**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM10-Q/A**

 

**Amendment No. 1**

 

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

 

**For the quarterly period ended:**

 

**March 31, 2004**

 

**Commission File Number:  2-95114**

 

**LOGANCOUNTY BANCSHARES, INC.**

(Exact name of Registrant as specified in its Charter)

 

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

 

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Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.                                                                          Yes  ý  No  o

 

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

 

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

 

Class Outstanding at November 24, 2004

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

 

 

 

LOGAN COUNTY BANCSHARES,INC.

 

Table of Contents

 
| EXPLANATORY NOTE                    |     |
|-------------------------------------|----------|
|                                |     |
| PART 1 – FINANCIAL INFORMATION |     |
|                                |     |   |   |
|                                | ITEM 1.  | FINANCIAL STATEMENTS: |   |
|                                |     |   |   |
|                                |     | Consolidated Balance Sheets  as of March 31, 2004 (unaudited) and December 31, 2003 |   |
|                                |     |   |   |
|                                |     | Consolidated  Statements of Income For the Three-Month Periods Ended March 31, 2004  and 2003 (unaudited) |   |
|                                |     |   |   |
|                                |     | Consolidated  Statement of Changes in Stockholders’ Equity for the Three-Month Period Ended  March 31, 2004 (unaudited) |   |
|                                |     |   |   |
|                                |     | Consolidated  Statements of Cash Flows for the Three-Month Periods Ended March 31,  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 MARKET RISK |   |
|                                |     |   |   |
|                                | ITEM 4.  | CONTROLS AND  PROCEDURES |   |
|                                |     |   |   |
| PART II – OTHER INFORMATION    |     |
|                                |     |   |   |
|                                | ITEM 1.  | LEGAL PROCEEDINGS |   |
|                                |     |   |   |
|                                | ITEM 2.  | UNREGISTERED SALES OF  EQUITY SECURITIES |   |
|                                |     |   |   |
|                                | ITEM 3.  | DEFAULTS UPON SENIOR  SECURITIES |   |
|                                |     |   |   |
|                                | ITEM 4.  | SUBMISSION OF MATTERS TO A  VOTE OF SECURITY HOLDERS |   |
|                                |     |   |   |
|                                | ITEM 5.  | OTHER INFORMATION |   |

 

i

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|   | ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K |                                                                           |
|--------|---------|----------------------------------|--------------------------------------------------------------------------------|
|   |    |                             |                                                                           |
|   |    | EXHIBITS                         |                                                                           |
|   |    |                             |
|   |    | Exhibit  31.1                    | Sarbanes-Oxley Act, Section 302  Certification of Chief Executive Officer |   |
|   |    |                             |                                                                           |   |
|   |    | Exhibit  31.2                    | Sarbanes-Oxley Act, Section 302  Certification of Chief Financial Officer |   |
|   |    |                             |                                                                           |   |
|   |    | Exhibit  32.1                    | Sarbanes-Oxley Act, Section 906  Certification of Chief Executive Officer |   |
|   |    |                             |                                                                           |   |
|   |    | Exhibit  32.2                    | Sarbanes-Oxley Act, Section 906  Certification of Chief Financial Officer |   |
|   |    |                             |                                                                           |
|   |    | Reports on  Form 8-K             |                                                                           |
|   |    |                             |                                                                           |
|   |    | Signatures                       |                                                                           |
|        |         |                                  |                                                                                |  |  |

 

ii

 

**EXPLANATORY NOTE**

 

ThisAmendment No. 1 on Form 10-Q/A amends the Company’s 10-Q for the period ending March 31,2004, by adding Items 3 and 4, which were not previously addressed in theCompany’s 10-Q for the period ending March 31, 2004, and making additionaldisclosures in Management’s Discussion and Analysis of Financial Condition andResults of Operation in Item 2.

 

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

 

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

 

1

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**PART I**

 

ITEM 1. - FINANCIAL INFORMATION

 

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

**CONSOLIDATED BALANCE SHEETS**

**(In Thousands)**

 
| ** **                                                   | ** ** | **March 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                   | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| **ASSETS**                                                   |       |                     |       |                        |       |
| Cash and cash equivalents:                                   |       |                     |       |                        |       |
| Cash and due from banks                                      |       | $                        | 5,820      |                        | $          | 5,342 |   |
| Federal funds sold                                           |       | 34,085                   |       | 13,385                      |       |
| Total cash and cash equivalents                              |       | 39,905                   |       | 18,727                      |       |
|                                                         |       |                     |       |                        |       |
| Investment securities:                                       |       |                     |       |                        |       |
| Available-for-sale (at fair value)                           |       | 36,226                   |       | 47,892                      |       |
|                                                         |       |                     |       |                        |       |
| Loans                                                        |       | 100,062                  |       | 101,615                     |       |
| Less allowance for loan losses                               |       | (1,562                   | )          | (1,582                      | )          |
| Net loans                                                    |       | 98,500                   |       | 100,033                     |       |
|                                                         |       |                     |       |                        |       |
| Premises and equipment, net                                  |       | 3,246                    |       | 3,103                       |       |
| Accrued interest receivable                                  |       | 644                      |       | 843                         |       |
| Other assets                                                 |       | 3,055                    |       | 3,005                       |       |
|                                                         |       |                     |       |                        |       |
| Total assets                                                 |       | $                        | 181,576    |                        | $          | 173,603 |   |
| **LIABILITIES**                                              |       |                     |       |                        |       |
| Noninterest bearing deposits:                                |       |                     |       |                        |       |
| Demand                                                       |       | $                        | 33,192     |                        | $          | 29,721 |   |
| Interest bearing deposits:                                   |       |                     |       |                        |       |
| Demand                                                       |       | 23,958                   |       | 21,735                      |       |
| Savings                                                      |       | 44,841                   |       | 43,203                      |       |
| Time                                                         |       | 57,790                   |       | 57,595                      |       |
| Total deposits                                               |       | 159,781                  |       | 152,254                     |       |
| Repurchase agreements                                        |       | 3,000                    |       | 3,000                       |       |
| Other liabilities                                            |       | 821                      |       | 559                         |       |
| Total liabilities                                            |       | 163,602                  |       | 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                                            |       | 15,623                   |       | 15,426                      |       |
| Accumulated other comprehensive income                       |       | 49                       |       | 62                          |       |
| Total stockholders’ equity                              |       | 17,974                   |       | 17,790                      |       |
|                                                         |       |                     |       |                        |       |
| Total liabilities and stockholders’ equity              |       | $                        | 181,576    |                        | $          | 173,603 |   |

 

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

 

2

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**Logan County Banc Shares, Inc. andSubsidiary**

**CONSOLIDATED STATEMENTS OF INCOME(UNAUDITED)**

**(In Thousands)**

 
| ** **                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                   | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| **INTEREST AND DIVIDEND INCOME**                             |       |                                   |       |   |   |
| Interest and fees on loans                                   |       |                                   |       |   |   |
| Taxable                                                      |       | $                                      | 1,757      |   | $ | 1,927 |   |
| Investment securities:                                       |       |                                   |       |   |   |
| Available-for-sale                                           |       | 213                                    |       | 273 |   |
| Interest on federal funds sold                               |       | 54                                     |       | 49 |   |
| Total interest income                                        |       | 2,024                                  |       | 2,249 |   |
|                                                         |       |                                   |       |   |   |
| **INTEREST EXPENSE**                                         |       |                                   |       |   |   |
| Deposits                                                     |       | 426                                    |       | 531 |   |
| Other borrowings                                             |       | 27                                     |       | 19 |   |
| Total interest expense                                       |       | 453                                    |       | 550 |   |
|                                                         |       |                                   |       |   |   |
| Net interest income                                          |       | 1,571                                  |       | 1,699 |   |
|                                                         |       |                                   |       |   |   |
| **PROVISION FOR POSSIBLE LOAN LOSSES**                       |       | —                                 |       | 2 |   |
| ** **                                                   |       |                                   |       |   |   |
| Net interest income after provision for possible loan losses |       | 1,571                                  |       | 1,697 |   |
|                                                         |       |                                   |       |   |   |
| **NONINTEREST INCOME**                                       |       |                                   |       |   |   |
| Service charges and other fees                               |       | 197                                    |       | 194 |   |
| Other operating income                                       |       | 63                                     |       | 59 |   |
| Total noninterest income                                     |       | 260                                    |       | 253 |   |
|                                                         |       |                                   |       |   |   |
| **NONINTEREST EXPENSE**                                      |       |                                   |       |   |   |
| Salary and employee benefits                                 |       | 590                                    |       | 584 |   |
| Occupancy and equipment expense                              |       | 134                                    |       | 149 |   |
| Other operating expenses                                     |       | 409                                    |       | 385 |   |
| Total noninterest expense                                    |       | 1,133                                  |       | 1,118 |   |
|                                                         |       |                                   |       |   |   |
| Income before income taxes                                   |       | 698                                    |       | 832 |   |
|                                                         |       |                                   |       |   |   |
| **INCOME TAXES**                                             |       | 248                                    |       | 301 |   |
| ** **                                                   |       |                                   |       |   |   |
| Net income                                                   |       | $                                      | 450        |   | $ | 531 |   |
|                                                         |       |                                   |       |   |   |
| **WEIGHTED AVERAGE SHARES OUTSTANDING**                      |       | 703,991                                |       | 703,991 |   |
| ** **                                                   |       |                                   |       |   |   |
| **EARNINGS PER COMMON SHARE**                                |       | $                                      | 0.64       |   | $ | 0.75 |   |

 

Theaccompanying notes are an integral part of the unaudited consolidated financialstatements.

 

3

 

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

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

**(In Thousands)**

 
| ** **                                            | ** ** | **Common Stock** | ** ** | **Surplus** | ** ** | **Retained  Earnings** | ** ** | **Treasury  Stock** | ** ** | **Accumulated  Other  Compre-  hensive   Income (loss)** | ** ** | **Compre-  hensive  Income** | ** ** | **Total**  | ** ** |
|-------------------------------------------------------|------------|------------------|------------|-------------|------------|------------------------|------------|---------------------|------------|----------------------------------------------------------|------------|------------------------------|------------|------------|------------|
| **Shares**                                            | ** ** | **Stock**        |
| ** **                                            | ** ** | ** **       | ** ** | ** **  | ** ** | ** **             | ** ** | ** **          | ** ** | ** **                                               | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **BALANCE, DECEMBER 31, 2003**                   |       | 703,991          |       | $           | 1,300      |                   | $          | 2,408               |       | $                                                        | 15,426     |                         | $          | (1,406     | )          | $ | 62 |   |   |   | $ | 17,790 |   |
|                                                  |       |             |       |        |       |                   |       |                |       |                                                     |       |                         |       |       |       |   |   |
| Comprehensive income:                                 |       |             |       |        |       |                   |       |                |       |                                                     |       |                         |       |       |       |   |   |
|                                                  |       |             |       |        |       |                   |       |                |       |                                                     |       |                         |       |       |       |   |   |
| Net income for the 3 months ended March 31, 2004 |       | —           |       | —      |       | —                 |       | 450                 |       | —                                                   |       | —                       |       | $          | 450        |   | 450 |   |
|                                                  |       |             |       |        |       |                   |       |                |       |                                                     |       |                         |       |       |       |   |   |
| Other comprehensive income, net of tax                |       |             |       |        |       |                   |       |                |       |                                                     |       |                         |       |       |       |   |   |
|                                                  |       |             |       |        |       |                   |       |                |       |                                                     |       |                         |       |       |       |   |   |
| Unrealized loss on securities available-for-sale      |       | —           |       | —      |       | —                 |       | —              |       | —                                                   |       | (13                          | )          | (13        | )          | (13 | ) |
| Comprehensive income                                  |       |             |       |        |       |                   |       |                |       |                                                     |       |                         |       | $          | 437        |   |   |   |
|                                                  |       |             |       |        |       |                   |       |                |       |                                                     |       |                         |       |       |       |   |   |
| Cash dividend ($0.36 per share)                       |       | —           |       | —      |       | —                 |       | (253                | )          | —                                                   |       | —                       |       |       |       | (253 | ) |
|                                                  |       |             |       |        |       |                   |       |                |       |                                                     |       |                         |       |       |       |   |   |
| **BALANCE, MARCH 31, 2004**                      |       | 703,991          |       | $           | 1,300      |                   | $          | 2,408               |       | $                                                        | 15,623     |                         | $          | (1,406     | )          | $ | 49 |   |   |   | $ | 17,974 |   |
|                                                       |            |                  |            |             |            |                        |            |                     |            |                                                          |            |                              |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of the unaudited consolidated financialstatements.

 

4

 

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

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

**(In Thousands)**

 
| ** **                                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                           |       |                                   |       |   |   |
| Net income                                                                         |       | $                                      | 450        |   | $ | 531 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                   |       |   |   |
| Allowance for loan losses                                                          |       | —                                 |       | 3 |   |
| Depreciation and amortization                                                      |       | 62                                     |       | 66 |   |
| Premium amortization and accretion on investment securities                        |       | 5                                      |       | 23 |   |
| (Increase) decrease in interest receivable and other assets                        |       | 183                                    |       | (220 | ) |
| (Increase) decrease in interest payable and other liabilities                      |       | 104                                    |       | (10 | ) |
| Net cash provided by operating activities                                          |       | 804                                    |       | 393 |   |
|                                                                               |       |                                   |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                           |       |                                   |       |   |   |
| Proceeds from calls of securities available-for-sale                               |       | 29,502                                 |       | 21,477 |   |
| Purchases of securities available-for-sale                                         |       | (17,750                                | )          | (20,014 | ) |
| Net decrease in loans                                                              |       | 1,553                                  |       | 2,755 |   |
| Purchase of bank premises and equipment                                            |       | (205                                   | )          | (45 | ) |
| Net cash provided by investing activities                                          |       | 13,100                                 |       | 4,173 |   |
|                                                                               |       |                                   |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                           |       |                                   |       |   |   |
| Net increase in demand deposits                                                    |       | 5,694                                  |       | 7,334 |   |
| Net increase (decrease) in savings deposits                                        |       | 1,638                                  |       | (1,848 | ) |
| Net increase (decrease) in time deposits                                           |       | 195                                    |       | (453 | ) |
| Net increase in repurchase agreements                                              |       | —                                 |       | 2,003 |   |
| Dividends paid                                                                     |       | (253                                   | )          | (246 | ) |
| Net cash provided by financing activities                                          |       | 7,274                                  |       | 6,790 |   |
|                                                                               |       |                                   |       |   |   |
| **INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS**                              |       | 21,178                                 |       | 11,356 |   |
| ** **                                                                         |       |                                   |       |   |   |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD**                                |       | 18,727                                 |       | 16,968 |   |
| ** **                                                                         |       |                                   |       |   |   |
| **CASH AND CASH EQUIVALENTS, END OF PERIOD**                                       |       | $                                      | 39,905     |   | $ | 28,324 |   |
| ** **                                                                         |       |                                   |       |   |   |
| **Supplemental Disclosures:**                                                      |       |                                   |       |   |   |
| Cash paid for interest                                                             |       | $                                      | 459        |   | $ | 549 |   |
| Cash paid for income taxes                                                         |       | $                                      | 232        |   | $ | 286 |   |

 

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

 

5

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**LOGAN COUNTY BANCSHARES, INC. AND SUBSIDIARIES**

Notesto Consolidated Financial Statements

 

**NOTE 1 - CRITICAL ACCOUNTINGPOLICIES**

 

The accounting and reporting policies of LoganCounty BancShares, Inc. and its subsidiary (the “Company”) were prepared inaccordance with accounting principles generally accepted in the United Statesof America, (“U.S. GAAP”), instructions to Form 10-Q, Article 10 ofRegulation S-X, and to general practices within the financial servicesindustry. The preparation of financial statements in conformity with U.S. GAAPrequires management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes. Actual resultscould differ from those estimates. Management has identified the accountingpolicies described below as those that, due to the judgments, estimates andassumptions inherent in those policies, are critical to an understanding of theCompany’s consolidated financial statements and management’s discussion andanalysis of financial conditions and results of operations.

 

**INCOME RECOGNITION**

 

The Company recognizes interest income by methodsconforming to U.S. GAAP that include general accounting practices within thefinancial services industry. Interest income on loans and investment securitiesis recognized by methods that result in level rates of return on principalamounts 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 management believes collection of allor a portion of contractual interest on a loan has become doubtful, whichgenerally occurs after the loan is 90 days past due, the accrual of interest isdiscontinued. In addition, previously accrued interest deemed uncollectiblethat was recognized in income is reversed. Interest received on nonaccrualloans is included in income only if principal recovery is reasonably assured. Anonaccrual loan is restored to accrual status when it is brought current or hasperformed in accordance with contractual terms for a reasonable period of time,and the collectibility of the total contractual principal and interest is nolonger doubtful.

 

**ALLOWANCE FOR LOAN LOSSES**

 

In general, determining the amount of the allowancefor loan losses requires significant judgment and the use of estimates bymanagement. The Company maintains an allowance for loan losses to absorbprobable losses in the loan portfolio based on a quarterly analysis of theportfolio. This formal analysis determines an appropriate level and allocationof the allowance for loan losses among loan types and resulting provision forloan losses by considering factors affecting loan losses, including specificlosses, levels and trends in impaired and nonperforming loans, historical loanloss experience, current national and local economic conditions, volume, growthand composition of the portfolio, regulatory guidance and other relevantfactors. Management continually monitors the loan portfolio through reviews ofpast due loans and all significant loans which are considered to be potentialproblem loans on a monthly basis. The internal loan review function providesfor an independent review to evaluate the adequacy of the allowance. Theprovision could increase or decrease each quarter based upon the results ofmanagement’s formal analysis.

 

The amount of the allowance for loan losses for thevarious loan types represents management’s estimate of expected losses fromexisting loans based upon specific allocations for individual lendingrelationships and historical loss experience for each category of homogeneousloans. Impaired loans are commercial and commercial real estate loans for whichit is probable the Company will not be able to collect all amounts dueaccording to the contractual terms of the loan agreement. The Company individuallyevaluates such loans for impairment and does not aggregate loans by major riskclassifications. The definition of “impaired loans” is not the same as thedefinition of “nonaccrual loans,” although the two categories overlap. TheCompany may choose to place a loan on nonaccrual status due to payment 

 

6

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delinquency or uncertain collectibility while notclassifying the loan as impaired, provided the loan is not a commercial orcommercial real estate classification. Factors considered by management indetermining impairment include payment status and collateral value. The amountof impairment for these types of loans is determined by the difference betweenthe present value of the expected cash flows related to the loan, using theoriginal interest rate, and its recorded value, or as a practical expedient inthe case of collateralized loans, the difference between the fair value of thecollateral and the recorded amount of the loans. When foreclosure is probable,impairment is measured based on the fair value of the collateral. Whileallocations are made to specific loans and pools of loans, the allowance isavailable for all loan losses.

 

Mortgage loans secured by one-to-four familyproperties and all consumer loans are large groups of smaller-balancehomogeneous loans and are measured for impairment collectively. Loans thatexperience insignificant payment delays, which are defined as 90 days or less,generally are not classified as impaired. Management determines thesignificance 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 are based upon specificquantitative and qualitative criteria, including the size of the loan, loanquality ratings, value of collateral, repayment ability of borrowers, andhistorical experience factors. The historical experience factors utilized forindividual loan reviews are based upon past loss experience, known trends inlosses and delinquencies, the growth of loans in particular markets andindustries, and known changes in economic conditions in the particular lendingmarkets. Allowances for homogeneous loans (such as residential mortgage loans,personal loans, etc.) are evaluated based upon historical loss experience,trends in losses and delinquencies, growth of loans in particular markets, andknown changes in economic conditions in each lending market. There can be noassurance the allowance for loan losses will be adequate to cover all losses,but management believes the allowance for loan losses in the amount of$1,562,000 at March 31, 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 are classified at the time ofpurchase, based on management’s intention and ability, as securities availablefor sale or held to maturity. All debt and equity securities have beenclassified as available for sale to serve principally as a source of liquidity.Unrealized holding gains and losses for available-for-sale securities arereported as a separate component of stockholders’ equity, net of tax, untilrealized. Realized securities gains and losses are computed using the specificidentification method. Interest and dividends on investment securities arerecognized as income when earned.

 

While temporary changes in the market value ofavailable-for-sale securities are not recognized in earnings, a decline in fairvalue below amortized cost deemed to be other-than-temporary results in anadjustment to the cost basis of the investment, with a corresponding losscharged against earnings. Management evaluates the investment securities forother-than-temporary declines in estimated fair value on a quarterly basis.This analysis requires management to consider various factors in order todetermine if a decline in estimated fair value is temporary orother-than-temporary. These factors include duration and magnitude of thedecline in value, the financial condition of the issuer, and the company’sability and 

 

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intent to continue holding the investment for aperiod of time sufficient to allow for any anticipated recovery in marketvalue. At March 31, 2004, there were no investment securities identifiedby management to be other-than-temporarily impaired. If investments decline infair value due to adverse changes in the financial markets, charges to incomecould occur in future periods.

 

**INCOME TAXES**

 

The Company and its subsidiary file a consolidatedfederal income tax return. Deferred tax assets and liabilities are reflected atcurrently enacted income tax rates applicable to the period in which thedeferred tax assets and liabilities are expected to be realized or settled. Aschanges in tax laws or rates are enacted, deferred tax assets and liabilitiesare adjusted through the provision for income taxes. Deferred income taxexpenses or benefits are based on the changes in the deferred tax asset orliability from period to period. The provision for income taxes during thecurrent period is at a rate which management believes will approximate theeffective rate for the year.

 

**CASH FLOWS**

 

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

 

**EARNINGSPER SHARE**

 

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

 

**NOTE 2 –COMPREHENSIVE INCOME**

 

The components of comprehensive income consist exclusively ofunrealized gains and losses on available for sale securities.  For the three months ended March 31,2004, this activity is shown under the heading Comprehensive Income aspresented in the Consolidated Statement of Changes in Stockholders’ Equity(Unaudited).  For the three months ended March 31,2003, comprehensive income totaled $443,000.

 

**NOTE 3 - RESTATEMENT OF PREVIOUSLY REPORTEDFINANCIAL INFORMATION**

 

As disclosed on Form 8-K filed with the Commission on August 4,2004, the Company was informed by its independent auditor, McNeal, Williamson& Co. (“McNeal Williamson”) that McNeal Williamson was no longer permittedto issue audit reports for the Company and was no longer permitted to performinterim reviews in accordance with SAS 100 for the Company as a result ofMcNeal Williamson’s failure to register with the Public Company AccountingOversight Board (“PCAOB”).  McNealWilliamson advised the Company that it should obtain independentaccountants.  Accordingly, the Companyretained S. R. Snodgrass, A.C. on August 10, 2004, to:  (i) review all interim periods that werereviewed by McNeal Williamson after the adoption of Sarbanes-Oxley; (ii)re-audit the audit report for the period ended December 31, 2003; and(iii) review the audit report for the period ended December 31, 2002.  As a result of S. R. Snodgrass, A.C.’sre-audit of the 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 was decreased by $1,898,000, non-interest bearing demand depositsdecreased by $376,000, and interest bearing demand deposits decreased by$1,522,000 as the result of the elimination of intercompany account balances asof December 31, 2003.  Total assetsand total liabilities each decreased by $2,056,000 

 

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as the result of these eliminations and the reclassification ofdeferred tax balances.  Previouslyreported net income and net income per share remained unchanged.

 

The Consolidated Statement of Cash Flows has been restated to includefederal funds sold as cash and cash equivalents.

 

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LOGAN COUNTY BANCSHARES, INC.

 

ITEM 2. - MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

 

This narrative will assist readers in their analysis of theaccompanying consolidated financial statements. It should be read in conjunction with the unaudited consolidatedfinancial statements and the notes. Management is not aware of any market or institutional trends, events,or uncertainties that will have or are reasonably likely to have a materialeffect on the liquidity, capital resources, or operations 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.

 

THREE MONTHS ENDED MARCH 31,2004

 

The Company reported net income of$450,000 for the three months ended March 31, 2004, compared to $531,000for the three months ended March 31, 2003, representing a decrease of 15%,or $81,000.  The net interest income was$1,571,000, for the three months ended March 31, 2004, a decrease of $128,000,or 7.53%, compared to $1,699,000 for the first quarter of 2003.  The decrease points out the decline ininterest rates during the two periods. Management continues to actively monitor interest rate risk using assetand liability matching techniques.  Netinterest margins for the three months ended March 31, 2004 and 2003, were3.77% and 4.16%, respectively.

 

Interest income amounted to $2,024,000 for the three months ended March 31,2004, a decrease of $225,000, or 10%, from $2,249,000 for the same three-monthperiod of 2003.  This decrease isdirectly tied to lower market interest rates. Interest income reflected a weighed-average yield on earning assets of4.86% for the quarter ended March 31, 2004, compared to 5.51% for thefirst quarter of 2003.  Average interestearning assets were $100,838,000 and $106,577,000 during the three months endedMarch 31, 2004 and 2003, respectively.

 

Interest expense decreased to $453,000 for the quarter ended March 31,2004.  The decrease equaled $97,000, or17.64%, from $550,000 for the three-month period ended March 31,2003.  This reflected an average cost offunds of 1.35% and 1.68%, respectively, for the three-month periods ended March 31,2004 and 2003.  Lower market interestrates were the major factor.  Averageinterest bearing liabilities were $125,790,000 and $126,530,0000 during thethree months ended March 31, 2004 and 2003, respectively.

 

There was no provision for loan losses for the three-month period endedMarch 31, 2004, compared to $2,000 for the first quarter of 2003.  The decreased provision resulted primarilyfrom an increase in recoveries and slower loan growth.

 

NONINTEREST INCOME

 

Non-interest income includes revenues from all sources other thaninterest income.  For the three-month-periodended March 31, 2004, non-interest income totaled $260,000, representingan increase of $7,000, or 2.77%, from the $253,000 recorded during the sameperiod of 2003.  This increase wasprimarily due to increases in other income of $4,000 and increased fees of $3,000.

 

NONINTEREST EXPENSE

 

Non-interest expense includes overhead costs which are not related tointerest expense or to losses from loans or securities.  For the three months ended March 31,2004, the Company’s non-interest expense 

 

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totaled $1,154,000, increasing $36,000 over the $1,118,000 ofnon-interest expense for the three months ended March 31, 2003.  Expressed as a percentage of period-endassets, annualized non-interest expense was 2.53% at both March 31, 2004,and March 31, 2003.

 

Salaries and employee benefits are Logan County BancShares’ largestnon-interest cost, representing approximately 51% of total non-interest expenseat March 31, 2004, and 52% for the first quarter of 2003.  Salaries and employee benefits increased only$6,000, or 1.03%, at March 31, 2004, compared to March 31, 2003.  This increase is primarily due to normalpersonnel increases and timing of personnel benefit accruals.

 

INCOME TAXES

 

Logan County BancShares’ income tax expense, for the three month periodended March 31, 2004, reflected a $53,000, or 18%, decrease when comparedto the same period of 2003, primarily as the result of a decrease in pre-taxincome.  Income tax expense equaled33.53% and 36.18% of income before taxes at March 31, 2004 and 2003,respectively.

 

Earnings per weighted-average income per common share, for thethree-month periods ended March 31, 2004 and 2003, were $0.64 and $0.75,respectively.  The amounts were the samefor both basic and diluted earnings per share. Earnings through March 31, 2004, reflect an annualized return onaverage assets (ROAA) of 1.01% compared to 1.23% for the period ended March 31,2003.  Also, these earnings reflect anannualized return on average equity (ROAE) of 10.07% and 12.28%, respectively,for the periods ending March 31, 2004 and 2003.  Dividends for the first quarter of 2004increased to $0.36 per share, or a 2.9% increase from $0.35 per share paid forthe first quarter of 2003.

 

FINANCIAL CONDITION AND ASSET QUALITY

 

Total assets at March 31, 2004, were approximately $181,576,000,as compared to approximately $173,603,000 at December 31, 2003, for anincrease of $ 7,973,000, or 4.6%.  Theloan portfolio decreased by $1,553,000 to $100,062,000 at March 31, 2004,or 1.53%, during this three-month period, from $101,615,000 at December 31,2003.  As the economy began to show signsof improvement during the first quarter, loan demand began to improve.  However, management continues to adhere toits policy of not extending long-term fixed rate financing in this low interestrate environment.  By investingshort-term, management believes it is better positioned to manage the interestmargin as interest rates began to increase. The investment portfolio decreased by $11,747,000, or 24.49%, duringthis same period.  At the same time,federal funds sold increased by $20,700,000, which was an increase of155%.  Total deposits increased by$7,526,000 to $159,781,000 at March 31, 2004, from $152,255,000 at December 31,2003.  Although deposits increased by4.9%, pricing for deposits was very competitive in the Company’s primary tradeareas among banks and other nontraditional financial service providers,indicating future pressure on the Company’s net interest income.

 

The continuing stagnation in the local and national economies placesongoing emphasis on the Company’s methodology in determining the adequacy ofthe allowance for loan losses.  TheCompany periodically evaluates the adequacy of the allowance for loan losses inorder to maintain the allowance at a level that is sufficient to absorbprobable credit losses.  This evaluationis based on a review of the Company’s historical loss experience, known andinherent risks in the loan portfolio, including adverse circumstances that mayaffect the ability of the borrower to repay interest and/or principal, theestimated value of collateral, and an analysis of the levels and trends ofdelinquencies, charge-offs, and the risk ratings of the various loancategories.  Such factors as the leveland trend of interest rates and the condition of the national and localeconomies are also considered.  At March 31,2004, and December 31, 2003, the allowance for loan losses was $1,562,000and $1,582,000, respectively.  Thisresulted in the 

 

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ratio of the allowance for loan losses to total period-end loansdecreasing slightly from 1.56% at December 31, 2003, compared to 1.56% at March 31,2004.  Estimates may change at some pointin the future.

 

Financial instruments include commitments to extend credit and standbyletters of credit.  These commitmentsinclude standby letters of credit of approximately $1,057,000 at March 31,2004, and $1,027,000 at December 31, 2003. These instruments contain various elements of credit and interest raterisk in excess of the amount recognized in the consolidated statements offinancial condition.  Additionally,certain off-balance sheet items of approximately $11,842,000 at March 31,2004, and $11,670,000 at December 31, 2003, were comprised primarily ofunfunded loan commitments.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity management involvesthe ability to meet the cash flow requirements of depositors wanting towithdraw funds or borrowers needing assurance that sufficient funds will beavailable to meet their credit needs. Liquidity can best be demonstrated by an analysis of the Company’s cashflows.  The primary source of cash flowsfor the Company is operating activities. Operating activities provided $804,000 of liquidity for the three-monthperiod ended March 31, 2004, compared to $393,000 for the same threemonths in 2003.  The principal elementsof these operating flows are net income, increased for significant non-cashexpenses, and depreciation and amortization. A secondary source of liquidity for the Company comes from investingactivities, principally the maturities of investment securities.  For the three-month periods ended March 31,2004 and 2003, due to the low interest rate environment, maturities and callsof investment securities amounted to $29,502,000 and $21,477,000,respectively.  As of March 31, 2004,the Company had approximately $4,257,000 of investment securities that maturewithin 12 months.  Interest rates arebeginning to stabilize and the rapidity of calls in investment securities isexpected to decline.  Relatively flatloan demand resulted in a net decrease in loans of $1,553,000 for the firstthree months of 2004 following a decline of $2,755,000 the same period in2003.  The Company could always borrowmoney as another source of funds.

 

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

 

ITEM3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

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

 

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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 SENSITIVEANALYSIS 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    | %          |

 

ITEM 4. – CONTROLS ANDPROCEDURES

 

Evaluation of disclosure controls andprocedures:

 

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.

 

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Changes in internal controls:

 

There were no significant changes in the Company’s internal controls orin other factors that could significantly affect these controls subsequent tothe date of the evaluation referred to above.

 

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**PART II**

 

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 1350 Certifications

 

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

 

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

 

(b)                 Reports on Form8-K

 

None

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized. 

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

 

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**EXHIBITINDEX**

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

 

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