**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended:**

 

**March 31, 2005**

 

**Commission File Number:  2-95114**

 

**LOGAN COUNTY BANCSHARES, INC.**

(Exact name of Registrant as specified in its Charter)

 

**West Virginia**

(State or other jurisdiction of Incorporation or organization)

 

**55-0660015**

(I.R.S. Employer Identification No.)

 
| **P. O. Box 597, Logan, West Virginia**  | ** ** | **25601**  |
|------------------------------------------|------------|------------|
| (Address of principal executive offices) |       | (Zip Code) |

 

**(304) 752-1166**

(Registrant’s telephone number, including area code)

 

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

 

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

 

Indicate thenumber of shares outstanding of each of the registrant’s classes of commonstock as of the latest practicable date:

 

| Class Outstanding at May 13, 2005 |
|-----------------------------------|
| Common Stock  ($1.67 Par Value)   |   | 703,991 Shares |

 

 

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**LOGAN COUNTY BANCSHARES, INC.**

 

**Table of Contents**

 
| PART I – FINANCIAL INFORMATION |     |
|-------------------------------------|----------|
|                                |     |
|                                | ITEM 1.  | FINANCIAL STATEMENTS: |   |
|                                |     |   |   |
|                                |     | Consolidated Balance Sheets as of March 31, 2005 (Unaudited) and  December 31, 2004 | 2 |
|                                |     |   |   |
|                                |     | Consolidated Statements of Income For the  Three Month Periods Ended March 31, 2005 and 2004 (Unaudited) | 3 |
|                                |     |   |   |
|                                |     | Consolidated Statement of Changes in  Stockholders’ Equity for the Three Month Period Ended  March 31, 2005 (unaudited) | 4 |
|                                |     |   |   |
|                                |     | Consolidated Statements of Cash Flows for  the Three Month Periods Ended March 31, 2005 and 2004 (Unaudited) | 5 |
|                                |     |   |   |
|                                |     | Notes to Consolidated Financial Statements | 6-8 |
|                                |     |   |   |
|                                | ITEM 2.  | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND  RESULTS OF OPERATIONS | 9-11 |
|                                |     |   |   |
|                                | ITEM 3.  | QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK | 12 |
|                                |     |   |   |
|                                | ITEM 4.  | CONTROLS AND PROCEDURES | 13 |
|                                |     |   |   |
| PART II – OTHER INFORMATION    |     |
|                                |     |   |   |
|                                | ITEM 1.  | LEGAL PROCEEDINGS | 14 |
|                                |     |   |   |
|                                | ITEM 2.  | UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS | 14 |
|                                |     |   |   |
|                                | ITEM 3.  | DEFAULTS UPON SENIOR SECURITIES | 14 |
|                                |     |   |   |
|                                | ITEM 4.  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS | 14 |
|                                |     |   |   |
|                                | ITEM 5.  | OTHER INFORMATION | 14 |
|                                |     |   |   |
|                                | ITEM  6. | EXHIBITS | 14 |

 

i

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| **EXHIBITS** | ** **                                                                                              |   |   |
|--------------|---------------------------------------------------------------------------------------------------------|--------|--------|
|         |                                                                                                    |   |
| Exhibit 31.1 | Sarbanes-Oxley  Act, Section 302 Certification of Executive Vice President and Chief  Executive Officer |   |
|         |                                                                                                    |   |
| Exhibit 31.2 | Sarbanes-Oxley  Act, Section 302 Certification of Vice President and Chief Financial Officer            |   |
|         |                                                                                                    |   |
| Exhibit 32.1 | Sarbanes-Oxley  Act, Section 906 Certification of Executive Vice President and Chief  Executive Officer |   |
|         |                                                                                                    |   |
| Exhibit 32.2 | Sarbanes-Oxley  Act, Section 906 Certification of Vice President and Chief Financial Officer            |   |
|         |                                                                                                    |   |
| Signatures   |                                                                                                    |

 

ii

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**LOGAN COUNTY BANCSHARES, INC.**

 

**PART I**

 

**FINANCIAL INFORMATION**

 

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

 

1

 

**LoganCounty BancShares, Inc. and Subsidiary**

**CONSOLIDATED BALANCE SHEETS**

**(In Thousands)**

 
| ** **                                                   | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                                   | ** ** | **(Unaudited)**     | ** ** | ** **             | ** ** |
| **ASSETS**                                                   |       |                |       |                   |       |
| Cash and cash equivalents:                                   |       |                |       |                   |       |
| Cash and due from banks                                      |       | $                   | 7,852      |                   | $          | 5,995 |   |
| Federal funds sold                                           |       | 10,910              |       | 5,990                  |       |
| Total cash and cash equivalents                              |       | 18,762              |       | 11,985                 |       |
|                                                         |       |                |       |                   |       |
| Investment securities:                                       |       |                |       |                   |       |
| Available-for-sale (at fair value)                           |       | 65,127              |       | 65,920                 |       |
|                                                         |       |                |       |                   |       |
| Loans                                                        |       | 97,745              |       | 98,297                 |       |
| Less allowance for loan losses                               |       | (1,263              | )          | (1,263                 | )          |
| Net loans                                                    |       | 96,482              |       | 97,034                 |       |
|                                                         |       |                |       |                   |       |
| Premises and equipment, net                                  |       | 3,148               |       | 3,191                  |       |
| Accrued income receivable                                    |       | 881                 |       | 675                    |       |
| Bank owned life insurance                                    |       | 2,091               |       | 2,076                  |       |
| Other assets                                                 |       | 802                 |       | 787                    |       |
|                                                         |       |                |       |                   |       |
| Total assets                                                 |       | $                   | 187,293    |                   | $          | 181,668 |   |
|                                                         |       |                |       |                   |       |
| **LIABILITIES**                                              |       |                |       |                   |       |
|                                                         |       |                |       |                   |       |
| Noninterest bearing deposits:                                |       |                |       |                   |       |
| Demand                                                       |       | $                   | 37,008     |                   | $          | 33,992 |   |
| Interest bearing deposits:                                   |       |                |       |                   |       |
| Demand                                                       |       | 25,583              |       | 23,675                 |       |
| Savings                                                      |       | 48,181              |       | 46,549                 |       |
| Time                                                         |       | 55,918              |       | 56,995                 |       |
| Total deposits                                               |       | 166,690             |       | 161,211                |       |
| Repurchase agreements                                        |       | 2,000               |       | 2,000                  |       |
| Accrued interest and other liabilities                       |       | 588                 |       | 530                    |       |
| Total liabilities                                            |       | 169,278             |       | 163,741                |       |
|                                                         |       |                |       |                   |       |
| **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                                            |       | 16,100              |       | 15,851                 |       |
| Accumulated other comprehensive income  (loss)               |       | (387                | )          | (226                   | )          |
| Total stockholders’ equity                              |       | 18,015              |       | 17,927                 |       |
|                                                         |       |                |       |                   |       |
| Total liabilities and stockholders’ equity              |       | $                   | 187,293    |                   | $          | 181,668 |   |

 

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

 

2

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

**CONSOLIDATEDSTATEMENTS OF INCOME****(UNAUDITED)**

**(In Thousands)**

 
| ** **                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                    | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| **INTEREST AND DIVIDEND INCOME**                              |       |                              |       |   |   |
| Interest and fees on loans - taxable                          |       | $                                 | 1,698      |   | $ | 1,757 |   |
| Investment securities available for sale                      |       | 383                               |       | 213 |   |
| Interest on federal funds sold                                |       | 54                                |       | 54 |   |
| Dividends                                                     |       | 6                                 |       | — |   |
| Total interest income                                         |       | 2,141                             |       | 2,024 |   |
|                                                          |       |                              |       |   |   |
| **INTEREST EXPENSE**                                          |       |                              |       |   |   |
| Deposits                                                      |       | 395                               |       | 426 |   |
| Other borrowings                                              |       | 17                                |       | 27 |   |
| Total interest expense                                        |       | 412                               |       | 453 |   |
|                                                          |       |                              |       |   |   |
| Net interest income                                           |       | 1,729                             |       | 1,571 |   |
|                                                          |       |                              |       |   |   |
| **PROVISION FOR LOAN LOSSES**                                 |       | —                            |       | — |   |
|                                                          |       |                              |       |   |   |
| Net interest income after provision for  possible loan losses |       | 1,729                             |       | 1,571 |   |
|                                                          |       |                              |       |   |   |
| **NONINTEREST INCOME**                                        |       |                              |       |   |   |
| Service charges and other fees                                |       | 193                               |       | 197 |   |
| Other operating income                                        |       | 64                                |       | 63 |   |
| Total noninterest income                                      |       | 257                               |       | 260 |   |
|                                                          |       |                              |       |   |   |
| **NONINTEREST EXPENSE**                                       |       |                              |       |   |   |
| Salary and employee benefits                                  |       | 593                               |       | 590 |   |
| Occupancy and equipment expense                               |       | 155                               |       | 134 |   |
| Data processing                                               |       | 184                               |       | 130 |   |
| Other operating expenses                                      |       | 251                               |       | 279 |   |
| Total noninterest expense                                     |       | 1,183                             |       | 1,133 |   |
|                                                          |       |                              |       |   |   |
| Income before income taxes                                    |       | 803                               |       | 698 |   |
|                                                          |       |                              |       |   |   |
| **INCOME TAXES**                                              |       | 293                               |       | 248 |   |
|                                                          |       |                              |       |   |   |
| Net income                                                    |       | $                                 | 510        |   | $ | 450 |   |
|                                                          |       |                              |       |   |   |
| Dividends declared per common share                           |       | $                                 | 0.37       |   | $ | 0.36 |   |
|                                                          |       |                              |       |   |   |
| Earnings per common share:                                    |       |                              |       |   |   |
| Basic                                                         |       | $                                 | 0.72       |   | $ | 0.64 |   |
| Diluted                                                       |       | $                                 | 0.72       |   | $ | 0.64 |   |
|                                                          |       |                              |       |   |   |
| Average outstanding shares:                                   |       |                              |       |   |   |
| Basic                                                         |       | 703,991                           |       | 703,991 |   |
| Diluted                                                       |       | 703,991                           |       | 703,991 |   |

 

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

 

3

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

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

**(In Thousands)**

 
| ** **                                            | ** ** | **Common Stock** | ** ** | ** ** | ** ** | **Retained** | ** ** | **Treasury** | ** ** | **Accumulated  Other  Compre-  hensive** | ** ** | **Compre  hensive** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|------------------|------------|------------|------------|--------------|------------|--------------|------------|------------------------------------------|------------|---------------------|------------|------------|------------|
| ** **                                            | ** ** | **Shares**       | ** ** | **Stock**  | ** ** | **Surplus**  | ** ** | **Earnings** | ** ** | **Stock**                                | ** ** | **Income (loss)**   | ** ** | **Income** | ** ** | **Total** | ** ** |
|                                                  |       |             |       |       |       |         |       |         |       |                                     |       |                |       |       |       |   |   |
| **BALANCE, DECEMBER 31, 2004**                        |       | 703,991          |       | $          | 1,300      |         | $          | 2,408        |       | $                                        | 15,851     |                | $          | (1,406     | )          | $ | (226 | ) |   |   | $ | 17,927 |   |
|                                                  |       |             |       |       |       |         |       |         |       |                                     |       |                |       |       |       |   |   |
| Comprehensive income:                                 |       |             |       |       |       |         |       |         |       |                                     |       |                |       |       |       |   |   |
| Net income for the three months ended March  31, 2005 |       | —           |       | —     |       | —       |       | 510          |       | —                                   |       | —              |       | $          | 510        |   | 510 |   |
| Other comprehensive income, net of tax                |       |             |       |       |       |         |       |         |       |                                     |       |                |       |       |       |   |   |
| Unrealized loss on securities available-for-sale      |       | —           |       | —     |       | —       |       | —       |       | —                                   |       | (161                | )          | (161       | )          | (161 | ) |
| Comprehensive income                                  |       |             |       |       |       |         |       |         |       |                                     |       |                |       | $          | 349        |   |   |   |
|                                                  |       |             |       |       |       |         |       |         |       |                                     |       |                |       |       |       |   |   |
| Cash dividend ($0.37 per share)                       |       | —           |       | —     |       | —       |       | (261         | )          | —                                   |       | —              |       |       |       | (261 | ) |
|                                                  |       |             |       |       |       |         |       |         |       |                                     |       |                |       |       |       |   |   |
| **BALANCE, MARCH 31, 2005**                      |       | 703,991          |       | $          | 1,300      |         | $          | 2,408        |       | $                                        | 16,100     |                | $          | (1,406     | )          | $ | (387 | ) |   |   | $ | 18,015 |   |

 

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

 

4

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

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

**(In Thousands)**

 
| ** **                                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                           |       |                              |       |   |   |
| Net income                                                                         |       | $                                 | 510        |   | $ | 450 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                              |       |   |   |
| Depreciation and amortization                                                      |       | 85                                |       | 67 |   |
| Deferred income taxes                                                              |       | 132                               |       | — |   |
| Earnings on bank owned life insurance                                              |       | (15                               | )          | — |   |
| Change in:                                                                         |       |                              |       |   |   |
| Accrued interest receivable and other  assets                                      |       | (221                              | )          | 183 |   |
| Accrued interest payable and other  liabilities                                    |       | 58                                |       | 104 |   |
| Net cash provided by operating activities                                          |       | 549                               |       | 804 |   |
|                                                                               |       |                              |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                           |       |                              |       |   |   |
| Proceeds from maturities and calls of  securities available-for-sale               |       | 500                               |       | 29,502 |   |
| Purchases of securities available-for-sale                                         |       | —                            |       | (17,750 | ) |
| Net decrease in loans                                                              |       | 552                               |       | 1,553 |   |
| Purchase of bank premises and equipment                                            |       | (42                               | )          | (205 | ) |
| Net cash used in investing activities                                              |       | 1,010                             |       | 13,100 |   |
|                                                                               |       |                              |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                           |       |                              |       |   |   |
| Net increase in deposits                                                           |       | 5,479                             |       | 7,527 |   |
| Dividends paid                                                                     |       | (261                              | )          | (253 | ) |
| Net cash provided by financing activities                                          |       | 5,218                             |       | 7,274 |   |
|                                                                               |       |                              |       |   |   |
| **INCREASE IN CASH AND CASH EQUIVALENTS**                                          |       | 6,777                             |       | 21,178 |   |
|                                                                               |       |                              |       |   |   |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD**                                |       | 11,985                            |       | 18,727 |   |
|                                                                               |       |                              |       |   |   |
| **CASH AND CASH EQUIVALENTS, END OF PERIOD**                                       |       | $                                 | 18,762     |   | $ | 39,905 |   |
|                                                                               |       |                              |       |   |   |
| **Supplemental Disclosures:**                                                      |       |                              |       |   |   |
| Cash paid for interest                                                             |       | $                                 | 415        |   | $ | 459 |   |
| Cash paid for income taxes                                                         |       | $                                 | —     |   | $ | 232 |   |

 

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

 

5

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**LOGAN COUNTY BANCSHARES, INC. ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

NOTE 1 – CRITICALACCOUNTING POLICIES

 

The accounting and reporting policies ofLogan County BancShares, Inc. ( the “Company”) and its subsidiary were preparedin accordance with accounting principles generally accepted in the UnitedStates of America, (“US GAAP”) and to general practices within the financialservices industry. This Form 10-Q is also in accordance with instructions toForm 10-Q and Rule 10-01 ofRule S-X.  Accordingly, this Form10-Q does not include all of the information and footnotes required by US GAAPfor complete financial statements.  Thepreparation of financial statements in conformity with US GAAP requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes. Actual results could differfrom those estimates. Management has identified the accounting policies describedbelow as those that, due to the judgments, estimates and assumptions inherentin those policies, are critical to an understanding of the Company’sconsolidated financial statements and management’s discussion and analysis.

 

IncomeRecognition

 

The Company recognizes interest income bymethods conforming to US GAAP that include general accounting practices withinthe financial services industry. Interest income on loans and investmentsecurities is recognized by methods that result in level rates of return onprincipal amounts outstanding, including yield adjustments resulting from theamortization of loan costs and premiums on investment securities and accretionof loan fees and discounts on investment securities.

 

In the event management believes collectionof all or a portion of contractual interest on a loan has become doubtful,which generally occurs after the loan is 90 days past due, the accrual ofinterest is discontinued. In addition, previously accrued interest deemeduncollectible that was recognized in income is reversed. Interest received onnonaccrual loans is recorded as a reduction to principal and is included inincome only if principal recovery is reasonably assured. A nonaccrual loan isrestored to accrual status when it is brought current or has performed inaccordance with contractual terms for a reasonable period of time, and thecollectibility of the total contractual principal and interest is no longerdoubtful.

 

Allowancefor 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 lossesfor the various loan types represents management’s estimate of expected lossesfrom existing 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 

 

6

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individually evaluates such loans forimpairment and does not aggregate loans by major risk classifications. Thedefinition of “impaired loans” is not the same as the definition of “nonaccrualloans,” although the two categories overlap. The Company may choose to place aloan on nonaccrual status due to payment delinquency or uncertaincollectibility while not classifying the loan as impaired. Factors consideredby management in determining impairment include payment status and collateralvalue. The amount of impairment for these types of loans is determined by thedifference between the present value of the expected cash flows related to theloan, using the original interest rate, and its recorded value, or as apractical expedient in the case of collateralized loans, the difference betweenthe fair value of the collateral and the recorded amount of the loans. Whenforeclosure is probable, impairment is measured based on the fair value of thecollateral. While allocations are made to specific loans and pools of loans,the allowance is available for all loan losses.

 

Mortgage loans secured by one-to-four familyproperties and all consumer loans are considered large groups ofsmaller-balance homogeneous loans and are measured for impairment collectively.Loans that experience insignificant payment delays, which are defined as 90days or less, generally are not classified as impaired. Management determinesthe significance of payment delays on a case-by-case basis taking intoconsideration all circumstances concerning the loan, the credit worthiness andpayment history of the borrower, the length of the payment delay, and theamount of shortfall in relation to the principal and interest owed.

 

Individual loan reviews are based uponspecific quantitative and qualitative criteria, including the size of the loan,loan quality 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 $1,263,000at March 31, 2005, was adequate to provide for probable losses from existingloans based on information currently available. While management uses availableinformation to provide for loan losses, the ultimate collectibility of asubstantial portion of the loan portfolio and the need for future additions tothe allowance will be based on changes in economic conditions and otherrelevant factors. As such, an adverse change in economic activity could reducecash flows for both commercial and individual borrowers, which would likelycause the Company to experience increases in problem assets, delinquencies, andlosses on loans.

 

InvestmentSecurities

 

Investment securities are classified at thetime of purchase, based on management’s intention and ability, as securitiesavailable-for-sale or held-to-maturity. All debt and equity securities havebeen classified as available-for-sale which serve principally as a source ofliquidity. Unrealized holding gains and losses for available-for-salesecurities are reported as a separate component of stockholders’ equity, net oftax, until realized. Realized securities gains and losses are computed usingthe specific identification method. Interest and dividends on investmentsecurities are recognized as income when earned.

 

While temporary changes in the market valueof available-for-sale securities are not recognized in earnings, a decline infair value below amortized cost, deemed to be other-than-temporary, results inan adjustment 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 to determineif a decline in estimated fair value is temporary or other-than-temporary.These factors include duration and magnitude of the decline in value, thefinancial condition of the 

 

7

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issuer, and the company’s ability and intentto continue holding the investment for a period of time sufficient to allow forany anticipated recovery in market value. At March 31, 2005, there were noinvestment securities identified by management to be other-than-temporarilyimpaired. If investments decline in fair value due to adverse changes in thefinancial markets, charges to income could occur in future periods.

 

IncomeTaxes

 

The Company and its subsidiary file aconsolidated 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 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.

 

CashFlows

 

Cash and cash equivalents consist of cash anddue from banks and federal funds sold.

 

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

 

In April, the Securitiesand Exchange Commission adopted a new rule that amends the compliance dates forFinancial Accounting Standards Board’s (“FASB”) Statement of FinancialAccounting Standards No. 123 (revised 2004), Share-Based Payment (FAS No.123R).  The Statement requires that compensationcost relating to share-based payment transactions be recognized in financialstatements and that this cost be measured based on the fair value of the equityor liability instruments issued.  FAS No.123 (Revised 2004) covers a wide range of share-based compensation arrangementsincluding share options, restricted share plans, performance-based awards,share appreciation rights, and employee share purchase plans. The Company willadopt FAS No. 123 (Revised 2004) on January 1, 2006 and is currently evaluatingthe impact the adoption of the standard will have on the Company’s results ofoperations.

 

In December 2004, FASB issuedFAS No. 153, “Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No.29”. The guidance in APB Opinion No. 29, “Accounting for NonmonetaryTransactions”, is based on the principle that exchanges of nonmonetary assetsshould be measured based on the fair value of the assets exchanged. Theguidance in that Opinion, however, included certain exceptions to thatprinciple. FAS No. 153 amends Opinion No. 29 to eliminate the exception fornonmonetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of nonmonetary assets that do not havecommercial substance. A nonmonetary exchange has commercial substance if thefuture cash flows of the entity are expected to change significantly as aresult of the exchange. The provisions of FAS No. 153 are effective fornonmonetary asset exchanges occurring in fiscal periods beginning after June 15,2005. Early application is permitted and companies must apply the standardprospectively. The adoption of this standard is not expected to have a materialeffect on the Company’s results of operations or financial position.

 

8

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**ITEM 2.****      MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

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

 

# **Comparison of theResults of Operations for the Three Months ended March 31, 2005 and 2004**

 

Net income increased by $60,000, or 13%, fromnet income of $450,000 for the three months ended March 31, 2004, to net incomefor the three months ended March 31, 2005, of $510,000.

 

Interest and dividend income increased$117,000 or 6%, from $2,024,000 for the quarter ended March 31, 2004, to$2,141,000 for the same period in 2005. The increase is attributed to the increase in interest and dividends oninvestments of $170,000 or 79%, offset by decrease in interest on loans of$59,000 or 3%.  The decrease in intereston loans was entirely due to the decrease in the average balance of loans of$4,599,000 as the average yield on loans remained nearly unchanged from the samequarter of 2004.  Interest on available-for-salesecurities increased due to an increase of $27,608,000 in the average balanceinvested.  The yield on investmentsecurities increased by 37 basis points due to the increase in bond ratesthroughout the latter part of 2004 and continuing into 2005.

 

Interest expense on deposits decreased by$31,000, or 7%, from $426,000 for the three months ended March 31, 2004, to$395,000 for the three months ended March 31, 2005.  The decrease in interest expense on deposits wasthe direct result of the 10 basis point decrease in the cost of funds from1.33% for the three months ended March 31, 2004, to 1.23% for the same periodin 2005.

 

Management regularly performs an analysis toidentify the inherent risk of loss in its loan portfolio.  This analysis includes evaluation ofconcentrations of credit, past loss experience, current economic conditions,amount and composition of the loan portfolio (including loans beingspecifically monitored by management), estimated fair value of underlyingcollateral, loan commitments outstanding, delinquencies, and otherfactors.  Based on this analysis,management established an allowance for loan losses.  The allowance for loan losses is adjusted periodicallyby a provision for loan losses, which is charged to operations based onmanagement’s evaluation of the possible losses that may be incurred in the Bank’sportfolio.  Based on management’sevaluation no provision for loan losses was required for the three monthsended March 31, 2005 and 2004.

 

The Bank willcontinue to monitor its allowance for loan losses and make future additions tothe allowance through the provision for loan losses as economic conditionsdictate.  Although the Bank maintains itsallowance for loan losses at a level that it considers to be adequate to providefor the inherent risk of loss in its loan portfolio, there can be no assurancethat future losses will not exceed estimated amounts or that additionalprovisions for loan losses will not be required in future periods.  In addition, the Bank’s determination as tothe amount of its allowance for loan losses is subject to review by regulators,as part of their examination process, which may result in the establishment ofan additional allowance based on the judgment of the regulators after a reviewof the information available at the time of their examination.  The Bank’s independent auditors also reviewthe allowance for loan losses as part of their audit process.

 

9

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Non-interest income decreased by $3,000, or1%, to $257,000 for the three-month period ended March 31, 2005, from $260,000for the same period in 2004 due to a decrease in the volume of service charges.

 

Non-interest expenseincreased by $50,000, or 4%, from $1,133,000 for the three months ended March31, 2004, to $1,183,000 for the same period in 2005.  Compensation and employee benefits, thelargest component of non-interest expense, increased slightly for the threemonths ended March 31, 2005, compared to the same period in 2004.  Other significant changes in non-interestexpenses for the 2005 period compared to 2004 include a $54,000 increase indata processing costs to $184,000, or 42%; a $21,000 or 16% increase inoccupancy expense, a $10,000 or 27% decrease in supplies and a $24,000 or 50%decrease in other taxes.  Supplies anddata processing costs increased because of the bank’s implementation of a newcheck image processing system in the latter part of 2004.

 

Income tax expense increased by $45,000, or18%, from $248,000 for the three months ended March 31, 2004, to $293,000 forthe three months ended March 31, 2005, as a result of the increase in pre-taxincome.

 

## FINANCIAL CONDITION AND ASSET QUALITY

 

Total assetsat March 31, 2005, were approximately $187,293,000 as compared to approximately$181,668,000 at December 31, 2004, or an increase of $5,625,000, or 3.1%.  The loan portfolio decreased by $552,000, orless than 1%, during the three-month period ended March 31, 2005.  The economy showed signs of improvementduring the first quarter causing loan demand began to improve.  However, competition from other lendinginstitutions has prevented the company from adding a significant amount of newloans at this time.  Management continuesto adhere to its policy of not extending long-term fixed rate financing in thecurrent interest rate environment. Management believes it is better positioned to manage the interestmargin as interest rates are beginning to increase.  The investment portfolio decreased by$793,000, or 1.2% during this same period; at the same time, federal funds soldincreased $4,920,000 or 82.1%.  Totaldeposits increased by $5,479,000 to $166,690,000 at March 31, 2005, from$161,211,000 at December 31, 2004. Although deposits increased by nearly 3.2%, pricing for deposits is verycompetitive in the Company’s primary trade areas among banks and othernontraditional financial service providers, indicating future pressure on theCompany’s net interest income. Management believes that the deposit growth is attributable to the Bank’sservice delivery as its deposit rates are in line with those of competinginstitutions.

 

As previouslydiscussed the Company periodically evaluates the adequacy of the allowance forloan losses in order to maintain the allowance at a level that is sufficient toabsorb probable credit losses.  Theallowance for loan losses was $1,263,000 at March 31, 2005 and December 31,2004.  This resulted in the ratio of theallowance for loan losses to total loans decreasing slightly from 1.29% atDecember 31, 2004, compared to 1.28% at March 31, 2005.  Estimates may change at some point in thefuture.

 

Totalstockholders’ equity increased by $88,000 during the quarter, from $17,927,000at December 31, 2004 to $18,015,000. Retained earnings increased by $249,000 as the result of quarterly netincome of $510,000 reduced by dividends declared in the amount of$261,000.  Accumulated othercomprehensive income declined by $161,000 as the result of the decrease in thefair value of investment securities during the quarter.  This decline was the direct result ofincreased market rates on bonds, causing prices to decline.

 

Financialinstruments include commitments to extend and standby letters of credit.  These 

 

10

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commitmentsinclude standby letters of credit of approximately $856,000 at March 31, 2005,and $856,000 at December 31, 2004.  Theseinstruments contain various elements of credit and interest rate risk in excessof the amount recognized in the consolidated statements of financialcondition.  Additionally, certainoff-balance sheet items of approximately $13,329,000 at March 31, 2005, and$13,966,000 at December 31, 2004, were comprised primarily of unfunded loancommitments.

 

## LIQUIDITY AND CAPITAL RESOURCES

 

Liquiditymanagement involves the ability to meet the cash flow requirements ofdepositors wanting to withdraw funds or borrowers needing assurance thatsufficient funds will be available to meet their credit needs.  Liquidity can best be demonstrated by an analysisof the Company’s cash flows.  The primarysource of cash flows for the Company is operating activities.  Operating activities provided $549,000 ofliquidity for the three-month period ended March 31, 2005, compared to $804,000for the same three months in 2004.  Theprincipal elements of these operating flows are net income, increased forsignificant non-cash expenses and depreciation and amortization.  A secondary source of liquidity for theCompany comes from investing activities, principally the maturities ofinvestment securities.  For thethree-month period ended March 31, 2004, due to the low interest rateenvironment, maturities and calls of investment securities amounted to$29,502,000, compared to $500,000 for the first quarter of 2005.  As of March 31, 2005, the Company hadapproximately $25,757,000 of investment securities that mature within 12months.  No securities available-for-salewere purchased for the first quarter of 2005 compared to $17,750,000 for thesame period in 2004.  Interest rates arebeginning to increase and the rapidity of calls in investment securities isexpected to decline.  Increasedcompetition for loans resulted in a net decrease in loans of $552,000 for thefirst three months of 2005 following an increase of $1,553,000 for the sameperiod in 2004.

 

As indicatedin previous filings and disclosed in the notes to its 2004 financial statementsthe Company intends to engage in a corporate reorganization whereby it willrepurchase the shares of any shareholder owning less than 200 shares of theCompany’s stock.  It is expected thatfunds required to accomplish this will be approximately $1,150,000.  The Company has sufficient liquidity andcapital to complete this transaction.

 

OFF BALANCESHEET ARRANGEMENTS

 

At March 31,2005 and December 31, 2004, the Company had outstanding loan commitments andunused lines of credit totaling $14,185,000 and $14,822,000, respectively.  As of March 31, 2005, management placed ahigh degree of probability for required funding within one year ofapproximately $2.6 million. Approximately $10.7 million is principally unused home equity and creditcard lines on which management places a low probability for required funding.

 

This reportmay contain certain forward-looking statements, including certain plans,expectations, goals and projections, which are subject to numerous assumptions,risks and uncertainties.  Actual resultscould differ materially from those contained in or implied by such statementsfor a variety of factors including: changes in economic conditions which mayaffect the Company’s primary market area; rapid movements in interest rates;competitive pressures on product pricing and services; success and timing ofbusiness strategies; the nature and extent of government actions and reforms;and rapidly changing technology and evolving financial industry standards.

 

11

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** **

**ITEM 3.****      QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

The negative gap position aspresented in the following table for maturities of one year or less is offsetby the substantial positive gap position for maturities greater than oneyear.  The earnings of the Company aresufficient 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.

 

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.

 

INTERESTRATE SENSITIVE ANALYSIS TABLE

 

(InThousands of Dollars)

 
| **As of March 31, 2005**                                                  | ** ** | **0-90** | ** ** | **91-180** | ** ** | **181-365** | ** ** | **Total  One  Year** | ** ** | **Over  One  Year** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------|------------|----------|------------|------------|------------|-------------|------------|----------------------|------------|---------------------|------------|-----------|------------|
| Earning Assets                                                            |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Loans                                                                     |       | $        | 16,459     |       | $          | 2,618       |       | $                    | 4,433      |                | $          | 23,510    |       | $ | 74,235 |   | $ | 97,745 |   |
| Investments                                                               |       | 1,746    |       | 4,229      |       | 19,782      |       | 25,757               |       | 39,370              |       | 65,127    |       |
| Federal Funds Sold                                                        |       | 10,910   |       | 0          |       | 0           |       | 10,910               |       | 0                   |       | 10,910    |       |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Total Earning Assets                                                      |       | 29,115   |       | 6,847      |       | 24,215      |       | 60,177               |       | 113,605             |       | 173,782   |       |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Interest Bearing Liabilities                                              |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Demand Deposits                                                           |       | 25,583   |       | 0          |       | 0           |       | 25,583               |       | 0                   |       | 25,583    |       |
| Savings                                                                   |       | 13,490   |       | 10,601     |       | 24,090      |       | 48,181               |       | 0                   |       | 48,181    |       |
| CD’s of $100,000 and Over                                            |       | 3,072    |       | 3,356      |       | 3,951       |       | 10,379               |       | 12,381              |       | 22,760    |       |
| Other Time                                                                |       | 5,204    |       | 5,287      |       | 8,983       |       | 19,474               |       | 15,684              |       | 35,158    |       |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Total Interest Bearing Liability                                          |       | 47,349   |       | 19,244     |       | 37,024      |       | 103,617              |       | 28,065              |       | 131,682   |       |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Interest Sensitivity Gap                                                  |       | $        | (18,234    | )          | $          | (12,397     | )          | $                    | (12,809    | )                   | $          | (43,440   | )          | $ | 85,540 |   | $ | 42,100 |   |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Cumulative Gap                                                            |       | $        | (18,234    | )          | $          | (30,631     | )          | $                    | (43,440    | )                   | $          | (43,440   | )          | $ | 85,540 |   | $ | 42,100 |   |
|                                                                      |       |     |       |       |       |        |       |                 |       |                |       |      |       |
| Rate Sensitive Assets/Rate  Sensitive Liabilities (Cumulative Percentage) |       | 61.49    | %          | 54.00      | %          | 58.08       | %          | 58.08                | %          | 132.81              | %          | 131.97    | %          |

 

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**ITEM 4.****      CONTROLS ANDPROCEDURES**

 

Evaluation ofDisclosure Controls and Procedures

 

As of the endof the period covered by this report, the Company’s Executive Vice Presidentand Chief Executive Officer, Eddie Canterbury, and Vice President and ChiefFinancial Officer, Mark Mareske, 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 Executive Vice President and Chief Executive Officer and theVice President and Chief Financial Officer have concluded that the Company’sdisclosure controls and procedures were adequate and effective to ensure thatmaterial information required to be disclosed by the Company in reports that itfiles or submits under the Exchange Act is recorded, processed, summarized, andreported within the time periods specified in Securities and ExchangeCommission rules and forms.

 

Changes inInternal Controls

 

There were nochanges in the Company’s internal control over financial reporting identifiedin the evaluation performed by the Company’s Executive Vice President and ChiefExecutive Officer and Vice President and Chief Financial Officer thatmaterially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

13

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**PART II**

 

**OTHER INFORMATION**

 

ITEM 1.          LEGALPROCEEDINGS

 

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

 

ITEM 2.          UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None

 

ITEM 3.          DEFAULTSUPON SENIOR SECURITIES

 

None

 

 

ITEM 4.          SUBMISSIONOF MATTERS TO VOTE OF SECURITY HOLDERS

 

None

 

 

ITEM 5.          OTHERINFORMATION

 

None

 

 

ITEM 6.          EXHIBITS

 

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

 

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

 

Certificationas Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 by ExecutiveVice President and Chief Executive Officer

 

Certificationas Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 byVice-President and Chief Financial Officer

 

(32) Section 1350Certifications

 

Certification Pursuant to 18 U.S.C. Section 1350, as AdoptedPursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by ExecutiveVice President and Chief Executive Officer

 

Certification Pursuant to 18 U.S.C. Section 1350, as AdoptedPursuant to Section 906 of the Sarbanes-Oxley Act of 2002 byVice-President and Chief Financial Officer

 

14

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**SIGNATURES**

** **

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

 
|                |                                                                    |
|---------------------|-------------------------------------------------------------------------|
|                | LOGAN COUNTY  BANCSHARES, INC.                                          |
|                | (Registrant)                                                            |
|                |                                                                    |
| Date: May  13, 2005 | /s/ Eddie  Canterbury                                                   |
|                | Eddie  Canterbury, Executive Vice President and Chief Executive Officer |
|                |                                                                    |
| Date: May  13, 2005 | /s/ Mark  Mareske                                                       |
|                | Mark  Mareske,  Vice President and 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 Executive Vice President and 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 Executive Vice  President and 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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