.  Interest on available-for-sale securitiesdeclined due to interest rates earned in spite of an increase of $6,961,000 inthe average balance invested.  The yieldon investment securities dropped by 119 basis points due to the generaldecrease in rates from 2002 and management’s decision to invest in securitieswith shorter maturities.

 

Interest expense on depositsdecreased by $148,000, or 23%, from $654,000 for the three months ended June 30,2002, to $506,000 for the three months ended June 30, 2003.  The decrease in interest expense on depositswas the direct result of the 39 basis point decrease in the cost of funds from1.71% for the three months ended June 30, 2002, to 1.32 for the same period in2003.

 

Management regularly performsan analysis to identify 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 underlyingcollateral, loan commitments outstanding, delinquencies, and otherfactors.  Based on this analysis,management established an allowance for loan losses.  The allowance for loan losses is adjustedperiodically by a provision for loan losses, which is charged to operationsbased on management’s evaluation of the possible losses that may be incurred inthe Bank’s portfolio.  The provision forloan losses decreased by $59,000 for the three months ended June 30, 2003,as compared to the same three months ended June 30, 2002, as a result of suchan analysis by management.

 

The Bank will continue tomonitor its allowance for loan losses and make future additions to theallowance through the provision for loan losses as economic conditionsdictate.  Although the Bank maintains itsallowance for loan losses at a level that it considers to be adequate to providefor the inherent risk of loss in its loan portfolio, there can be no assurancethat future losses will not exceed estimated amounts or that additionalprovisions for 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 their examination.  In addition, the Company’s independentaccountants reviewed the allowance as part of their audit.

 

Noninterest income increased by$80,000, or 44%, to $262,000 for the three-month period ended June 30, 2003,from $182,000 for the same period in 2002 due to an increase in service chargeincome and other operating income.  Theincrease in service charge income was the direct result of a fee increase institutedin 2003.

 

Noninterest expense increasedby $62,000, or 5%, from $1,134,000 for the three months ended June 30, 2002, to$1,196,000 for the same period in 2003. Compensation and employee benefits, the largest component of noninterestexpense, increased slightly for the three months ended June 30, 2003,compared to the same three months ended June 30, 2002.

 

Income tax expense decreased by$95,000, or 29%, from $329,000 for the three months ended June 30, 2002, to$234,000 for the three months ended June 30, 2003.

 

**Comparison of the Results of Operations forthe Six Months ended June 30, 2003 and 2002**

 

TheCompany reported net income of $1,029,000 for the six months endedJune 30, 2003, compared to $1,061,000 for the six months ended June 30,2002, representing a 3% decrease, or $32,000. The primary component, net interest income, for the six-month periodended June 30, 2003, was $3,363,000, a decrease of $339,000, or 9%, as comparedto $3,585,000 for the same period in 2002. The decrease points out the decline in interest rates over the twoperiods.  Management continues toactively monitor interest rate risk using asset and liability managementtechniques.  Net interest margins for thesix months ended June 30, 2003 and 2002, were 4.32% and 4.80%, respectively.

 

Interest income amounted to $4,449,000 forthe same six months ended June 30, 2003, a decrease of $714,000, from$5,163,000 for the same six-month period in 2002.  Interest income reflected a weighted-averageyield of 5.60% for the six months ended June 30, 2003, compared to 6.52% forthe same six-month period in 2002. Average interest earning assets were $161,683,000 and $160,105,500during the six months ended June 30, 2003 and 2002, respectively.

 

Interest expense decreased to $1,083,000 forthe six months ended June 30, 2003, or $375,000, from $1,458,000 for the sameperiod ended June 30, 2002.  Thisreflected an average cost of funds of 1.37% and 1.83%, respectively, for thesix-month periods ended June 30, 2003 and 2002. Average interest bearing liabilities were $125,316,000 and $125,456,000during the six months ended June 30, 2003 and 2002, respectively.

 

Noninterest expense increased by $66,000, or2.9% from $2,248,000 for the six months ended June 30, 2002, to $2,314,000 forthe same period in 2003.  Compensationand employee benefits, the largest component of noninterest expense increaseslightly for the six months ended June 30, 2003, compared to the same period in2002.

 

The provisions for loan losses amounted to$3,000 and $120,000 for the six-month periods ended June 30, 2003 and 2002,respectively.  The decreased provisionresulted primarily from collection activity and slower loan growth.

 

Earnings per weighted-average common share,for the six-month periods ended June 30, 2003 and 2002, were $1.46 and $1.48,respectively.  Earnings through June 30,2003, reflect an annualized return on average assets (ROAA) of 1.20% comparedto 1.24% for the period ended June 30, 2002. Also, these

 

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earnings reflect an annualized return onaverage equity (ROAE) of 11.83% and 12.40%, respectively, for the periodsending June 30, 2003 and 2002.  Dividendsfor the six months ended June 30, 2003, increased to $.70 per share, or 2.9%,from $.68 per share paid for the same period in 2002.

 

FINANCIAL CONDITION AND ASSET QUALITY

 

Total assets at June 30, 2003, wereapproximately $172,952,000 as compared to approximately $169,699,000 atDecember 31, 2002, or an increase of $3,253,000, or 1.9%.  The loan portfolio decreased by $4,020,000,at June 30, 2003, or 3.7%, during the six-month period, from $107,933,000 atDecember 31, 2002.  As the economybegan to show signs of improvement during the second quarter, loan demand beganto improve.  However, managementcontinues to adhere to its policy of not extending long-term fixed ratefinancing 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 $5,351,000, or 12.9%, during this same period; at thesame time, federal funds sold increased $820,000, or 7.2%.  Total deposits increased by $1,196,000 to$151,639,000 at June 30, 2003, from $150,443,000 at December 31, 2002.  Although deposits increased 0.8%, pricing fordeposits is very competitive in the Company’s primary trade areas among banksand other nontraditional financial service providers, indicating continuedpressure on the Company’s net interest income.

 

The continuing stagnation in the local andnational economies places ongoing emphasis on the Company’s methodology indetermining 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 possible 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 June 30, 2003, and December 31, 2002, theallowance for loan losses was $1,571,000 and $1,619,000, respectively.  This resulted in the ratio of the allowancefor loan losses to total loans increased slightly from 1.51% at June 30, 2003,compared to 1.50% at June 30, 2002. Estimates may change at some point in the future.

 

Financial instruments include commitments toextend credit and standby letters of credit. These commitments include standby letters of credit of approximately$1,077,000 at June 30, 2003, and $1,062,000 at December 31, 2002.  These instruments contain various elements ofcredit and interest rate risk in excess of the amount recognized in theconsolidated statements of financial condition. Additionally, certain off-balance sheet items of approximately$11,450,000 at June 30, 2003, and $10,801,000 at December 31, 2002, werecomprised primarily of unfunded loan commitments.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquiditymanagement involves the ability to meet the cash flow requirements ofdepositors wanting to withdraw funds or borrowers needing assurance thatsufficient funds will be available to meet their credit needs.  Liquidity can best be demonstrated by ananalysis of the Company’s cash flows. The primary source of cash flows for the Company is operatingactivities.  Operating activitiesprovided $518,000 of liquidity for the six-month period ended June 30, 2003,compared to $1,431,000 for the same six months in 2002.  The principal elements of these operatingflows are net income, increased for significant non-cash expenses and depreciationand amortization.  A secondary source ofliquidity for the Company comes from investing activities, principally thematurities of investment securities.  Forthe six-month

 

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periodsended June 30, 2003 and 2002, due to the low interest rate environment,maturities and calls of investment securities amounted to $31,977,000 and$19,987,000, respectively.  As of June30, 2003, the Company had approximately $28,534,000 of investment securitiesthat mature within 12 months.  Interestrates are beginning to increase and the rapidity of calls in investmentsecurities is expected to decline. Relatively flat loan demand resulted in a net decrease in loans of$4,020,000 for the first six months of 2003 following a decline of $6,002,000for the same period in 2002.  Thesedecreases in loans are consistent with management’s strategy of investingshort-term and not competing for fixed rate loans.

 

This report may contain certainforward-looking statements, including certain plans, expectations, goals andprojections, 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.  QUANTITATIVEAND 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, 2002.

 

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INTEREST RATE SENSITIVEANALYSIS 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 AND PROCEDURES**

 

Evaluationof Disclosure Controls and Procedures

 

As of the end of the period covered by this report, the Company’s ChiefExecutive Officer and Chief Financial Officer evaluated the effectiveness ofthe Company’s disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)).  Based ontheir evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that the Company’s disclosure controls and procedures (i) enable theCompany to record, process, summarize and report in a timely manner theinformation that the Company is required to disclose in its Exchange Actreports, and (ii) are designed with the objective of ensuring that suchinformation is accumulated and communicated to management, including the ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding disclosure.

 

Changes in Internal Control Over FinancialReporting

 

There were no changes in the Company’sinternal control over financial reporting identified in the evaluationperformed by the Company's Chief Executive Officer and Chief Financial Officerthat materially affected, or are reasonably likely to materially affect, theCompany's internal control over financial reporting.

 

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ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

 

     (a)      Exhibits required by Item 601 ofRegulation 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 1350Certifications

 

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

 

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

 

     (b)      Reports on Form 8-K

 

None

 

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly 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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**EXHIBIT INDEX**

 
| **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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