**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

** **

**FORM10-Q/A**

** **

**AmendmentNo. 1**

 

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**Quarterly Report Pursuant toSection 13 or 15(d) of**

**the Securities Exchange Act of1934**

 

**For thequarterly period ended:**

** **

**March31, 2003**

** **

**CommissionFile Number:  2-95114**

** **

**LOGANCOUNTY BANCSHARES, INC.**

(Exactname 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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Indicateby check 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 filing requirementsfor the past 90 days.                                                                        Yes   ý   No   o

 

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

 

Indicatethe number of shares outstanding of each of the registrant’s classes of commonstock as of the latest practicable date:

 
| Class  Outstanding at February 28, 2005 |   |
|-----------------------------------------|--------|
|                                    |   |   |   |
| Common Stock  ($1.67 Par Value)         |   | 703,991 Shares |   |

 

 

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LOGAN COUNTY BANCSHARES, INC.

 

Table of Contents

 
| EXPLANATORY NOTE                     |                                                                                                                                   |
|--------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------|
|                                 |                                                                                                                                   |
| PART I –  FINANCIAL INFORMATION |                                                                                                                                   |
| ITEM 1.                              | FINANCIAL STATEMENTS:                                                                                                                  |   |
|                                 |                                                                                                                                   |   |
|                                 | Consolidated Statement  of Condition as of March 31, 2003 (unaudited) and December 31, 2002.                                           |   |
|                                 |                                                                                                                                   |   |
|                                 | Consolidated  Statements of Income For the Three-Month Periods Ended March 31, 2003 and  2002 (unaudited)                              |   |
|                                 |                                                                                                                                   |   |
|                                 | Consolidated  Statement of Changes in Stockholders’ Equity for the Three-Month Periods  Ended March 31, 2003 and 2002 (unaudited) |   |
|                                 |                                                                                                                                   |   |
|                                 | Consolidated  Statements of Cash Flows for the Three-Month Periods Ended March 31, 2003 and  2002 (unaudited)                          |   |
|                                 |                                                                                                                                   |   |
|                                 | Notes  to Consolidated Financial Statements                                                                                            |   |
|                                 |                                                                                                                                   |   |
| ITEM 2.                              | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                            |   |
|                                 |                                                                                                                                   |   |
| ITEM  3.                             | QUANTITATIVE  AND QUALITATIVE MARKET RISK                                                                                              |   |
|                                 |                                                                                                                                   |   |
| ITEM 4.                              | CONTROLS AND  PROCEDURES                                                                                                               |   |
|                                 |                                                                                                                                   |
| PART II –  OTHER INFORMATION    |                                                                                                                                   |
|                                 |                                                                                                                                   |   |
| ITEM 1.                              | LEGAL PROCEEDINGS                                                                                                                      | None |
|                                 |                                                                                                                                   |   |
| ITEM 2.                              | CHANGES IN SECURITIES AND USE OF PROCEEDS                                                                                              | None |
|                                 |                                                                                                                                   |   |
| ITEM 3.                              | DEFAULTS UPON SENIOR SECURITIES                                                                                                        | None |
|                                 |                                                                                                                                   |   |
| ITEM 4.                              | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                                    | None |
|                                 |                                                                                                                                   |   |
| ITEM 5.                              | OTHER INFORMATION                                                                                                                      | None |
|                                 |                                                                                                                                   |   |

 

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**

 

This Amendment No. 1 on Form10-Q/A amends the Company’s 10-Q for the period ending March 31, 2003, byadding Items 3 and 4, which were not previously addressed in the Company’s 10-Qfor the period ending March 31, 2003, and making additional disclosures inManagement’s Discussion and Analysis of Financial Condition and Results ofOperation in Item 2.

 

As disclosed on Form 8-Kfiled with the Securities and Exchange Commission (the “Commission”) on July23, 2004, Logan County 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.

 

This Amendment No. 1 on Form10-Q/A also revises the consolidated balance sheet to eliminate intercompanybalances, restates the consolidated statement of cash flows to reflect federalfunds sold as cash equivalents, and makes other revisions in format to conformto standard presentation for financial institutions.  As disclosed on Form 8-K filed with theCommission on August 4, 2004, the Company was informed by its independentauditor, McNeal, Williamson & Co. (“McNeal Williamson”) that McNealWilliamson was no longer permitted to issue audit reports for the Company andwas no longer permitted to perform interim reviews in accordance with SAS 100for the Company as a result of McNeal Williamson’s failure to register with thePublic Company Accounting Oversight Board (“PCAOB”).  McNeal Williamson advised the Company that itshould obtain independent accountants. Accordingly, the Company retained S. R. Snodgrass, A.C. on August 10,2004, to:  (i) review all interim periodsthat were reviewed by McNeal Williamson after the adoption of Sarbanes-Oxley;(ii) re-audit the financial statements for the period ended December 31, 2003;and (iii) review the audit for the period ended December 31, 2002.  As a result of S. R. Snodgrass, A.C.’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 STATEMENT OF CONDITION**

**(InThousands)**

 
| ** **                                                                          | ** ** | **March 31,**   | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                          | ** ** | **2003**        | ** ** | **2002**         | ** ** |
| ** **                                                                          | ** ** | **(Unaudited)** | ** ** | ** **       | ** ** |
| **ASSETS**                                                                          |       |            |       |             |       |
| **CASH AND  CASH EQUIVALENTS**                                                      |       |            |       |             |       |
| Cash and due  from banks                                                            |       | $               | 6,938      |             | $          | 5,598 |   |
| Federal  funds sold                                                                 |       | 20,990          |       | 11,370           |       |
| Total cash  and cash equivalents                                                    |       | 27,928          |       | 16,968           |       |
|                                                                                |       |            |       |             |       |
| **INVESTMENT  SECURITIES**                                                          |       |            |       |             |       |
| Available-for-sale                                                                  |       | 39,605          |       | 41,305           |       |
|                                                                                |       |            |       |             |       |
| **LOANS**                                                                           |       | 105,222         |       | 107,933          |       |
| Allowance  for loan losses                                                          |       | (1,578          | )          | (1,619           | )          |
| Net loans                                                                           |       | 103,644         |       | 106,314          |       |
|                                                                                |       |            |       |             |       |
| **BANK  PREMISES AND EQUIPMENT**                                                    |       | 3,196           |       | 3,217            |       |
|                                                                                |       |            |       |             |       |
| **ACCRUED  INTEREST AND OTHER ASSETS**                                              |       | 1,746           |       | 1,526            |       |
| ** **                                                                          |       |            |       |             |       |
| **TOTAL  ASSETS**                                                                   |       | $               | 176,119    |             | $          | 169,330 |   |
|                                                                                |       |            |       |             |       |
| **LIABILITIES**                                                                     |       |            |       |             |       |
| **DEPOSITS**                                                                        |       |            |       |             |       |
| Non-interest                                                                        |       | $               | 27,017     |             | $          | 24,707 |   |
| Interest-bearing                                                                    |       | 26,479          |       | 21,851           |       |
| Savings                                                                             |       | 43,016          |       | 44,864           |       |
| Time                                                                                |       | 58,199          |       | 58,652           |       |
| **TOTAL  DEPOSITS**                                                                 |       | 154,711         |       | 150,074          |       |
|                                                                                |       |            |       |             |       |
| Securities  repurchase agreements                                                   |       | 3,003           |       | 1,000            |       |
|                                                                                |       |            |       |             |       |
| Accrued  interest and other liabilities                                             |       | 430             |       | 1,046            |       |
|                                                                                |       |            |       |             |       |
| **INCOME  TAXES PAYABLE**                                                           |       |            |       |             |       |
| Current                                                                             |       | 283             |       | —           |       |
| Deferred                                                                            |       | 302             |       | 17               |       |
| **TOTAL  LIABILITIES**                                                              |       | 158,729         |       | 152,137          |       |
|                                                                                |       |            |       |             |       |
| **STOCKHOLDERS’  EQUITY**                                                      |       |            |       |             |       |
|                                                                                |       |            |       |             |       |
| Common stock  - 780,000 shares authorized at $1.67 par value; 703,991 shares issued |       | 1,300           |       | 1,300            |       |
| Treasury  Stock - 76,000 shares at cost                                             |       | (1,406          | )          | (1,406           | )          |
| Surplus                                                                             |       | 2,408           |       | 2,408            |       |
| Retained  earnings                                                                  |       | 14,916          |       | 14,631           |       |
| Accumulated  other comprehensive income                                             |       | 172             |       | 260              |       |
| Total  stockholders’ equity                                                    |       | 17,390          |       | 17,193           |       |
|                                                                                |       |            |       |             |       |
| Total  liabilities and stockholders’ equity                                    |       | $               | 176,119    |             | $          | 169,330 |   |

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

2

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

**CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)**

**(InThousands)**

 
| ** **                                           | ** ** | **Three  Months Ended** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|
| ** **                                           | ** ** | **March  31,**          | ** ** |
| ** **                                           | ** ** | **2003**                | ** ** | **2002** | ** ** |
| **INTEREST  INCOME**                                 |       |                    |       |   |   |
| Interest and  fees on loans - taxable                |       | $                       | 1,927      |   | $ | 2,218 |   |
| Investment  securities:                              |       |                    |       |   |   |
| Available-for-sale                                   |       | 273                     |       | 335 |   |
| Interest on  federal funds sold                      |       | 49                      |       | 51 |   |
| Total  interest income                               |       | 2,249                   |       | 2,604 |   |
|                                                 |       |                    |       |   |   |
| **INTEREST  EXPENSE**                                |       |                    |       |   |   |
| Deposits                                             |       | 531                     |       | 725 |   |
| Other  borrowings                                    |       | 19                      |       | 39 |   |
| Total interest  expense                              |       | 550                     |       | 764 |   |
|                                                 |       |                    |       |   |   |
| Net interest  income                                 |       | 1,699                   |       | 1,840 |   |
|                                                 |       |                    |       |   |   |
| **PROVISION  FOR LOAN LOSSES**                       |       | 2                       |       | 60 |   |
| Net interest  income after provision for loan losses |       | 1,697                   |       | 1,780 |   |
|                                                 |       |                    |       |   |   |
| **NON-INTEREST  INCOME**                             |       |                    |       |   |   |
| Service  charges and other fees                      |       | 194                     |       | 153 |   |
| Other  operating income                              |       | 59                      |       | 43 |   |
| Total  non-interest income                           |       | 253                     |       | 196 |   |
|                                                 |       |                    |       |   |   |
| **NON-INTEREST  EXPENSES**                           |       |                    |       |   |   |
| Salaries and  benefits                               |       | 584                     |       | 572 |   |
| Expense of  bank premises and equipment              |       | 149                     |       | 139 |   |
| Other  operating expenses                            |       | 385                     |       | 403 |   |
| Total  non-interest expenses                         |       | 1,118                   |       | 1,114 |   |
|                                                 |       |                    |       |   |   |
| Income  before income taxes                          |       | 832                     |       | 862 |   |
|                                                 |       |                    |       |   |   |
| **INCOME  TAXES**                                    |       | 301                     |       | 325 |   |
|                                                 |       |                    |       |   |   |
| Net income                                           |       | $                       | 531        |   | $ | 537 |   |
|                                                 |       |                    |       |   |   |
| **WEIGHTED  AVERAGE SHARES OUTSTANDING**             |       | 703,991                 |       | 716,991 |   |
|                                                 |       |                    |       |   |   |
| **EARNINGS  PER COMMON SHARE**                       |       | $                       | 0.75       |   | $ | 0.76 |   |

 

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

 

3

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**LoganCounty BancShares, Inc. and Subsidiary**

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

**(In Thousands)**

 
| ** **                                              | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|------------|------------|-------------|------------|--------------|------------|-------------------|------------|-------------------|------------|--------------|------------|------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | **Other**         | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | **Common** | ** ** | ** **  | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Comprehensive** | ** ** | **Treasury** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | **Stock**  | ** ** | **Surplus** | ** ** | **Earnings** | ** ** | **Income, Net**   | ** ** | **Income**        | ** ** | **Stock**    | ** ** | **Total**  | ** ** |
| ** **                                              | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | ** **        | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** |
| **BALANCE  DECEMBER 31, 2002**                          |       | $          | 1,300      |        | $          | 2,408        |       | $                 | 14,631     |              | $          | 260          |       |       |       | $ | (1,406 | ) | $ | 17,193 |   |
|                                                    |       |       |       |        |       |         |       |              |       |              |       |         |       |       |       |
| Comprehensive  Income:                                  |       |       |       |        |       |         |       |              |       |              |       |         |       |       |       |
| Net income  for the three months ended March 31, 2003   |       | —     |       | —      |       | 531          |       | —            |       | $                 | 531        |         | —     |       | 531        |   |
|                                                    |       |       |       |        |       |         |       |              |       |              |       |         |       |       |       |
| Net  unrealized losses on available-for-sale securities |       | —     |       | —      |       | —       |       | (88               | )          | (88               | )          | —       |       | (88        | )          |
| Total  comprehensive income                             |       |       |       |        |       |         |       |              |       | $                 | 443        |         |       |       |       |   |
|                                                    |       |       |       |        |       |         |       |              |       |              |       |         |       |       |       |
| Dividends on  703,991 shares common stock @ $0.35       |       | —     |       | —      |       | (246         | )          | —            |       |              |       | —       |       | (246       | )          |
|                                                    |       |       |       |        |       |         |       |              |       |              |       |         |       |       |       |
| **BALANCE,  MARCH 31, 2003**                            |       | $          | 1,300      |        | $          | 2,408        |       | $                 | 14,916     |              | $          | 172          |       |       |       | $ | (1,406 | ) | $ | 17,390 |   |
|                                                         |            |            |            |             |            |              |            |                   |            |                   |            |              |            |            |            |  |  |  |  |  |  |  |  |  |

 

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

 

4

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**Logan County BancShares, Inc. andSubsidiary**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the Three Month Periods Ended March 31, 2003 and2002**

**(InThousands)**

 
| ** **                                                                         | ** ** | **March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------|------------|
| ** **                                                                         | ** ** | **2003**      | ** ** | **2002** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                          |       |          |       |   |   |
| Net income                                                                         |       | $             | 531        |   | $ | 537 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |          |       |   |   |
| Depreciation                                                                       |       | 66            |       | 67 |   |
| Deferred tax  related to investments                                               |       | 66            |       | — |   |
| Premium  amortization and accretion on investment securities                       |       | 23            |       | 19 |   |
| Provision  for loan losses                                                         |       | 2             |       | 60 |   |
| (Increase)  decrease in other assets                                               |       | (220          | )          | (51 | ) |
| Increase  (decrease) in other liabilities                                          |       | (48           | )          | (56 | ) |
| Net cash  provided by operating activities                                         |       | 420           |       | 576 |   |
|                                                                               |       |          |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                          |       |          |       |   |   |
| Proceeds  from sales of securities available-for-sale                              |       | 21,477        |       | 13,000 |   |
| Proceeds  from maturities of securities available-for-sale                         |       | —        |       | 3,487 |   |
| Purchases of  securities available-for-sale                                        |       | (19,954       | )          | (17,504 | ) |
| Net  (increase) decrease in loans                                                  |       | 2,668         |       | 5,781 |   |
| Purchase of  bank premises and equipment                                           |       | (45           | )          | (6 | ) |
| Net cash  provided by investing activities                                         |       | 4,146         |       | 4,758 |   |
|                                                                               |       |          |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                          |       |          |       |   |   |
| Net increase  (decrease) in demand deposits                                        |       | 6,938         |       | 2,797 |   |
| Net increase  (decrease) in savings deposits                                       |       | (1,848        | )          | 4,021 |   |
| Net increase  (decrease) in time deposits                                          |       | (453          | )          | (1,903 | ) |
| Net increase  (decrease) in Federal Funds purchased/repurchased                    |       | 2,003         |       | 1,004 |   |
| Dividends  paid                                                                    |       | (246          | )          | (244 | ) |
| Net cash  provided by financing activities                                         |       | 6,394         |       | 5,675 |   |
|                                                                               |       |          |       |   |   |
| **NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**                          |       | 10,960        |       | 11,009 |   |
| ** **                                                                         |       |          |       |   |   |
| **CASH AND  CASH EQUIVALENTS, BEGINNING OF PERIOD**                                |       | 16,968        |       | 14,222 |   |
| ** **                                                                         |       |          |       |   |   |
| **CASH AND  CASH EQUIVALENTS, END OF PERIOD**                                      |       | $             | 27,928     |   | $ | 25,231 |   |
| ** **                                                                         |       |          |       |   |   |
| **Supplemental  Disclosures:**                                                     |       |          |       |   |   |
| Cash paid  for interest                                                            |       | $             | 549,528    |   | $ | 791,432 |   |
| Cash paid  for income taxes                                                        |       | $             | 75,482     |   | $ | 745,276 |   |

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

5

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**LOGANCOUNTY BANCSHARES, INC. AND SUBSIDIARIES**

Notesto Consolidated Financial Statements (Unaudited)

 

**NOTE 1 - CRITICAL ACCOUNTING POLICIES**

 

Theaccounting and reporting policies of Logan County BancShares, Inc. and itssubsidiary ( the “Company”) were prepared in accordance with accountingprinciples generally accepted in the United States of America, (“U.S. GAAP”),instructions to Form 10-Q, Article 10 of Regulation S-X, and to generalpractices within the financial services industry. The preparation of financialstatements in conformity with U.S. GAAP requires management to make estimatesand assumptions that affect the amounts reported in the financial statementsand accompanying notes. Actual results could differ from those estimates.Management has identified the accounting policies described below as thosethat, due to the judgments, estimates and assumptions inherent in thosepolicies, are critical to an understanding of the Company’s consolidatedfinancial statements and management’s discussion and analysis of financialconditions and results of operations.

 

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

 

The accompanying unaudited consolidated financial statements have beenprepared in accordance with the instructions to Form 10-Q and Article 10 ofRegulation X and, therefore, do not necessarily include all information thatwould be included in audited financial statements required by U. S.GAAP.  The information furnished reflectsall adjustments which are, in the opinion of management, necessary for a fairstatement of the results of operations. All such adjustments are of a normal recurring nature.  The results of operations for the interimperiods may not necessarily be indicative of the results to be expected for thefiscal year ended December 31, 2003.

 

Thesestatements should be read in conjunction with the audited consolidatedstatements as of and for the fiscal year ended December 31, 2002, and related noteswhich are included in the Company’s Annual Report on Form 10-K (file no.2-95114).

 

**INCOME RECOGNITION**

 

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

 

Inthe event management believes collection of all or a portion of contractualinterest on a loan has become doubtful, which generally occurs after the loanis 90 days past due, the accrual of interest is discontinued.  In addition, previously accrued interestdeemed uncollectible that was recognized in income is reversed.  Interest received on nonaccrual loans isincluded in income only if principal recovery is reasonably assured.  A nonaccrual loan is restored to accrualstatus when it is brought current or has performed in accordance withcontractual terms for a reasonable period of time, is well secured, and thecollectibility of the total contractual principal and interest is no longerdoubtful.

 

**ALLOWANCE FOR LOAN LOSSES**

 

Ingeneral, determining the amount of the allowance for loan losses requiressignificant judgment and the use of estimates by management.  The Company maintains an allowance for loanlosses to absorb

 

6

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probablelosses in the loan portfolio based on a quarterly analysis of theportfolio.  This formal analysisdetermines an appropriate level and allocation of the allowance for loan lossesamong loan types and resulting provision for loan losses by considering factorsaffecting loan losses, including specific losses, levels and trends in impairedand nonperforming loans, historical loan loss experience, current national andlocal economic conditions, volume, growth and composition of the portfolio,regulatory guidance and other relevant factors. Management continually monitors the loan portfolio through reviews ofpast due loans and all significant loans which are considered to be potentialproblem loans on a monthly basis.  Theinternal loan review function provides for an independent review to evaluatethe adequacy of the allowance.  Theprovision could increase or decrease each quarter based upon the results ofmanagement’s formal analysis. In addition, adequacy of the allowance isreviewed on a regular basis by the Bank’s primary regulator and by the Company’sindependent accountants.

 

Theamount of the allowance for loan losses for the various loan types representsmanagement’s estimate of expected losses from existing loans based uponspecific allocations for individual lending relationships and historical lossexperience for each category 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 individuallyevaluates such loans for impairment and does not aggregate loans by major riskclassifications.  The definition of “impairedloans” is not the same as the definition of “nonaccrual loans,” although thetwo categories overlap.  The Company maychoose to place a loan on nonaccrual status due to payment delinquency oruncertain collectibility while not classifying the loan as impaired, providedthe loan is not a commercial or commercial real estate classification.  Factors considered by management indetermining impairment include payment status and collateral value.  The amount of impairment for these types ofloans is determined by the difference between the present value of the expectedcash flows related to the loan, using the original loan interest rate, and itsrecorded value, or as a practical expedient in the case of collateralizedloans, the difference between the fair value of the collateral and the recordedamount of the loans.  When foreclosure isprobable, impairment is measured based on the fair value of thecollateral.  While allocations are madeto specific loans and pools of loans, the allowance is available for all loanlosses.

 

Mortgageloans secured by one-to-four family properties and all consumer loans are largegroups of smaller-balance homogeneous loans and are measured for impairmentcollectively based on historical experience of the group.  Loans that experience insignificant paymentdelays, which are defined as 90 days or less past due, generally are notclassified as impaired.  Managementdetermines the significance of payment delays on a case-by-case basis takinginto consideration all circumstances concerning the loan, the credit worthinessand payment history of the borrower, the length of the payment delay, and theamount of shortfall in relation to the principal and interest owed.

 

Individualloan reviews are based upon specific quantitative and qualitative criteria,including the size of the loan, loan quality ratings, value of collateral,repayment ability of borrowers, and historical experience factors.  The historical experience factors utilizedfor individual loan reviews are based upon past loss experience, known trendsin losses 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 basedupon historical loss experience, trends in losses and delinquencies, growth ofloans in particular markets, and known changes in economic conditions in eachlending 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 $1,578,000at March 31, 2003, was adequate to provide for probable losses from existingloans based on information currently available. While management uses available information to provide for loan losses,the ultimate collectibility of a substantial portion of the loan portfolio, andthe need for future additions to the allowance, will be based on changes ineconomic conditions and other relevant

 

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factors.  As such, an adverse change in economicactivity could reduce cash flows for both commercial and individual borrowers,which could cause the Company to experience increases in problem assets,delinquencies and losses on loans.

 

**INVESTMENT SECURITIES**

 

Investmentsecurities are classified at the time of purchase, based on management’sintention and ability, as securities available for sale or held tomaturity.  All debt and equity securitieshave been classified as available for sale to serve principally as a source ofliquidity.  Unrealized holding gains andlosses for available-for-sale securities are reported as a separate componentof stockholders’ equity, net of tax, until realized.  Realized securities gains and losses arecomputed using the specific identification method.  Interest and dividends on investmentsecurities are recognized as income when earned.

 

Whiletemporary changes in the market value of available-for-sale securities are notrecognized in earnings, a decline in fair value below amortized cost deemed tobe other-than-temporary results in an adjustment to the cost basis of theinvestment, with a corresponding loss charged against earnings.  Management evaluates the investmentsecurities for other-than-temporary declines in estimated fair value on aquarterly basis.  This analysis requiresmanagement to consider various factors in order to determine if a decline inestimated fair value is temporary or other-than-temporary.  These factors include duration and magnitudeof the decline in value, the financial condition of the issuer, and the company’sability and intent to continue holding the investment for a period of timesufficient to allow for any anticipated recovery in market value.  At March 31, 2003, there were no investmentsecurities identified by management to be other-than-temporarily impaired.  If investments decline in fair value due toadverse changes in the financial markets, charges to income could occur infuture periods unless the investments are held to maturity.

 

**INCOME TAXES**

 

TheCompany and its subsidiary file a consolidated federal income tax return.  Deferred tax assets and liabilities arereflected at currently enacted income tax rates applicable to the period inwhich the deferred tax assets and liabilities are expected to be realized orsettled.  As changes in tax laws or ratesare enacted, deferred tax assets and liabilities are adjusted through the provisionfor income taxes.  Deferred income taxexpenses or benefits are based on the changes in the deferred tax asset orliability from period to period.  Theprovision for income taxes during the current period is at a rate whichmanagement believes will approximate the effective rate for the year.

 

**CASH FLOWS**

 

Cashand cash equivalents consist of cash and due from banks and federal funds sold.

 

**EARNINGS PER SHARE**

 

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

 

**NOTE 2 – RECENT ACCOUNTING STANDARDS**

 

The FASB issued SFAS No. 143, “Accounting forAsset Retirement Obligations,” which addresses financial accounting andreporting for obligations associated with the retirement of tangible long-livedassets and the associated asset retirement costs.  This statement requires an entity torecognize the fair

 

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value of a liability for an asset retirementobligation in the period in which it is incurred if a reasonable estimate offair value can be made.  This statementis effective for financial statements issued for fiscal years beginning afterJune 15, 2002.  Initial application ofthis statement is as of the beginning of an entity’s fiscal year.  The adoption of SFAS No. 143 did not have amaterial impact on the Company.

 

The FASB issued SFAS No. 146, “Accounting forCosts Associated with Exit or Disposal Activities.”  This Statement requires that a liability fora cost associated with an exit or disposal activity be recognized and measuredinitially at fair value when the liability is incurred.  This statement nullifies Emerging Issues TaskForce Issue No. 94-3, which required the recognition of a liability for an exitcost at the date of an entity’s commitment to an exit plan.  The effective date of this statement is forexit or disposal activities that are initiated after December 31, 2002, withearly application encouraged.  Theadoption of this Statement did not have a material impact on the Company.

 

The FASB issued SFAS No. 147, “Acquisitions ofCertain Financial Institutions.”  Exceptfor transactions between two or more mutual enterprises, this Statement removesacquisitions of financial institutions from the scope of both SFAS No. 72, “Accountingfor Certain Acquisitions of Banking and Thrift Institutions,” and FASBInterpretation No. 9, “Applying APB Opinions No. 16 and 17 When a Savings andLoan Association or Similar Institution Is Acquired in a Business CombinationAccounted for by the Purchase Method.” SFAS No. 147 requires that these transactions be accounted for inaccordance with FASB Statements No. 141, “Business Combinations,” and No. 142, “Goodwilland Other Intangible Assets.”  Thisstatement also amends SFAS No. 144 to include in its scope long-termcustomer-relationship intangible assets of financial institutions such asdepositor- and borrower- relationship intangible assets and credit cardholderintangible assets.  The effective date ofthis Statement is generally for activities on or after October 1, 2002.  The adoption of SFAS No. 147 did not have amaterial impact on the Company.

 

On December 31, 2002, the FASB issued SFAS No.148, “Accounting for Stock-BasedCompensation - Transition and Disclosure,” which amends SFAS No. 123, “Accounting for Stock-Based Compensation.”  SFAS No. 148 amends the disclosurerequirements of SFAS No. 123 to require more prominent and more frequentdisclosures in financial statements about the effects of stock-basedcompensation.  Under the provisions ofSFAS No. 123, companies that adopted the preferable, fair value based methodwere required to apply that method prospectively for new stock optionawards.  This contributed to a “ramp-up”effect on stock-based compensation expense in the first few years followingadoption, which caused concern for companies and investors because of the lackof consistency in reported results.  Toaddress that concern, SFAS No. 148 provides two additional methods oftransition that reflect an entity’s full complement of stock-based compensationexpense immediately upon adoption, thereby eliminating the ramp-up effect.  SFAS No. 148 also improves the clarity andprominence of disclosures about the pro forma effects of using the fair valuebased method of accounting for stock-based compensation for all companies—regardlessof the accounting method used—by requiring that the data be presented moreprominently and in a more user-friendly format in the footnotes to thefinancial statements.  In addition, thestatement improves the timeliness of those disclosures by requiring that thisinformation be included in interim as well as annual financial statements.  The transition guidance and annual disclosureprovisions of SFAS No. 148 are effective for fiscal years ending after December15, 2002, with earlier application permitted in certain circumstances.  The interim disclosure provisions areeffective for financial reports containing financial statements for interimperiods beginning after December 15, 2002. The adoption of SFAS No. 148 did not have a material impact on theCompany.

 

In November 2002, the FASB issued InterpretationNo. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others*.*”  This interpretation elaborates on thedisclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under certain guarantees that it hasissued.  This interpretation clarifies

 

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that a guarantor is required to disclose (a) thenature of the guarantee, including the approximate term of the guarantee, howthe guarantee arose, and the events or circumstances that would require theguarantor to perform under the guarantee; (b) the maximum potential amount offuture payments under the guarantee; (c) the carrying amount of the liability,if any, for the guarantor’s obligations under the guarantee; and (d) the natureand extent of any recourse provisions or available collateral that would enablethe guarantor to recover the amounts paid under the guarantee.  This interpretation also clarifies that aguarantor is required to recognize, at the inception of a guarantee, aliability for the obligations it has undertaken in issuing the guarantee,including its ongoing obligation to stand ready to perform over the term of theguarantee in the event that the specified triggering events or conditions occur. The objective of the initial measurementof that liability is the fair value of the guarantee at its inception.  The initial recognition and initialmeasurement provisions of this interpretation are applicable on a prospectivebasis to guarantees issued or modified after December 31, 2002, irrespective ofthe guarantor’s fiscal year end.  Thedisclosure requirements in this interpretation are effective for financialstatements of interim or annual periods ending after December 15, 2002.  Adoption did not have a material impact onthe Company.

 

In January 2003, the FASB issued InterpretationNo. 46, “Consolidation of Variable Interest Entities,” which addresses whethercertain types of entities, referred to as variable interest entities (“VIE”),should be consolidated in a company’s financial statements.  A VIE is an entity that either (1) has equityinvestors that lack certain essential characteristics of a controllingfinancial interest (including the ability to control the entity, the obligationto absorb the entity’s expected losses, and the right to receive the entity’sexpected residual returns) or (2) lacks sufficient equity to finance its ownactivities without financial support provided by other entities which, in turn,would be expected to absorb at least some of the expected losses of theVIE.  An entity should consolidate a VIEif it stands to absorb a majority of the VIE’s expected losses or to receive amajority of the VIE’s expected residual returns.  The Company adopted the Interpretation for relationshipswith VIE’s that begin on or after February 1, 2003.  The implementation of the consolidationguidance did not have a material effect on the Company.

 

**NOTE 3 – COMPREHENSIVE INCOME**

 

The components ofcomprehensive income consist exclusively of unrealized gains and losses onavailable for sale securities and current earnings.  For the three months ended March 31, 2003,this activity is shown under the heading Comprehensive Income as presented inthe Consolidated Statement of Changes in Stockholders’ Equity (Unaudited).  For the three months ended March 31, 2003,comprehensive income totaled $443,000.

 

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

 

Asdisclosed on Form 8-K filed with the Commission on August 4, 2004, the Company wasinformed 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 financial statements for the period ended December 31, 2003;and (iii) review the audit for the period ended December 31, 2002.  As a result of S. R. Snodgrass, A.C.’sre-audit of the 2003 financial statements, it was discovered that intercompanyaccount balances had not been eliminated as of March 31, 2003, and December 31,2002.  With the concurrence of McNealWilliamson, the following adjustments were made to previously reportedfinancial information as of June 30, 2003, and December 31, 2002:

 

 

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Cashand non-interest bearing demand deposits were decreased by $369,000 as theresult of the elimination of intercompany account balances as of December 31,2002.  Total assets and total liabilitieseach decreased by $369,000 as a result of these eliminations.  Previously reported net income and net incomeper share remain unchanged.

 

TheConsolidated Statement of Cash Flows has been restated to include federal fundssold as cash and cash equivalents.  Thestatement has also been restated to include the effects of the above changes.

 

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ITEM2. - MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

 

Thisnarrative will assist readers in their analysis of the accompanyingconsolidated financial statements.  Itshould be read in conjunction with the unaudited consolidated financialstatements and the notes.  Management isnot aware of any market or institutional trends, events, or uncertainties thatwill have or are reasonably likely to have a material effect on the liquidity,capital resources, or operations of the Company, except as discussed herein.Management is also not aware of any current recommendations by any regulatoryauthorities, which would have such a material effect if implemented.

 

**Comparisonof the Results of Operations for the Three Months ended March 31, 2003 and 2002**

 

The Company reported net income of $531,000 forthe three months ended March 31, 2003, compared to $537,000 for the threemonths ended March 31, 2002, representing a decrease of 1.0%, or $6,000.  The net interest income was $1,699,000, forthe three months ended March 31, 2003, a decrease of $141,000, or 7.7%,compared to $1,840,000 for the first quarter of 2002.  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, 2003 and 2002, were 4.3%and 4.67%, respectively.

 

Interestincome amounted to $2,249,000 for the three months ended March 31, 2003, adecrease of $355,000, or 14%, from $2,604,000 for the same three-month periodof 2002.  This decrease is directly tiedto lower market interest rates.  Interestincome reflected a weighed-average yield on earning assets of 5.6% for thequarter ended March 31, 2003, compared to 6.44% for the first quarter of 2002.  Average interest earning assets were $163,312,000and $163,699,000 during the three months ended March 31, 2003 and 2002,respectively.

 

Interestexpense decreased to $550,000 for the quarter ended March 31, 2003.  The decrease equaled $214,000 or 28.0%, from$764,000 for the three-month period ended March 31, 2002.  This reflected an average cost of funds of 1.39%and 1.88%, respectively, for the three-month periods ended March 31, 2003 and2002.  Lower market interest rates werethe major factor.  Average interestbearing liabilities were $126,531,000 and $127,215,000 during the three monthsended March 31, 2003 and 2002, respectively.

 

Management regularly performs an analysis to identify the inherent riskof loss in its loan portfolio.  Thisanalysis includes evaluation of concentrations of credit, past loss experience,current economic conditions, amount and composition of the loan portfolio (includingloans being specifically monitored by management), estimated fair value ofunderlying collateral, 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 decreased by $58,000 for the three months ended March 31,2003, as compared to the same three months ended March 31, 2002, as a result ofsuch an analysis by management.

 

The Bank will continue to monitor its allowance for loan losses andmake future additions to the allowance through the provision for loan losses aseconomic conditions dictate.  Althoughthe Bank maintains its allowance for loan losses at a level that it considersto be adequate to provide for the inherent risk of loss in its loan portfolio,there can be no assurance that future losses will not exceed

 

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estimated amounts or that additional provisions for loan losses willnot be required in future periods.  Inaddition, the Bank’s determination as to the amount of its allowance for loanlosses is subject to review by regulators, as part of their examinationprocess, and the Company’s independent accountants, which may result in theestablishment of an additional allowance based on the judgment of the regulatorsafter a review of the information available at the time of theirexamination.  In addition, the Company’sindependent accountants reviewed the allowance as part of their audit.

 

NONINTERESTINCOME

 

Non-interestincome includes revenues from all sources other than interest income.  For the three-month-period ended March 31,2003, non-interest income totaled $253,000, representing an increase of $57,000,or 29%, from the $196,000 recorded during the same period of 2002.  This increase was primarily due to increasesin other income of $16,000 and increased fees of $41,000.

 

NONINTERESTEXPENSE

 

Non-interestexpense includes overhead costs which are not related to interest expense or tolosses from loans or securities.  For thethree months ended March 31, 2003, the Company’s non-interest expense totaled $1,118,000,increasing $4,000 over the $1,114,000 of non-interest expense for the threemonths ended March 31, 2002.  Expressedas a percentage of period-end assets, annualized non-interest expense was 2.50%at both March 31, 2003, and March 31, 2002.

 

Salariesand employee benefits are Logan County BancShares’ largest non-interest cost,representing approximately 52% of total non-interest expense at March 31, 2003,and 51% for the first quarter of 2002.  Salariesand employee benefits increased only $12,000, or 2.0%, at March 31, 2003,compared to March 31, 2002.  Thisincrease is primarily due to normal personnel increases and timing of personnelbenefit accruals.

 

INCOMETAXES

 

LoganCounty BancShares’ income tax expense, for the three month period ended March31, 2003, reflected a $24,000, or 7.4%, decrease when compared to the sameperiod of 2002, primarily as the result of a decrease in pre-tax income.  Income tax expense equaled 36.2% and 37.7% ofincome before taxes at March 31, 2003 and 2002, respectively.

 

Earningsper weighted-average income per common share, for the three-month periods endedMarch 31, 2003 and 2002, were $0.75 and $0.76, respectively.  The amounts were the same for both basic anddiluted earnings per share.  Earningsthrough March 31, 2003, reflect an annualized return on average assets (ROAA)of 1.23% compared to 1.23% for the period ended March 31, 2002.  Also, these earnings reflect an annualizedreturn on average equity (ROAE) of 12.28% and 12.78%, respectively, for theperiods ending March 31, 2003 and 2002. Dividends for the first quarter of 2003 increased to $0.35 per share, ora 3.0% increase from $0.34 per share paid for the first quarter of 2002.

 

FINANCIALCONDITION AND ASSET QUALITY

 

Totalassets at March 31, 2003, were approximately $176,119,000, as compared toapproximately $169,330,000 at December 31, 2002, for an increase of $6,789,000,or 4.0%.  The loan portfolio decreased by$2,711,000 to $105,222,000 at March 31, 2003, or 2.50%, during this three-monthperiod, from $107,933,000 at December 31, 2002. As the economy began to show signs of improvement during the firstquarter, loan demand began to improve. However, management continues to adhere to its policy of not extendinglong-term fixed rate financing in this low interest rate environment.  By investing short-term,

 

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managementbelieves it is better positioned to manage the interest margin as interestrates began to increase.  The investmentportfolio decreased by $1,700,000, or 4.11%, during this same period.  At the same time, federal funds soldincreased by $9,620,000, which was an increase of 84.6%.  Total deposits increased by $4,637,000 to $154,711,000at March 31, 2003, from $150,074,000 at December 31, 2002.  Although deposits increased by 3.0%, pricingfor deposits was very competitive in the Company’s primary trade areas amongbanks and other nontraditional financial service providers, indicating future pressureon the Company’s net interest income.

 

Thecontinuing stagnation in the local and national economies places ongoingemphasis on the Company’s methodology in determining the adequacy of theallowance for loan losses.  The Companyperiodically evaluates the adequacy of the allowance for loan losses in orderto maintain the allowance at a level that is sufficient to absorb possiblecredit losses.  This evaluation is basedon a review of the Company’s historical loss experience, known and inherentrisks in the loan portfolio, including adverse circumstances that may affectthe ability of the borrower to repay interest and/or principal, the estimatedvalue of collateral, 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 March 31, 2003, andDecember 31, 2002, the allowance for loan losses was $1,578,000 and $1,619,000,respectively.  This resulted in the ratioof the allowance for loan losses to total period-end loans remaining unchangedat 1.50% for both March 31, 2003, and December 31, 2002.  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 $1,077,000 at March 31, 2003, and $1,062,000at December 31, 2002.  These instrumentscontain various elements of credit and interest rate risk in excess of theamount recognized in the consolidated statements of financial condition.  Additionally, certain off-balance sheet itemsof approximately $12,104,000 at March 31, 2003, and $10,801,000 atDecember 31, 2002, were comprised primarily of unfunded loan commitments.

 

LIQUIDITYAND CAPITAL RESOURCES

 

Liquidity management involves the ability tomeet the cash flow requirements of depositors wanting to withdraw funds orborrowers needing assurance that sufficient funds will be available to meettheir credit needs.  Liquidity can bestbe demonstrated by an analysis of the Company’s cash flows.  The primary source of cash flows for theCompany is operating activities. Operating activities provided $420,000 of liquidity for the three-monthperiod ended March 31, 2003, compared to $576,000 for the same three months in2002.  The principal elements of theseoperating flows are net income, increased for significant non-cash expenses,and depreciation and amortization.  Asecondary source of liquidity for the Company comes from investing activities,principally the maturities of investment securities.  For the three-month periods ended March 31,2003 and 2002, due to the low interest rate environment, maturities and callsof investment securities amounted to $21,477,000 and $16,487,000,respectively.  As of March 31, 2003, theCompany had approximately $28,043,000 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 $2,711,000 for the firstthree months of 2003 following a decline of $5,721,000 the same period in2002.  The Company could always borrowmoney as another source of funds.

 

Thisreport may 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

 

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strategies;the nature and extent of government actions and reforms; and rapidly changingtechnology and evolving financial industry standards.

 

ITEM3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Assetand liability management is responsible for the planning, implementation, andcontrol process for determining asset mix and maturity features relative toliability maturities in such a way that net interest margin will bemaximized.  A major tool for such aprocess is gap management of the Company’s interest-sensitive assets tointerest-sensitive liabilities.

 

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

 

TheCompany’s management recognized the concentration of large certificates ofdeposit.  The Company’s policy ofasset-liability management matches both rates and maturities so the Companywill not have a liquidity problem or allow income to be affected by a change inrates.

 

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

Managementbelieves there has been no material change to either the interest rate risk ormaterial market risk since December 31, 2002.

 

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INTERESTRATE SENSITIVE ANALYSIS TABLE

 

(InThousands of Dollars)

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

 

ITEM 4. – CONTROLS ANDPROCEDURES

 

Evaluation of disclosure controls andprocedures:

 

Asof the end of the period covered by this report, the Company’s Chief ExecutiveOfficer and Chief Financial Officer evaluated the effectiveness of the Company’sdisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)and 15d-15(e)).  Based on theirevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures (i) enable the Company torecord, process, summarize and report in a timely manner the information thatthe Company is required to disclose in its Exchange Act reports, and (ii) aredesigned with the objective of ensuring that such information is accumulatedand communicated to management, including the Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regardingdisclosure.

 

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Changesin internal control over financial reporting:

 

Therewere no changes in the Company’s internal control over financial reportingidentified in the evaluation performed by the Company's Chief Executive Officerand Chief Financial Officer that materially affected, or are reasonably likelyto materially affect, the Company's internal control over financial reporting.

 

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**PART II**

 

ITEM6. EXHIBITS AND REPORTS ON FORM 8-K

 
|   | (a)    |   | Exhibits  required by Item 601 of Regulation S-K : |
|--------|--------|--------|--------------------------------------------------------------|
|   |   |   |                                                         |   |
|   |   |   | (31)                                                         | Rule 13a-14(a)/15d-14(a)  Certifications |
|   |   |   |                                                         |   |
|   |   |   |                                                         | Certification  as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 by  Chief Executive Officer |
|   |   |   |                                                         |   |
|   |   |   |                                                         | Certification  as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 by  Chief Financial Officer |
|   |   |   |                                                         |   |
|   |   |   | (32)                                                         | Section 1350  Certifications |
|   |   |   |                                                         |   |
|   |   |   |                                                         | 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 |
|   |   |   |                                                         |   |
|   |   |   |                                                         | 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 |
|   |   |   |                                                         |   |
|   | (b)    |   | Reports  on Form 8-K                                         |
|   |   |   |                                                         |   |
|   |   |   |                                                         | None |

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

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

 

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**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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