**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

----

 

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

 

**For the quarterly period ended:**

 

**September 30, 2004**

 

**Commission File Number:  2-95114**

 

**LOGAN COUNTY BANCSHARES, INC.**(Exact name of Registrant 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**(Address of principal executive offices)  | **25601**(Zip Code) |
| ** **                                                                       |
| **(304) 752-1166**(Registrant’s telephone number, including area code)      |

 

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

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of 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 November 11, 2004 |
|----------------------------------------|
| Common Stock  ($1.67 Par Value)        | 703,991 Shares |

 

 

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**LOGAN COUNTY BANCSHARES, INC.**

 

**Table of Contents**

EXPLANATORYNOTE

 
| PART I - FINANCIAL INFORMATION |     |
|--------------------------------|----------|
|                           |     |
|                           | ITEM 1.  | FINANCIAL STATEMENTS: |   |
|                           |     |   |   |
|                           |     | Consolidated Statements of Condition as of September 30, 2004  (Unaudited) and December 31, 2003 |   |
|                           |     |   |   |
|                           |     | Consolidated Statements of Income For the  Nine-Month Periods Ended September 30, 2004 and 2003 (Unaudited) |   |
|                           |     |   |   |
|                           |     | Consolidated Statements of Income For the  Three-Month Periods Ended September 30, 2004 and 2003 (Unaudited) |   |
|                           |     |   |   |
|                           |     | Consolidated Statement of Changes in  Stockholders’ Equity for the Nine-Month Period Ended September 30, 2004  (unaudited) |   |
|                           |     |   |   |
|                           |     | Consolidated Statements of Cash Flows for the Nine-Month Periods  Ended September 30, 2004 and 2003 (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 |   |
|                           |     |   |   |
|                           | ITEM 2.  | UNREGISTERED SALES OF EQUITY SECURITIES |   |
|                           |     |   |   |
|                           | ITEM 3.  | DEFAULTS UPON SENIOR SECURITIES |   |
|                           |     |   |   |
|                           | ITEM 4.  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |   |
|                           |     |   |   |
|                           | ITEM  5. | OTHER  INFORMATION |   |
|                           |     |   |   |
|                           | 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

 

As disclosed on Form 8-K filed with theSecurities and Exchange Commission (the “Commission”) on July 23, 2004, LoganCounty Bancshares, Inc. (the “Company”), working with its outside auditors andspecially retained securities counsel, determined that it was subject to theSarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). In addition, and as disclosed on Form 8-K filed with the Commission onAugust 4, 2004, the Company was informed by its independent auditor, McNeal,Williamson & Co. (“McNeal Williamson”) that McNeal Williamson was no longerpermitted to issue audit reports for the Company and was no longer permitted toperform interim reviews in accordance with SAS 100 for the Company as a resultof McNeal Williamson’s failure to register with the Public Company AccountingOversight Board (“PCAOB”).  McNealWilliamson advised the Company that it should obtain independentaccountants.  Accordingly, the Companyretained S. R. Snodgrass, A.C. on August 10, 2004, to:  (i) review all interim periods that werereviewed by McNeal Williamson after the adoption of Sarbanes-Oxley; (ii)re-audit the audit report for the period ended December 31, 2003; and (iii)review the audit report for the period ended December 31, 2002.  As a result of S. R. Snodgrass, A.C.’sre-audit of the 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.  The Company anticipates filingamended disclosures to the Company’s reports on Form 10-Q for the periodsending March 31, 2004, September 30, 2003, June 30, 2003, March 31, 2003 andSeptember 30, 2002 and on Form 10-K for the periods ending December 31, 2003and December 31, 2002, in order to bring these reports into compliance withSarbanes-Oxley and to reflect the re-audit of the financial statements for theyear ended December 31, 2003.  Theinformation contained in this report takes into account the re-auditedfinancial statements.

 

1

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**PART I**

 

**FINANCIAL INFORMATION**

 

**ITEM 1.****  FINANCIAL STATEMENTS**

 

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

**CONSOLIDATEDBALANCE SHEETS**

**(In Thousands)**

 
| ** **                                                                           | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                                           | ** ** | **(Unaudited)**         | ** ** | ** **             | ** ** |
|                                                                                 |       |                    |       |                   |       |
| **ASSETS**                                                                           |       |                    |       |                   |       |
| Cash and cash equivalents:                                                           |       |                    |       |                   |       |
| Cash and due from banks                                                              |       | $                       | 6,256      |                   | $          | 5,342 |   |
| Federal funds sold                                                                   |       | 23,200                  |       | 13,385                 |       |
| Total cash and cash equivalents                                                      |       | 29,456                  |       | 18,727                 |       |
|                                                                                 |       |                    |       |                   |       |
| Investment securities:                                                               |       |                    |       |                   |       |
| Available-for-sale (at fair value)                                                   |       | 53,774                  |       | 47,892                 |       |
|                                                                                 |       |                    |       |                   |       |
| Loans                                                                                |       | 98,900                  |       | 101,615                |       |
| Less allowance for possible loan losses                                              |       | (1,555                  | )          | (1,582                 | )          |
| Net loans                                                                            |       | 97,345                  |       | 100,033                |       |
|                                                                                 |       |                    |       |                   |       |
| Premises and equipment, net                                                          |       | 3,267                   |       | 3,103                  |       |
| Accrued income receivable                                                            |       | 740                     |       | 843                    |       |
| Bank owned life insurance                                                            |       | 2,062                   |       | 2,012                  |       |
| Other assets                                                                         |       | 1,001                   |       | 993                    |       |
|                                                                                 |       |                    |       |                   |       |
| Total assets                                                                         |       | $                       | 187,645    |                   | $          | 173,603 |   |
|                                                                                 |       |                    |       |                   |       |
| **LIABILITIES**                                                                      |       |                    |       |                   |       |
|                                                                                 |       |                    |       |                   |       |
| Noninterest bearing deposits:                                                        |       |                    |       |                   |       |
| Demand                                                                               |       | $                       | 33,565     |                   | $          | 29,722 |   |
| Interest bearing deposits:                                                           |       |                    |       |                   |       |
| Demand                                                                               |       | 27,095                  |       | 21,735                 |       |
| Savings                                                                              |       | 48,520                  |       | 43,203                 |       |
| Time                                                                                 |       | 57,876                  |       | 57,595                 |       |
| Total deposits                                                                       |       | 167,056                 |       | 152,255                |       |
| Repurchase agreements                                                                |       | 2,000                   |       | 3,000                  |       |
| Accrued interest and other liabilities                                               |       | 472                     |       | 558                    |       |
| Total liabilities                                                                    |       | 169,528                 |       | 155,813                |       |
|                                                                                 |       |                    |       |                   |       |
| **STOCKHOLDERS’  EQUITY**                                                       |       |                    |       |                   |       |
|                                                                                 |       |                    |       |                   |       |
| Common stock - 780,000 shares authorized at  $1.67 par value:  703,991 shares issued |       | 1,300                   |       | 1,300                  |       |
| Treasury Stock - 76,000 shares at cost                                               |       | (1,406                  | )          | (1,406                 | )          |
| Surplus                                                                              |       | 2,408                   |       | 2,408                  |       |
| Retained earnings                                                                    |       | 15,951                  |       | 15,426                 |       |
| Accumulated other comprehensive income  (loss)                                       |       | (136                    | )          | 62                     |       |
| Total stockholders’ equity                                                      |       | 18,117                  |       | 17,790                 |       |
|                                                                                 |       |                    |       |                   |       |
| Total liabilities and stockholders’ equity                                      |       | $                       | 187,645    |                   | $          | 173,603 |   |
|                                                                                      |            |                         |            |                        |            |  |  |  |

 

The accompanying notes are anintegral part of the unaudited consolidated financial statements.

 

2

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

**CONSOLIDATED****STATEMENTS OF INCOME (UNAUDITED)**

**(In Thousands)**

 
| ** **                                                    | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                    | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| ** **                                                    | ** ** | ** **                          | ** ** | ** ** | ** ** |
| **INTEREST AND DIVIDEND INCOME**                              |       |                                |       |   |   |
| Interest and fees on loans                                    |       |                                |       |   |   |   |   |
| Taxable                                                       |       | $                                   | 5,196      |   | $ | 5,725 |   |
| Investment securities:                                        |       |                                |       |   |   |
| Available-for-sale                                            |       | 793                                 |       | 741 |   |
| Interest on federal funds sold                                |       | 162                                 |       | 150 |   |
| Total interest income                                         |       | 6,151                               |       | 6,616 |   |
|                                                          |       |                                |       |   |   |
| **INTEREST EXPENSE**                                          |       |                                |       |   |   |
| Deposits                                                      |       | 1,259                               |       | 1,529 |   |
| Other borrowings                                              |       | 69                                  |       | 73 |   |
| Total interest expense                                        |       | 1,328                               |       | 1,602 |   |
|                                                          |       |                                |       |   |   |
| Net interest income                                           |       | 4,823                               |       | 5,014 |   |
|                                                          |       |                                |       |   |   |
| **PROVISION FOR POSSIBLE LOAN LOSSES**                        |       | —                              |       | 3 |   |
|                                                          |       |                                |       |   |   |
| Net interest income after provision for  possible loan losses |       | 4,823                               |       | 5,011 |   |
|                                                          |       |                                |       |   |   |
| **NONINTEREST INCOME**                                        |       |                                |       |   |   |
| Service charges and other fees                                |       | 616                                 |       | 661 |   |
| Other operating income                                        |       | 180                                 |       | 106 |   |
| Total noninterest income                                      |       | 796                                 |       | 767 |   |
|                                                          |       |                                |       |   |   |
| **NONINTEREST EXPENSE**                                       |       |                                |       |   |   |
| Salary and employee benefits                                  |       | 1,732                               |       | 1,721 |   |
| Taxes - other                                                 |       | 79                                  |       | 140 |   |
| Depreciation                                                  |       | 198                                 |       | 198 |   |
| Repairs and maintenance                                       |       | 181                                 |       | 202 |   |
| Fees paid to Directors                                        |       | 71                                  |       | 58 |   |
| Federal Reserve charges                                       |       | 95                                  |       | 84 |   |
| Data processing                                               |       | 510                                 |       | 402 |   |
| Supplies                                                      |       | 134                                 |       | 91 |   |
| Professional fees                                             |       | 130                                 |       | 56 |   |
| Postage                                                       |       | 83                                  |       | 89 |   |
| Other operating expenses                                      |       | 397                                 |       | 449 |   |
| Total noninterest expense                                     |       | 3,610                               |       | 3,490 |   |
|                                                          |       |                                |       |   |   |
| Income before income taxes                                    |       | 2,009                               |       | 2,288 |   |
|                                                          |       |                                |       |   |   |
| **INCOME TAXES**                                              |       | 717                                 |       | 864 |   |
|                                                          |       |                                |       |   |   |
| Net income                                                    |       | $                                   | 1,292      |   | $ | 1,424 |   |
|                                                          |       |                                |       |   |   |
| Dividends declared per common share                           |       | $                                   | 1.09       |   | $ | 1.06 |   |
|                                                          |       |                                |       |   |   |
| Earnings per common share:                                    |       | $                                   | 1.83       |   | $ | 2.15 |   |
|                                                          |       |                                |       |   |   |
| Weighted-average outstanding shares:                          |       | 703,991                             |       | 703,991 |   |

 

The accompanying notes are anintegral part of the unaudited consolidated financial statements.

 

3

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

**CONSOLIDATED****STATEMENTS OF INCOME (UNAUDITED)**

**(In Thousands)**

 
| ** **                                                    | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                    | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| ** **                                                    | ** ** | ** **                           | ** ** | ** ** | ** ** |
| **INTEREST AND DIVIDEND INCOME**                              |       |                                 |       |   |   |
| Interest and fees on loans                                    |       |                                 |       |   |   |   |   |
| Taxable                                                       |       | $                                    | 1,710      |   | $ | 1,888 |   |
| Investment securities:                                        |       |                                 |       |   |   |
| Available-for-sale                                            |       | 321                                  |       | 237 |   |
| Interest on federal funds sold                                |       | 62                                   |       | 42 |   |
| Total interest income                                         |       | 2,093                                |       | 2,167 |   |
|                                                          |       |                                 |       |   |   |
| **INTEREST EXPENSE**                                          |       |                                 |       |   |   |
| Deposits                                                      |       | 418                                  |       | 492 |   |
| Other borrowings                                              |       | 18                                   |       | 27 |   |
| Total interest expense                                        |       | 436                                  |       | 519 |   |
|                                                          |       |                                 |       |   |   |
| Net interest income                                           |       | 1,657                                |       | 1,648 |   |
|                                                          |       |                                 |       |   |   |
| **PROVISION FOR POSSIBLE LOAN LOSSES**                        |       | —                               |       | — |   |
|                                                          |       |                                 |       |   |   |
| Net interest income after provision for  possible loan losses |       | 1,657                                |       | 1,648 |   |
|                                                          |       |                                 |       |   |   |
| **NONINTEREST INCOME**                                        |       |                                 |       |   |   |
| Service charges and other fees                                |       | 198                                  |       | 231 |   |
| Other operating income                                        |       | 70                                   |       | 21 |   |
| Total noninterest income                                      |       | 268                                  |       | 252 |   |
|                                                          |       |                                 |       |   |   |
| **NONINTEREST EXPENSE**                                       |       |                                 |       |   |   |
| Salary and employee benefits                                  |       | 569                                  |       | 561 |   |
| Taxes - other                                                 |       | 50                                   |       | 49 |   |
| Depreciation                                                  |       | 66                                   |       | 66 |   |
| Repairs and maintenance                                       |       | 33                                   |       | 67 |   |
| Fees paid to Directors                                        |       | 24                                   |       | 20 |   |
| Federal Reserve charge                                        |       | 45                                   |       | 30 |   |
| Data processing                                               |       | 201                                  |       | 129 |   |
| Supplies                                                      |       | 50                                   |       | 24 |   |
| Professional fees                                             |       | 74                                   |       | 20 |   |
| Postage                                                       |       | 40                                   |       | 28 |   |
| Other operating expenses                                      |       | 138                                  |       | 93 |   |
| Total noninterest expense                                     |       | 1,290                                |       | 1,087 |   |
|                                                          |       |                                 |       |   |   |
| Income before income taxes                                    |       | 635                                  |       | 813 |   |
|                                                          |       |                                 |       |   |   |
| **INCOME TAXES**                                              |       | 229                                  |       | 329 |   |
|                                                          |       |                                 |       |   |   |
| Net income                                                    |       | $                                    | 406        |   | $ | 484 |   |
|                                                          |       |                                 |       |   |   |
| Dividends declared per common share                           |       | $                                    | 0.37       |   | $ | 0.36 |   |
|                                                          |       |                                 |       |   |   |
| Earnings per common share:                                    |       | $                                    | 0.57       |   | $ | 0.69 |   |
|                                                          |       |                                 |       |   |   |
| Weighted-average outstanding shares:                          |       | 703,991                              |       | 703,991 |   |

 

The accompanying notes are anintegral part of the unaudited consolidated financial statements.

 

4

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

**CONSOLIDATED STATEMENTS OF CHANGESIN STOCKHOLDERS’ EQUITY (UNAUDITED)**

**(In Thousands)**

 
| ** **                                               | ** ** | ** **       | ** ** | ** ** | ** ** | ** **   | ** ** | ** **   | ** ** | ** ** | ** ** | **Accumulated  Other  Compre-  hensive** | ** ** | **Compre-** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|------------|------------|--------------|------------|--------------|------------|------------|------------|------------------------------------------|------------|-------------|------------|------------|------------|
| ** **                                               | ** ** | **Common Stock** | ** ** | ** ** | ** ** | **Retained** | ** ** | **Treasury** | ** ** | **Income** | ** ** | **hensive**                              | ** ** | ** **  | ** ** |
| ** **                                               | ** ** | **Shares**       | ** ** | **Stock**  | ** ** | **Surplus**  | ** ** | **Earnings** | ** ** | **Stock**  | ** ** | **(Loss)**                               | ** ** | **Income**  | ** ** | **Total**  | ** ** |
| ** **                                               | ** ** | ** **       | ** ** | ** ** | ** ** | ** **   | ** ** | ** **   | ** ** | ** ** | ** ** | ** **                               | ** ** | ** **  | ** ** | ** ** | ** ** |
| **BALANCE,  DECEMBER 31, 2003**                          |       | 703,991          |       | $          | 1,300      |         | $          | 2,408        |       | $          | 15,426     |                                     | $          | (1,406      | )          | $          | 62         |   |   |   | $ | 17,790 |   |
|                                                     |       |             |       |       |       |         |       |         |       |       |       |                                     |       |        |       |       |       |
| Comprehensive income:                                    |       |             |       |       |       |         |       |         |       |       |       |                                     |       |        |       |       |       |
| Net income for the nine months ended September  30, 2004 |       | —           |       | —     |       | —       |       | 1,292        |       | —     |       | —                                   |       | $           | 1,292      |       | 1,292      |   |
| Other comprehensive income, net of tax                   |       |             |       |       |       |         |       |         |       |       |       |                                     |       |        |       |       |       |
| Unrealized loss on securities available-for-sale         |       | —           |       | —     |       | —       |       | —       |       | —     |       | (198                                     | )          | (198        | )          | (198       | )          |
| Comprehensive income                                     |       |             |       |       |       |         |       |         |       |       |       |                                     |       | $           | 1,094      |       |       |   |
|                                                     |       |             |       |       |       |         |       |         |       |       |       |                                     |       |        |       |       |       |
| Cash dividend  ($1.09 per share)                         |       | —           |       | —     |       | —       |       | (767         | )          | —     |       | —                                   |       |        |       | (767       | )     |
|                                                     |       |             |       |       |       |         |       |         |       |       |       |                                     |       |        |       |       |       |
| **BALANCE,  SEPTEMBER 30, 2004**                         |       | 703,991          |       | $          | 1,300      |         | $          | 2,408        |       | $          | 15,951     |                                     | $          | (1,406      | )          | $          | (136       | ) |   |   | $ | 18,117 |   |

 

The accompanying notes are anintegral part of the unaudited consolidated financial statements.

 

5

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

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

**(In Thousands)**

 
| ** **                                                                         | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| ** **                                                                         | ** ** | ** **                          | ** ** | ** ** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                           |       |                                |       |   |   |
| Net income                                                                         |       | $                                   | 1,292      |   | $ | 1,513 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                |       |   |   |
| Allowance for loan losses                                                          |       | —                              |       | 3 |   |
| Depreciation and amortization                                                      |       | 198                                 |       | 198 |   |
| Earnings on bank owned life insurance                                              |       | (50                                 | )          | — |   |
| Premium amortization and accretion                                                 |       |                                |       |   |   |
| on investment securities                                                           |       | 239                                 |       | 189 |   |
| Change in interest receivable and other  assets                                    |       | 95                                  |       | (315 | ) |
| Change in accrued interest and other  liabilities                                  |       | (86                                 | )          | (469 | ) |
| Other, net                                                                         |       | (225                                | )          | (16 | ) |
| Net cash provided by operating activities                                          |       | 1,463                               |       | 1,103 |   |
|                                                                               |       |                                |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                           |       |                                |       |   |   |
| Proceeds from sales/calls of securities  available-for-sale                        |       | 45,583                              |       | 45,332 |   |
| Proceeds from maturities of securities  available-for-sale                         |       | 5,000                               |       | — |   |
| Purchases of securities available-for-sale                                         |       | (56,704                             | )          | (56,239 | ) |
| Net decrease in loans                                                              |       | 2,715                               |       | 5,915 |   |
| Purchase of bank premises and equipment                                            |       | (362                                | )          | (50 | ) |
| Net cash used in investing activities                                              |       | (3,768                              | )          | (5,042 | ) |
|                                                                               |       |                                |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                           |       |                                |       |   |   |
| Net change in demand deposits                                                      |       | 9,203                               |       | 9,075 |   |
| Net change in savings deposits                                                     |       | 5,317                               |       | (1,447 | ) |
| Net change in time deposits                                                        |       | 281                                 |       | (311 | ) |
| Net change in repurchase agreements                                                |       | (1,000                              | )          | 2,000 |   |
| Dividends paid                                                                     |       | (767                                | )          | (746 | ) |
| Net cash provided by financing activities                                          |       | 13,034                              |       | 8,571 |   |
|                                                                               |       |                                |       |   |   |
| **INCREASE IN CASH AND CASH EQUIVALENTS**                                          |       | 10,729                              |       | 4,632 |   |
|                                                                               |       |                                |       |   |   |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD**                                |       | 18,727                              |       | 16,968 |   |
|                                                                               |       |                                |       |   |   |
| **CASH AND CASH EQUIVALENTS, END OF PERIOD**                                       |       | $                                   | 29,456     |   | $ | 21,600 |   |
|                                                                               |       |                                |       |   |   |
| **Supplemental Disclosures:**                                                      |       |                                |       |   |   |
| Cash paid for interest                                                             |       | $                                   | 1,338      |   | $ | 1,536 |   |
| Cash paid for income taxes                                                         |       | $                                   | 614        |   | $ | 878 |   |

 

The accompanying notes are anintegral part of the unaudited consolidated financial statements.

 

6

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**LOGANCOUNTY BANCSHARES, INC. AND SUBSIDIARIES**

**NOTES TO****CONSOLIDATED FINANCIAL STATEMENTS**

 

**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. The preparation of financial statements inconformity with US GAAP requires management to make estimates and assumptionsthat affect the amounts reported in the financial statements and accompanyingnotes. Actual results could differ from those estimates. Management hasidentified the accounting policies described below as those that, due to thejudgments, estimates and assumptions inherent in those policies, are criticalto an understanding of the Company’s consolidated financial statements andmanagement’s discussion and analysis.

 

**Income Recognition**

 

The Company recognizesinterest income by methods conforming to US GAAP that include generalaccounting practices within the financial services industry. Interest income onloans and investment securities is recognized by methods that result in levelrates of return on principal amounts outstanding, including yield adjustmentsresulting from the amortization of loan costs and premiums on investmentsecurities and accretion of 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. In addition, previously accrued interestdeemed uncollectible that was recognized in income is reversed. Interestreceived on nonaccrual loans is included in income only if principal recoveryis reasonably assured. A nonaccrual loan is restored to accrual status when itis brought current or has performed in accordance with contractual terms for areasonable period of time, and the collectibility of the total contractualprincipal and interest is 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. The Company maintains an allowance for loanlosses to absorb probable losses in the loan portfolio based on a quarterlyanalysis of the portfolio. This formal analysis 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 economicconditions, volume, growth and composition of the portfolio, regulatoryguidance and other relevant factors. Management continually monitors the loanportfolio through reviews of past due loans and all significant loans which areconsidered to be potential problem loans on a monthly basis. The internal loanreview function provides for an independent review to evaluate the adequacy ofthe allowance. The provision could increase or decrease each quarter based uponthe results of management’s formal analysis.

 

The amount of the allowancefor loan 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. Impaired loans are commercial and commercialreal estate loans for which it is probable the Company will not be able tocollect all amounts due according to the contractual terms of the loanagreement. The Company individually evaluates such loans for impairment anddoes not aggregate these loans by major risk classifications. The definition of“impaired loans” is not the same as the definition of “nonaccrual loans,”although the two categories overlap. The Company may choose to place a loan onnonaccrual status due to payment delinquency or uncertain collectibility whilenot classifying the loan as impaired, provided the loan is not a commercial orcommercial real estate classification. Factors considered by management in determiningimpairment include payment status and collateral value. The amount ofimpairment for these types of loans is determined by the difference between thepresent value of the 

 

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expected cash flows relatedto the loan, using the original interest rate, and its recorded value, or as apractical expedient in the case of collateralized loans, the difference betweenthe fair value of the collateral and the recorded amount of the loans. Whenforeclosure is probable, impairment is measured based on the fair value of thecollateral. While allocations are made to specific loans and pools of loans,the allowance is 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 collectively.Loans that experience insignificant payment delays, which are defined as 90days or less, generally are not classified as impaired. Management determinesthe significance of payment delays on a case-by-case basis taking intoconsideration all circumstances concerning the loan, the credit worthiness andpayment history of the borrower, the length of the payment delay, and theamount of shortfall in relation 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 factorsutilized for individual loan reviews are based upon past loss experience, knowntrends in losses and delinquencies, the growth of loans in particular marketsand industries, and known changes in economic conditions in the particularlending markets. Allowances for homogeneous loans (such as residential mortgageloans, personal loans, etc.) are evaluated based upon historical lossexperience, trends in losses and delinquencies, growth of loans in particularmarkets, and known changes in economic conditions in each lending market. Therecan be no assurance the allowance for loan losses will be adequate to cover alllosses, but management believes the allowance for loan losses in the amount of$1,555,000 at September 30, 2004, was adequate to provide for probable lossesfrom existing loans based on information currently available. While managementuses 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 economicactivity could reduce cash flows for both commercial and individual borrowers,which would likely 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 and ability,as securities available-for-sale or held-to-maturity. All debt and equitysecurities have been classified as available-for-sale to serve principally as asource of liquidity. Until realized, unrealized holding gains and losses foravailable-for-sale securities are reported as a separate component ofstockholders’ 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. Managementevaluates the investment securities for other-than-temporary declines inestimated fair value on a quarterly basis. This analysis requires management toconsider various factors in order to determine if a decline in estimated fairvalue is temporary or other-than-temporary. These factors include duration andmagnitude of the decline in value, expectations about market interest rates,the financial 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 September 30, 2004, there were noinvestment securities identified by management to be other-than-temporarilyimpaired. If investments decline in fair value due to adverse changes in thefinancial markets, charges to income could occur in future periods unless theinvestments are held to maturity.

 

**Income Taxes**

 

The Company and itssubsidiary file consolidated federal and state income tax returns. Deferred taxassets and liabilities are reflected at currently enacted income tax ratesapplicable to the period in which the deferred tax assets and liabilities areexpected to be realized or settled. As changes in tax laws or rates areenacted, deferred 

 

8

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tax assets and liabilitiesare adjusted through the provision for income taxes. Deferred income taxexpenses or benefits are based on the changes in the deferred tax asset or liabilityfrom period to period. The provision for income taxes during the current periodis at a rate which management believes will approximate the effective rate forthe 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 ACCOUNTING PRONOUNCEMENTS**

 

In December 2003, the FASBissued a revision to Interpretation 46, *Consolidation of VariableInterest Entities,* which established standards for identifying avariable interest entity (“VIE”) and for determining under what circumstances aVIE should be consolidated with its primary beneficiary.  The Interpretation requires consolidation ofentities in which an enterprise absorbs a majority of the entity’s expectedlosses, receives a majority of the entity’s residual returns, or both, as aresult of ownership, contractual or other financial interests in theentity.  Prior to the interpretation,entities were generally consolidated by an enterprise when it had a controllingfinancial interest through ownership of a majority voting interest in theentity.  The adoption of thisInterpretation did not have a material effect on the Company’s financialposition or results of operations.

 

In December 2003, the financialAccounting Standards Board (“FASB”) revised FAS No. 132, *Employers’Disclosures about Pension and Other Postretirement Benefits.*  This statement retains the disclosuresrequired by FAS No. 132, which standardized the disclosure requirements forpensions and other postretirement benefits to the extent practicable andrequires additional information on changes in the benefit obligations and fairvalue of plan assets.  Additionaldisclosures include information describing the types of plan assets, investmentstrategy, measurement date(s), plan obligations, cash flows, and components ofnet periodic benefit cost recognized during interim periods.  This statement retains reduced disclosurerequirements for nonpublic entities from FAS No. 132, and it includes reduceddisclosure for certain of the new requirements. This statement is effective for financial statements with fiscal yearsending after December 15, 2003.  Theinterim disclosures required by this statement are effective for interimperiods beginning after December 15, 2003. The adoption of this statement did not have a material effect on theCompany’s disclosure requirements.

 

In March 2004,the Financial Accounting Standards Board (“FASB”) reached consensus on theguidance provided by Emerging Issues Task Force Issue 03-1 (“EITF 03-1”), TheMeaning of Other-Than-Temporary Impairment and its Application to CertainInvestments.  The guidance is applicableto debt and equity securities that are within the scope of FASB Statement ofFinancial Accounting Standard (“SFAS”) No. 115, Accounting for CertainInvestments In Debt and Equity Securities and certain other investments.  EITF 03-1 specifies that an impairment wouldbe considered other-than-temporary unless (a) the investor has the ability andintent to hold an investment for a reasonable period of time sufficient for therecovery of the fair value up to (or beyond) the cost of the investment and (b)evidence indicating the cost of the investment is recoverable within areasonable period of time outweighs evidence to the contrary.  EIFT 03-1 cost method investment anddisclosure provisions were effective for reporting periods ending after June15, 2004.  The measurement andrecognition provisions relating to debt and equity securities have been delayeduntil the FASB issues additional guidance. The Company adopted cost method investment and disclosure provisions ofEITF 03-1 on June 30, 2004.  The adoptiondid not have a material impact on the consolidated financial statements,results of operations or liquidity of the Company.

 

9

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**NOTE 3 –COMPREHENSIVE INCOME**

 

The components of comprehensiveincome consist exclusively of unrealized gains and losses on available for salesecurities.  For the nine months endedSeptember 30, 2004, this activity is shown under the heading ComprehensiveIncome as presented in the Consolidated Statement of Changes in Stockholders’Equity (Unaudited).  For the nine monthsended September 30, 2003, comprehensive income totaled $1,317,000.  For the three months ended September 30, 2004and 2003, comprehensive income totaled $528,000 and $410,000, respectively.

 

**NOTE 4 -RESTATEMENT OF PREVIOUSLY REPORTED FINANCIAL INFORMATION**

 

Asdisclosed on Form 8-K filed with the Commission on August 4, 2004, the Companywas informed by its independent auditor, McNeal, Williamson & Co. (“McNealWilliamson”) that McNeal Williamson was no longer permitted to issue auditreports for the Company and was no longer permitted to perform interim reviewsin accordance with SAS 100 for the Company as a result of McNeal Williamson’sfailure to register 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 audit report for the period ended December 31, 2003; and(iii) review the audit report for the period ended December 31, 2002.  As a result of S. R. Snodgrass, A.C.’sre-audit of the financial statements as of and for the year ended December 31,2003, the following material adjustments were made to the company’s previouslyreported 2003 financial statements:

 

Cash wasdecreased by $1,898,000, non-interest bearing demand deposits decreased by$376,000, and interest bearing demand deposits decreased by $1,522,000 as theresult of the elimination of intercompany account balances as of December 31,2003.  Total assets and total liabilitieseach decreased by $2,056,000 as the result of these eliminations and thereclassification of deferred tax balances. Previously reported net income and net income per share remainedunchanged.

 

TheConsolidated Statement of Cash Flows has been restated to include federal fundssold as cash and cash equivalents.

 

**LOGAN COUNTY BANCSHARES, INC.**

 

**ITEM 2****.      MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

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

 

# **Comparison of theResults of Operations for the Three Months ended September 30, 2004 and 2003**

 

Net income decreased by $78,000, or 16%, fromnet income of $484,000 for the three months ended September 30, 2003, to netincome for the three months ended September 30, 2004, of $406,000.

 

Total interest and dividend income decreased$74,000, or 3%, from $2,167,000 for the quarter ended September 30, 2003, to$2,093,000 for the same period in 2004. The decrease is attributed to the decrease in interest on loans of$178,000, or 9%, offset by increase in interest and dividends on investments of$84,000, or 35%.  The decrease ininterest on loans was due to the decrease in the average balance of loans of$6,653,000 and the decrease of 24 basis points in the average yield onloans.  Interest on available-for-salesecurities increased due 

 

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to an increase of $5,819,000 in the averagebalance invested.  The yield oninvestment securities dropped by 150 basis points due to the general decreasein rates from 2003 and management’s decision to invest in securities withshorter maturities Management invested in securities with shorter maturitiesbecause they expect interest rates to increase in the near future.

 

Total interest expense on deposits decreasedby $83,000, or 16%, from $519,000 for the three months ended September 30,2003, to $436,000 for the three months ended September 30, 2004.  The decrease in interest expense on depositswas the direct result of the 25 basis point decrease in the cost of funds from1.23% for the three months ended September 30, 2003, to .98% for the sameperiod in 2004.

 

Management regularly performs an analysis toidentify the inherent risk of loss in its 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 probable losses that may be incurred inthe Bank’s portfolio.  The provision forloan losses remained the same for the three months ended September 30,2004, as compared to the same three months ended September 30, 2003.

 

The Bank willcontinue to monitor its allowance for loan losses and make future additions tothe allowance through the provision for loan losses as the status of the loanportfolio and economic conditions dictate. Although the Bank maintains its allowance for loan losses at a levelthat it considers to be adequate to provide for the inherent risk of loss inits loan portfolio, there can be no assurance that future losses will not exceedestimated amounts or that additional provisions for loan losses will not berequired in future periods.  In addition,the Bank’s determination as to the amount of its allowance for loan losses issubject to review by regulators, as part of their examination process, and theCompany’s independent accountants, which may result in the establishment of anadditional allowance based on the judgment of the regulators after a review ofthe information available at the time of their examination.

 

Noninterest income increased by $16,000, or6%, to $268,000 for the three-month period ended September 30, 2004, from$252,000 for the same period in 2003 due to an increase in other operatingincome offset by a decrease in service charge income.  The increase in other income was the directresult of earnings on bank owned life insurance which was purchased in thefourth quarter of 2003.

 

Noninterest expenseincreased by $203,000, or 19%, from $1,087,000 for the three months endedSeptember 30, 2003, to $1,290,000 for the same period in 2004.  Compensation and employee benefits, thelargest component of noninterest expense, increased slightly for the threemonths ended September 30, 2004, compared to the same period in 2003.  Other significant changes in noninterestexpenses for the 2004 period compared to 2003 include a $72,000 increase indata processing costs to $201,000, or 56%; a $26,000 increase in supplies to$50,000, or 108%; and a $54,000 increase in professional fees to $74,000, or270%.  Supplies and data processing costsincreased because of the bank’s implementation of a new check image processingsystem in 2004.  The increase inprofessional fees is the result of the cost associated with amending previousperiodic securities filings to conform with the requirements of theSarbanes-Oxley Act of 2002 and for other deficiencies.  This cost will continue through the end of2004.

 

Income tax expense decreased by $100,000, or30%, from $329,000 for the three months ended September 30, 2003, to $229,000for the three months ended September 30, 2004, as a result of the decrease inpre-tax income.

 

**Comparisonof the Results of Operations for the Nine Months ended September 30, 2004 and2003**

 

TheCompany reported net income of $1,292,000 for the nine months ended September30, 2004, compared to $1,424,000 for the nine months ended September 30, 2003,representing a 9.3% decrease, or $132,000. The primary component, net interest income, for the nine-month periodended September 30, 2004, was $4,823,000, a decrease of $191,000, or 3.8%, ascompared to $5,014,000 for the same period in 2003.  The decrease points 

 

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outthe decline in interest rates over the two periods.  Management continues to actively monitorinterest rate risk using asset and liability matching techniques.  Net interest margins for the nine monthsended September 30, 2004 and 2003, were 3.54% and 3.85%, respectively.

 

Total interestincome amounted to $6,151,000 for the nine months ended September 30, 2004, adecrease of $465,000, from $6,616,000 for the same period in 2003 due to lowerrates.  Interest income reflected aweighted-average yield of 3.54% for the quarter ended September 30, 2004,compared to 3.85% for the same period in 2003. Average interest earning assets were $166,345,000 and $165,042,000during the nine months ended September 30, 2004 and 2003, respectively.

 

Total interestexpense decreased to $1,328,000 for the nine months ended September 30, 2004,or $274,000, from $1,602,000 for the same period in 2003 due to lowerrates.  This reflected an average cost offunds of 1.04% and 1.27%, respectively, for the nine-month periods endedSeptember 30, 2004 and 2003.  Averageinterest bearing liabilities were $128,012,000 and $126,399,000 during the ninemonths ended September 30, 2004 and 2003, respectively.

 

Noninterest income increased by $29,000, or4%, to $796,000 for the nine-month period ended September 30, 2004, from$767,000 for the same period in 2003 due to an increase in other operatingincome offset by a decrease in service charge income.  The increase in other income was the directresult of earnings on bank owned life insurance which was purchased in thefourth quarter of 2003.

 

Noninterestexpense increased by $120,000, or 3%, from $3,490,000 for the nine months endedSeptember 30, 2003, to $3,610,000 for the same period in 2004.  Compensation and employee benefits, thelargest component of noninterest expense, increased slightly for the nine monthsended September 30, 2004, compared to the same period in 2003.  Other significant changes in noninterestexpenses for the 2004 period compared to 2003 include a $108,000 increase indata processing costs to $510,000, or 27%; a $43,000 increase in supplies to$134,000, or 47%; and a $74,000 increase in professional fees to $130,000, or132%.  Supplies and data processing costsincreased because of the Bank’s implementation of a new check image processingsystem in 2004.  The increase inprofessional fees is the result of the cost associated with amending previousperiodic securities filings to conform with the requirements of theSarbanes-Oxley Act of 2002 and for other deficiencies.  As previously mentioned, this expense willcontinue through the end of 2004.

 

The provisionsfor loan losses amounted to zero and $3,000 for the nine-month periods endedSeptember 30, 2004 and 2003, respectively. The decreased provision resulted primarily from collection activity andslower loan growth.

 

Both basic anddiluted earnings per weighted-average common share, for the nine-month periodsended September 30, 2004 and 2003, were $1.83 and $2.15, respectively.  Earnings through September 30, 2004, reflectan annualized return on average assets (ROAA) of 0.95% compared to 1.16% forthe period ended September 30, 2004. Also, these earnings reflect an annualized return on average equity(ROAE) of 9.60% and 11.54%, respectively, for the periods ending September 30,2004 and 2003.  Dividends for the ninemonths ended September 30, 2004, increased to $1.09 per share, or 2.8%, from$1.06 per share paid for the same period in 2003.

 

FINANCIALCONDITION AND ASSET QUALITY

 

Total assetsat September 30, 2004, were approximately $187,645,000 as compared toapproximately $173,603,000 at December 31, 2003, or an increase of $14,042,000,or 8.1%.  The loan portfolio decreased by$2,715,000, or 2.7%, during the nine-month period ended September 30,2004.  As the economy began to show signsof improvement during the third 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 investingshort-term, management believes it is better positioned to manage the interestmargin as interest rates are beginning to increase.  The investment portfolio increased by$5,882,000, or 12.3%, during this same period; at the same time, federal fundssold increased $9,815,000, or 73.3%. Total deposits increased by $14,801,000 to $167,056,000 at September 30,2004, from $152,255,000 at December 31, 2003.

 

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Althoughdeposits increased by nearly 9.7%, pricing for deposits is very competitive inthe Company’s primary trade areas among banks and other nontraditionalfinancial service providers, indicating continued pressure on the Company’s netinterest income.  Management believesthat the deposit growth is attributable to the Bank’s service delivery as itsdeposit rates are in line with those of competing institutions.

 

The level toslow growth in the local and national economies places ongoing emphasis on theCompany’s methodology in determining the adequacy of the allowance for loanlosses.  The Company periodicallyevaluates the adequacy of the allowance for loan losses in order to maintainthe allowance at a level that is sufficient to absorb probable creditlosses.  This evaluation is based on areview of the Company’s historical loss experience, known and inherent risks inthe loan portfolio, including adverse circumstances that may affect the abilityof the borrower to repay interest and/or principal, the estimated value ofcollateral, and an analysis of the levels and trends of delinquencies,charge-offs and the risk ratings of the various loan categories.  Such factors as the level and trend ofinterest rates and the condition of the national and local economies are alsoconsidered.  At September 30, 2004, andDecember 31, 2003, the allowance for loan losses was $1,555,000 and $1,582,000,respectively.  This resulted in the ratioof the allowance for loan losses to total loans increased slightly from 1.57%at September 30, 2004, compared to 1.50% at September 30, 2003.  Estimates may change at some point in thefuture.

 

Financialinstruments include commitments to extend credit and standby letters ofcredit.  These commitments includestandby letters of credit of approximately $987,000 at September 30, 2004, and$817,000 at December 31, 2003.  Theseinstruments contain various elements of credit and interest rate risk in excessof the amount recognized in the consolidated statements of financialcondition.  Additionally, certainoff-balance sheet items of approximately $13,199,000 at September 30, 2004, and$11,879,000 at December 31, 2003, were comprised primarily of unfunded loancommitments.

 

LIQUIDITY ANDCAPITAL RESOURCES

 

Liquiditymanagement, in part, 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 $1,538,000 of liquidity for the nine-month period ended September 30,2004, compared to $1,537,000 for the same nine months in 2003.  The principal elements of these operatingflows are net income, increased for significant non-cash expenses anddepreciation and amortization.  Asecondary source of liquidity for the Company comes from investing activities,principally the maturities of investment securities.  For the nine-month periods ended September30, 2004 and 2003, due to the low interest rate environment, maturities andcalls of investment securities amounted to $50,583,000 and $45,332,000,respectively.  As of September 30, 2004,the Company had approximately $6,722,000 of investment securities that maturewithin 12 months.  Interest rates arebeginning to increase and the rapidity of calls in investment securities isexpected to decline.  Relatively flatloan demand resulted in a net decrease in loans of $2,715,000 for the firstnine months of 2004 following a decline of $5,970,000 for the same period in 2003.

 

This reportmay contain certain forward-looking statements, including certain plans,expectations, goals and projections, which are subject to numerous assumptions,risks and uncertainties.  Actual resultscould differ materially from those contained in or implied by such statementsfor a variety of factors including: changes in economic conditions which mayaffect the 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.

 

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**ITEM 3****.  QUANTITATIVE AND QUALITATIVEDISCLOSURES 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, and conversionof 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, 2003.

 

INTEREST RATE SENSITIVE ANALYSIS TABLE

 

(In Thousands of Dollars)

 

**As of December 31, 2003**
| ** **                                                                | ** ** | **0-90** | ** ** | **91-180** | ** ** | **181-365** | ** ** | **Total  One  Year** | ** ** | **Over  One  Year** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------|------------|----------|------------|------------|------------|-------------|------------|----------------------|------------|---------------------|------------|-----------|------------|
| Earning Assets                                                            |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Loans                                                                     |       | $        | 17,606     |       | $          | 2,572       |       | $                    | 3,364      |                | $          | 23,542    |       | $ | 78,073 |   | $ | 101,615 |   |
| Investments                                                               |       | 13,591   |       | 6,607      |       | 6,607       |       | 26,805               |       | 21,087              |       | 47,892    |       |
| Federal Funds Sold                                                        |       | 13,385   |       | 0          |       | 0           |       | 13,385               |       | 0                   |       | 13,385    |       |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Total Earning Assets                                                      |       | 44,582   |       | 9,179      |       | 9,971       |       | 63,732               |       | 99,160              |       | 162,892   |       |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Interest Bearing Liabilities                                              |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Demand Deposits                                                           |       | 21,735   |       | 0          |       | 0           |       | 21,735               |       | 0                   |       | 21,735    |       |
| Savings                                                                   |       | 12,185   |       | 9,689      |       | 21,330      |       | 43,204               |       | 0                   |       | 43,204    |       |
| CD’s of $100,000 and Over                                            |       | 2,804    |       | 1,991      |       | 3,270       |       | 8,065                |       | 14,348              |       | 22,413    |       |
| Other Time                                                                |       | 6,834    |       | 6,707      |       | 6,341       |       | 19,882               |       | 15,300              |       | 35,182    |       |
| Repurchase Agreements                                                     |       | 0        |       | 0          |       | 0           |       | 0                    |       | 3,000               |       | 3,000     |       |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Total Interest Bearing Liability                                          |       | 43,558   |       | 18,387     |       | 30,941      |       | 92,886               |       | 32,648              |       | 125,534   |       |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Interest Sensitivity Gap                                                  |       | $        | 1,024      |       | $          | (9,208      | )          | $                    | (20,970    | )                   | $          | (29,154   | )          | $ | 66,512 |   | $ | 27,358 |   |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Cumulative Gap                                                            |       | $        | 1,024      |       | $          | (8,184      | )          | $                    | (29,154    | )                   | $          | (29,154   | )          | $ | 37,358 |   | $ | 37,358 |   |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Rate Sensitive Assets/Rate Sensitive  Liabilities (Cumulative Percentage) |       | 102.35   | %          | 49.92      | %          | 32.23       | %          | 68.61                | %          | 149.08              | %          | 129.76    | %          |
|                                                                           |            |          |            |            |            |             |            |                      |            |                     |            |           |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**ITEM 4****.      CONTROLS AND PROCEDURES**

 

 

Evaluationof Disclosure Controls and Procedures

 

As of the end of the periodcovered by this report, the Company’s Chief Executive Officer and ChiefFinancial Officer evaluated the effectiveness of the Company’s disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)).  Based on their evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures (i) enable the Company to record, process,summarize and report in a timely manner the information that the Company isrequired to disclose in its Exchange Act reports, and (ii) are designed withthe objective of ensuring that such information is accumulated and communicatedto management, including the Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding disclosure.

 

Changes inInternal Controls

 

There were nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect the Company’s disclosure controls and proceduressubsequent to the date of their evaluation, nor were there any significantdeficiencies or material weaknesses in the Company’s internal controls.  As a result, no corrective actions wererequired or undertaken.

 

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**LOGAN COUNTY BANCSHARES, INC.**

 

**PART II**

 

**OTHER INFORMATION**

 

ITEM 1.      LEGAL PROCEEDINGS

 

The nature ofthe business of the Company’s subsidiary generates a certain amount oflitigation involving matters arising in the ordinary course of business.  The Company is unaware of any litigationother than ordinary routine litigation incidental to the business of theCompany, to which it or its subsidiary is a part or of which any of theirproperty is subject.

 

ITEM 2.      UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS

 

None

 

ITEM 3.      DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4.      SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

 

None

 

ITEM 5.      OTHER INFORMATION

 

None

 

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ITEM6.  EXHIBITSAND REPORTS ON FORM 8-K

 

(a) Exhibitsrequired by Item 601 of Regulation S-K :

 

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

 

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

 

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

 

(32) Section 1350 Certifications

 

CertificationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant 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: November  11, 2004 |   | /s/ Eddie  Canterbury                      |
|                     |   | Eddie  Canterbury, Chief Executive Officer |
|                     |   |                                       |
| Date:  November 11, 2004 |   | /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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