**SECURITIESAND EXCHANGE COMMISSION**

Washington, D.C.20549

 

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**FORM 10-K**

 

**AnnualReport Pursuant to Section 13 or 15 (d) ofThe Securities Exchange Act of 1934**

 

**For thecalendar year ended December 31, 2002 Commission file No. 2-95114**

 

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**LOGANCOUNTY BANCSHARES, INC.**

(Exact name ofregistrant 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, WV**                                |   | **25601**                            |
| (Address of  principal executive offices)                       |   | (Zip code)                           |
|                                                            |   |                                 |

 

Registrant’s TelephoneNumber, including area code: **(304) 752-2080**

 

SecuritiesRegistered Pursuant to Section 12(g) of The Act:

 

**NONE**

(Title of Class)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 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.  ýYes o No.

 

Indicate the number ofshares outstanding of each of the registrant’s classes of common stock as ofthe latest practicable date:

 

Class Outstandingat April 25, 2003

 

| Common Stock  ($1.67 Par Value)                                                                        |   | 703,991 Shares                 |
|--------------------------------------------------------------------------------------------------------|--------|--------------------------------|
|                                                                                                   |   |                           |
| State the aggregate market value of the voting stock  held by non-affiliates of the   Registrant. |
|                                                                                                   |   |                           |
| **Aggregate  market value of voting stock**                                                            |   | **Based on  last trade price** |
| $30,113,622                                                                                            |   | $42.00                         |
|                                                                                                   |   |                           |
| Documents  Incorporated by Reference                                                                   |
|                                                                                                   |
| **(None)**                                                                                             |

 

 

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LOGAN COUNTYBANCSHARES, INC.

 

FORM 10-K

 

# INDEX

 
| ITEM            | 1      | – | Business                                                                                       |
|-----------------|--------|--------|------------------------------------------------------------------------------------------------|
|            |   |   |                                                                                           |
| ITEM            | 2      | – | Properties                                                                                     |
|            |   |   |                                                                                           |
| ITEM            | 3      | – | Legal Proceedings                                                                              |
|            |   |   |                                                                                           |
| ITEM            | 4      | – | Submission of Matters to a Vote of Security Holders                                            |
|            |   |   |                                                                                           |
| ITEM            | 5      | – | Market for the Registrant’s Common Stock and  Related And Related Security Holder Matters |
|            |   |   |                                                                                           |
| ITEM            | 6      | – | Selected Financial Data                                                                        |
|            |   |   |                                                                                           |
| ITEM            | 7      | – | Management’s Discussion and Analysis                                                      |
|            |   |   |                                                                                           |
| ITEM            | 8      | – | Financial Statements and Supplemental Data                                                     |
|            |   |   |                                                                                           |
| ITEM            | 9      | – | Disagreements on Accounting and Financial  Disclosures                                         |
|            |   |   |                                                                                           |
| ITEM            | 10     | – | Directors and Executive Officers of the  Registrant                                            |
|            |   |   |                                                                                           |
| ITEM            | 11     | – | Executive Compensation                                                                         |
|            |   |   |                                                                                           |
| ITEM            | 12     | – | Security Ownership of Certain Beneficial Owners  and Management                                |
|            |   |   |                                                                                           |
| ITEM            | 13     | – | Certain Relationships and Related Transactions                                                 |
|            |   |   |                                                                                           |
| ITEM            | 14     | – | Exhibits, Financial Statement Schedules and  Reports on Form 8K                                |
|            |   |   |                                                                                           |
| PROXY MATERIALS |
|            |
| SIGNATURES      |

 

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ITEM 1 – BUSINESS

 

LOGAN COUNTYBANCSHARES, INC.

 

Logan County Bancshares, Inc. is a bank holdingcompany, which was organized under the laws of the State of West Virginia in1985.  On May 17, 1985, the Corporationacquired all the outstanding capital stock of Logan Bank & Trust Company(LB&T) and also all of the outstanding stock of Bank of Chapmanville(BC).  Both of these subsidiaries arebanking corporations organized under the laws of the State of West Virginia.  On May 28, 1996, the subsidiary banks; LoganBank & Trust Company and Bank of Chapmanville entered into a mergeragreement whereby they would be merged into Logan Bank & TrustCompany.  The merger was completed afterproper regulatory approval and was accounted for under the pooling of interestmethod of accounting.

 

Logan Bank & TrustCompany was organized in 1963, and still operates at its original location atthe corner of Washington and Main Streets in Logan, West Virginia.  The Company also has a separate drive-upfacility and mini-bank also located on Main Street in Logan, and in earlyFebruary 1996, opened a new full-service branch in the Man area.  In November 1996, the bank acquired a branchfacility from another financial institution located at Harts, West Virginia.  The facility at Route 10 North, Harts, is operatedas a full service branch of the bank. Logan Bank & Trust Company is a member of the Federal Reserve Systemand deposits are insured pursuant to the Federal Deposit Insurance Act.

 

Logan Bank & TrustCompany provides a complete range of retail banking services to individuals andsmall and medium size businesses.  Theirservices include checking, savings, NOW, certificates of deposit and moneymarket deposit accounts, business loans, individual loans, mortgage loans, homeequity loans, consumer loans for various other purposes, otherconsumer-oriented financial services including safety deposit box accounts, IRAaccounts and night depository.  Thecompany also operates several automatic teller machines at three strategiclocations in Logan County, which provide 24-hour working services to customersof Logan Bank & trust Company.  TheCompany is a member of the Cirrus ATM network which has over 100 locations inWest Virginia and more than 10,000 locations in 47 states.

 

Logan Bank & TrustCompany provides depository lending and related financial services tocommercial, retail, industrial, financial and governmental customers.  The lending function includes short andmedium term loans, letters of credit, inventory and accounts receivablefinancing and real estate construction lending.  The Company also offers a discount investment brokerage servicethrough a sub-contract arrangement with a larger financial institution.

 

The Chapmanville Bank ofLB&T Bank has one location situated on Railroad Avenue in Chapmanville,West Virginia.

 

This facility alsoprovides a complete range of retail banking services to individuals and smalland medium sized businesses.  Theseservices include checking, savings, NOW, certificates of deposit and moneymarket account deposits, business loans, individual loans, mortgage loans, homeequity loans, consumer loans for various other purposes are provided aswell.  In addition, the Bank offersconsumer oriented financial services such as IRA accounts, night depository,safety deposit boxes and other banking related services.

 

3

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The branch also providesdepository, lending and related financial services to commercial, retail,industrial, financial and governmental customers.  The lending function includes short and medium-term loans,letters of credit, inventory and accounts receivable financing, and real estateconstruction lending, as do all the branches of Logan Bank & trust Company.

 

INVESTMENT CONSIDERATIONS

 

An investment in the sharesoffered hereby involves certain risks. A subscription for shares should be made only after carefulconsiderations set forth below and elsewhere in this Offering Circular, andshould be undertaken only by persons who can afford an investment involvingsuch risks.

 

MARKET FOR THE COMMONSTOCKAND RELATED SECURITY HOLDER MATTERS

 

The shares of Logancounty BancShares, Inc. are infrequently traded in the over-the-counter marketand are not listed on the National Association of Security Dealers AutomatedQuotation System (NASDAQ) or on any exchange. Management is not aware of any security dealer, which makes a market inthe stock; therefore, no active trading market should be deemed to exist.

 

The sales price for LoganCounty BancShares, Inc. stock is determined by negotiations between individualbuyers and sellers.  Although companykeeps no records of sale prices paid for Company stock and has no directknowledge of such prices, for purposes of presentation, Corporation’smanagement estimates the approximate market value ranges for 2002 and 2001 tobe as follows:

 
|                           |   | **First  Quarter** |          | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** **    |
|--------------------------------|--------|--------------------|---------------|---------------------|------------|--------------------|------------|---------------------|---------------|
| Sale Price:                    |   |               |          |                |       |               |       |                |          |
| 2002 Common Stock              |   | $                  | 42– $ 42 |                | $          | 42– $ 42      |       | $                   | 42– $ 42 |   | $ | 42– $ 42 |   |
| 2001 Common Stock              |   | $                  | 42– $ 42 |                | $          | 42– $ 42      |       | $                   | 42– $ 42 |   | $ | 42– $ 42 |   |
|                           |   |               |          |                |       |               |       |                |          |
| Per Share Dividends  Declared: |   |               |          |                |       |               |       |                |          |
| 2002 Common Stock              |   | $                  | 0.34          |                | $          | 0.34               |       | $                   | 0.35          |   | $ | 0.50 |   |
| 2001 Common Stock              |   | $                  | 0.33          |                | $          | 0.34               |       | $                   | 0.34          |   | $ | 0.49 |   |

 

COMPETITION

 

Vigorous competitionexists in the market area of Logan County Bancshares, Inc.  In addition to the three other banks locatedwithin the market area, the location is in a relatively close proximity to twopopulation centers of the State.  Thereis also competition for deposits and related financial services from non-bankinstitutions such as savings and loans, insurance companies and brokeragefirms, all of which are active in the area. Those institutions as well in addition to the finance companies provideloans.  Since the Bank Holding CompanyAct, passed by the West Virginia Legislature in 1982, local banks have beenjoining bank holding companies around the State.  Of the five banks located in Logan County, only one is a unitbank.  The other four are members ofvarious multi-bank holding companies. Logan county BancShares, Inc. has been able to compete effectivelywithin the county by having one institution located in the county seat (LoganBank & Trust Company), and Branches located in the high-growth area of thecounty.  Also, to stimulate growth,Logan county BancShares, Inc. is the only bank holding company owned andcontrolled from within the county.

 

4

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SUPERVISION ANDREGULATION

 

The Corporation is a bankholding company within the meaning of the Bank Holding Company Act of 1956 (theAct) and is registered as such with the Board of Governors of the FederalReserve System (the Reserve Board).  Asa bank holding company, the corporation is required to file with the FederalReserve Board an annual report and such other information as may berequired.  The Federal Reserve Board mayalso make examinations of the corporation. In addition, the Federal Reserve Board has the authority (which it hasnot exercised) to regulate provisions of certain bank holding company debt.

 

The Act requires everybank holding company to obtain the prior approval of the Federal Reserve Boardbefore acquiring substantially all the assets of or direct or indirectownership or control of more than 5% of the voting shares of any bank, which isnot already majority-owned.  The Actalso prohibits a bank holding company, with certain exceptions, from itselfengaging in or acquiring direct or indirect control of more than 5% of thevoting shares of any company engaged in non-banking activities.  One of the principal exceptions to theseprohibitions is for engaging or acquiring shares of a company engaged inactivities found by the Federal Reserve Board by order or regulation to be soclosely related to banking or managing banks as to be a proper incidentthereto.  The Act prohibits theacquisition by a bank holding company of more that 5% of the outstanding votingshares of a bank located outside the State in which the operations of itsbanking subsidiaries are principally conducted, unless such an acquisition isspecifically authorized by statute of the State in which the bank acquired islocated.  The Act and regulations of theFederal Reserve Board also prohibit a bank holding company and its subsidiariesfrom engaging in certain tie-in arrangements in connection with any extensionof credit or provision of any property or services.

 

Logan Bank & TrustCompany is an insured bank, organized under the Banking Law of the State ofWest Virginia and is a member of the Federal Reserve System.  Accordingly, their operations are subject toFederal and State laws applicable to commercial banks with trust powers and toregulation by the Commissioner of Banking and the West Virginia State BankingCommissioner, the Federal Reserve Board and the Federal Deposit InsuranceCorporation.  Among other restrictions,the West Virginia Banking laws state that banks organized hereunder may paydividends only out of undivided profits. Under the Federal Reserve Act, the approval of the Federal Reserve Boardis required for dividends declared by a state member bank which in any yearexceeds the net profits of such bank for that year, as defined, combined withretained net profits for the two preceding years.

 

5

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GOVERNMENTMONETARY POLICIES AND ECONOMIC CONTROLS

 

The earnings and growthof the banking industry and of Logan Bank & Trust Company is affected bythe credit policies of monetary authorities including the Federal ReserveSystem.  An important function of theFederal Reserve System is to regulate the national supply of bank credit inorder to control recessionary and inflationary pressures.  Among the instruments of monetary policyused by the Federal Reserve to implement these objectives are open marketoperations in the U. S. Government securities, changes in the discount rate onmember bank borrowings, and changes in reserve requirements against member bankdeposits.  These means are used invarying combinations to influence overall growth of bank loans, investments anddeposits and may also affect interest rates charged on loans or paid fordeposits.  The monetary policies of theFederal Reserve authorities have had a significant effect on the operatingresults of commercial banks in the past and are expected to continue to havesuch an effect in the future.

 

In view of changingconditions in the national economy and in the money markets, as well as theeffect of actions by monetary and fiscal authorities, including the FederalReserve system, no prediction can be made as to possible future changes ininterest rates, deposit levels, loan demand of their effect on the business andearnings of the Corporation, and Logan Bank & Trust Company.

 

FOREIGN OPERATIONS

 

The corporation andsubsidiary have no foreign operations.

 

EXECUTIVE OFFICERS

 

For informationconcerning the Executive Officers of the Corporation, please see Item 10.

 

6

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ITEM 2 – PROPERTIES

 

The principal offices ofthe corporation are shared with those of Logan Bank & Trust Company and aresituated in Logan, West Virginia.  Thisbuilding, a two-story bank and office building, is owned by Logan Bank &trust Company, as is a mini-bank and drive-up facility which is locatednear-by.  In addition, a one-storyoffice and bank building is located on Railroad Avenue in Chapmanville, WestVirginia.  During 1996 the Bank openedtwo other branch facilities in West Virginia. Both are one-story office and bank buildings located at Rt. 10, SouthMan, West Virginia and Rt. 10 North at Harts, West Virginia.

 

ITEM 3 – LEGAL PROCEEDINGS

 

There are no legalactions or proceedings to which the Corporation, or its subsidiary is a party.

 

ITEM 4 – SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS

 

None.

 

7

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ITEM 5 – MARKET FOR THE REGISTRANT’SCOMMON STOCKAND RELATED SECURITY HOLDER MATTERS

 

The shares of LoganCounty BancShares, Inc are infrequently traded in the over-the-counter marketand are not listed on the National Association of Security Dealers AutomatedQuotation System (NASDAQ) or on any exchange. Management is not aware of any security dealer, which makes a market inthe stock; therefore, no active trading market should be deemed to exist.

 

The sales price for LoganCounty BancShares, Inc. stock is determined by negotiations between individualbuyers and sellers.  Although companykeeps no records of sales prices paid for Company stock and has no direct knowledgeof such prices, for purposes of presentations, Corporation’s managementestimates the approximate market value ranges for 2002 and 2001 to be asfollows:

 
|                           |   | **First  Quarter** |                | **Second  Quarter** | ** ** | **Third  Quarter**  | ** ** | **Fourth  Quarter** | ** **          |
|--------------------------------|--------|--------------------|---------------------|---------------------|------------|---------------------|------------|---------------------|---------------------|
| Sales Price:                   |   |               |                |                |       |                |       |                |                |
| 2002 Common Stock              |   | $                  |  42– $ 42 |                | $          |  42– $ 42 |       | $                   |  42– $ 42 |   | $ |  42– $ 42 |   |
| 2001 Common Stock              |   | $                  |  42– $ 42 |                | $          |  42– $ 42 |       | $                   |  42– $ 42 |   | $ |  42– $ 42 |   |
|                           |   |               |                |                |       |                |       |                |                |
| Per Share Dividends  Declared: |   |               |                |                |       |                |       |                |                |
| 2002 Common Stock              |   | $                  | 0.34                |                | $          | 0.34                |       | $                   | 0.35                |   | $ | 0.50 |   |
| 2001 Common Stock              |   | $                  | 0.33                |                | $          | 0.34                |       | $                   | 0.34                |   | $ | 0.49 |   |

 

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ITEM 6 – SELECTED FINANCIAL DATA

 

LOGAN BANCSHARES,INC. AND SUBSIDIARY

(In Thousands ofDollars)

 
| **YEAR ENDED DECEMBER 31:**                                                |   | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** | **1998** | ** ** |
|----------------------------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Total  Interest Revenue                                                    |   | $        | 10,088     |     | $          | 12,090   |       | $        | 11,508     |     | $          | 10,753 |   | $ | 9,964 |   |
| Total  Interest Expense                                                    |   | 2,764    |       | 4,801    |       | 4,828    |       | 4,378    |       | 4,260    |       |
|                                                                       |   |     |       |     |       |     |       |     |       |     |       |
| Net  Interest Revenue                                                      |   | 7,324    |       | 7,289    |       | 6,680    |       | 6,375    |       | 5,704    |       |
| Provision  for Possible Loan Losses                                        |   | 534      |       | 700      |       | 100      |       | 22       |       | 90       |       |
|                                                                       |   |     |       |     |       |     |       |     |       |     |       |
| Net  Interest Revenue After Provision for Possible Loan Losses             |   | 6,790    |       | 6,589    |       | 6,580    |       | 6,353    |       | 5,614    |       |
| Other  Operating Revenue                                                   |   | 805      |       | 707      |       | 769      |       | 699      |       | 989      |       |
| Other  Operating Expense                                                   |   | (4,689   | )          | (4,631   | )          | (4,185   | )          | (3,897   | )          | (3,629   | )          |
|                                                                       |   |     |       |     |       |     |       |     |       |     |       |
| Income  Before Income Taxes                                                |   | 2,906    |       | 2,665    |       | 3,164    |       | 3,155    |       | 2,974    |       |
| Income  Taxes                                                              |   | 1,064    |       | 909      |       | 1,131    |       | 1,131    |       | 1,083    |       |
|                                                                       |   |     |       |     |       |     |       |     |       |     |       |
| Net  Income                                                                |   | $        | 1,842      |     | $          | 1,756    |       | $        | 2,033      |     | $          | 2,024 |   | $ | 1,891 |   |
| Per  Common Share:                                                         |   |     |       |     |       |     |       |     |       |     |       |
| Net  Income                                                                |   | $        | 257        |     | $          | 2.45     |       | $        | 2.84       |     | $          | 2.83 |   | $ | 2.64 |   |
| Cash  Dividends Declared                                                   |   | $        | 1.53       |     | $          | 1.50     |       | $        | 1.44       |     | $          | 1.34 |   | $ | 1.18 |   |
|                                                                       |   |     |       |     |       |     |       |     |       |     |       |
| At  December 31:                                                           |   |     |       |     |       |     |       |     |       |     |       |
| Total  Loans                                                               |   | $        | 107,933    |     | $          | 116,907  |       | $        | 113,641    |     | $          | 109,571 |   | $ | 95,139 |   |
| Total  Assets                                                              |   | 170,041  |       | 171,599  |       | 157,480  |       | 152,746  |       | 139,278  |       |
| Total  Deposits                                                            |   | 156,443  |       | 152,028  |       | 138,723  |       | 127,619  |       | 124,420  |       |
| Short-Term  Debt                                                           |   | 1,000    |       | 2,000    |       | 2,000    |       | 9,840    |       | 0        |       |
| Tota  Shareholders’ Equity                                            |   | 17,193   |       | 16,800   |       | 16,014   |       | 14,444   |       | 14,060   |       |
| Selected  Ratios:                                                          |   |     |       |     |       |     |       |     |       |     |       |
| Rate  of Return on Average:                                                |   |     |       |     |       |     |       |     |       |     |       |
| Total  Assets                                                              |   | 1.06     | %          | 1.03     | %          | 1.36     | %          | 1.39     | %          | 1.43     | %          |
| Shareholders’  Equity                                                 |   | 10.37    | %          | 10.36    | %          | 13.35    | %          | 13.84    | %          | 13.99    | %          |
| Tier  1 Capital to Total Assets at Year End                                |   | 9.58     | %          | 10.31    | %          | 10.25    | %          | 9.92     | %          | 10.09    | %          |
| Average  Total Shareholders’ Equity to Average Total Assets           |   | 10.25    | %          | 9.95     | %          | 10.15    | %          | 10.05    | %          | 10.22    | %          |
| Common  Dividend Payout Ratio                                              |   | 59.56    | %          | 61.12    | %          | 50.79    | %          | 47.35    | %          | 44.70    | %          |
| Nonaccrual  and Restructured Business Loans as a Percentage of Total Loans |   | 0.16     | %          | 0.09     | %          | 0.13     | %          | 0.51     | %          | 0.53     | %          |

 

9

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ITEM 7 – Management’s Discussion andAnalysis

 

Logan CountyBancShares, Inc. and SubsidiaryManagement’s Discussion and Analysis of FinancialCondition and Results of Operations

 

INTRODUCTION

 

The Management’sDiscussion and Analysis reviews and discusses the financial condition of LoganCounty BancShares, Inc. and Subsidiary. Included are (a) the results of operations for 2002 and 2001 and (b)discussion of liquidity including an asset and liability sensitivity analysis,and (c) an analysis of earnings, dividends, and capital.  The discussion and analysis discloses anymaterial changes and any infrequent events and known trends as they relate toliquidity, capital resources and results of operations.  The information presented reflects theactivities of the holding company and the subsidiary bank, Logan Bank &Trust Company.

 

To assist inunderstanding and evaluating major changes in Logan County BancShares, Inc.’sfinancial position and results of operations, this discussion emphasizes acomparison of the years 2002 to 2001, 2001 to 2000 and 2000 to 1999, and alsopresents five year information in instances where appropriate.  This discussion should be read concurrentlywith the audited financial statements including notes to those statements.

 

The following definitionsapply to terms used in this report:

 

AVERAGE BALANCE:  All balances have been computed on the basisof monthly averages.

 

NET INTEREST INCOME:  Interest and related fee income on earningassets, reduced by total interest paid on interest bearing deposits andborrowed funds.  This net amount, whendivided by average earning asset balances becomes net interest margin.

 

LIQUIDITY ANDCAPITAL RESOURCES

 

Liquidity is providedthrough short-term investments, payments on outstanding loans, and the abilityto attract new deposits or borrow funds. At December 31, 2002 and 2001, the funds available within one year from investmentsand loans were $47,465,000. and $37,712,000.

 

Logan County BancShares,Inc.’s subsidiary bank deposit mix remained stable in 2002 after increasing by$13,305,000. in 2001, $11,104,000., in 2000, and $3,198,000. in 1999.  These increases in the deposit mix pointsout a marketing strategy that has attracted new customers to the Bank.  Time deposits represented the major growthin the deposit mix.  They increased by$5,392,000., and $8,056,000. respectively in 2000 and 1999.  Demand deposits contributed to the growth inthe deposit mix by increasing $6,164,000. in 2001 and $4,011,000. in 2000.  Savings deposits showed increases of$7,517,000 in 2001, $1,263,000. in 2000 and 1999 of $1,207,000. after remainingstable over the past five years.  Thesechanges are predominantly due to the fluctuating interest rates by the FederalReserve and movement of savings to time deposits by the consumer in order toobtain a better

 

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interest rate.  At December 31, 2002 and 2001, 31.19% and32.19%, of the total deposits were in demand deposits while 29.82% and 26.18%were in savings and 38.98% and 41.63% were in time deposits, respectively.  The stable growth in deposits gives the Banka firm deposit base to meet the lending demand and market fluctuations.

 

These changes arepredominantly due to the fluctuating interest rates by the Federal Reserve andmovement of savings to time deposit by the consumer in order to obtain a betterinterest rate.  At December 31, 2000 and1999, 30.83% and 30.03% of the total deposits were in demand deposits, while23.27% and 24.31% were in savings and 45.89% and 45.65% were in time depositsrespectively.  The stable growth indeposits gives the Bank a firm deposit base to meet the lending demand andmarket fluctuations.

 

11

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During 2001, 2000 and1999, banks have been faced with a highly competitive atmosphere in the senseof maintaining a continuity of growth. Logan County BancShares, Inc. has maintained a community bank approachwhich enhances its performance over those years.  The merger of Bank of Chapmanville into Logan Bank & Trustcompany enabled the Company to operate more efficiently and thereby capture asizeable portion of the market for deposits in the fastest growing area ofLogan county, West Virginia.  Also, withthe addition of the Man Branch of Logan Bank & Trust and Harts Bank ofLogan Bank & Trust in 1996, and the Fountain Place location in 1999, theCompany has expanded its current market. See Table I. for a five-year summary of financial data.

 

Capital planning isessentially the management process that allocates capital resources in a mannerthat generates the highest income, while maintaining sufficient liquidity, atthe lowest degree of risk attainable. Moreover, it is the philosophy of Logan County BancShares, Inc. tonurture that growth by planning for steady, long-range profits rather that thehigh-risk, high-exposure techniques.  Asnoted in Table I. the ratio of net income to average assets was 1.03%, 1.36%and 1.43% for the years ended December 31, 2001, 2000 and 1999,respectively.  Through the periodspresented, management has allocated new funds into the higher-yielding loansand holding the investment securities nearly constant.  Although the improvement in the localeconomy had been at a slow pace through the periods presented, overall loandemand and deposit growth show a marked increase due to marketing the communitybank service approach.

 

Table I. represents asummary of financial data for the previous five years.

 

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TABLE I.  – SUMMARY OF FINANCIAL DATA FOR FIVE YEARS

(In thousands ofdollars)

 
|                                                 |   | **2002** |    | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** | **1998** | ** ** |
|------------------------------------------------------|--------|----------|---------|----------|------------|----------|------------|----------|------------|----------|------------|
| Year End Balances:                                   |   |     |    |     |       |     |       |     |       |     |       |
| Total Assets                                         |   | $        | 170,041 |     | $          | 171,599  |       | $        | 157,480    |     | $          | 152,746 |   | $ | 139,278 |   |
| Total Earning Assets                                 |   | 160,608  |    | 160,413  |       | 147,539  |       | 139,600  |       | 130,454  |       |
| TotalDeposits                                        |   | 150,443  |    | 152,028  |       | 138,728  |       | 127,619  |       | 124,420  |       |
| Stockholders’ Equity                            |   | 17,193   |    | 16,800   |       | 16,014   |       | 14,444   |       | 14,059   |       |
|                                                 |   |     |    |     |       |     |       |     |       |     |       |
| Income for theYear:                                  |   |     |    |     |       |     |       |     |       |     |       |
| Total Interest Income                                |   | 10,088   |    | 12,090   |       | 11,508   |       | 10,753   |       | 9,964    |       |
| Total Interest Expnese                               |   | 2,764    |    | 4,801    |       | 4,828    |       | 4,378    |       | 4,260    |       |
| Net Interest Income                                  |   | 7,324    |    | 7,289    |       | 6,680    |       | 6,375    |       | 5,704    |       |
| Provision for Loan  Losses                           |   | 534      |    | 700      |       | 100      |       | 22       |       | 90       |       |
| Non-interest Income                                  |   | 805      |    | 707      |       | 769      |       | 699      |       | 989      |       |
| Non-interest expense                                 |   | 5,753    |    | 5,540    |       | 5,316    |       | 5,028    |       | 4,712    |       |
| Net Income                                           |   | 1,842    |    | 1,756    |       | 2,033    |       | 2,024    |       | 1,891    |       |
|                                                 |   |     |    |     |       |     |       |     |       |     |       |
| Per Share Data                                       |   |     |    |     |       |     |       |     |       |     |       |
| Net Income                                           |   | 2.57     |    | 2.45     |       | 2.84     |       | 2.83     |       | 2.64     |       |
| Stockholders’ Equity                            |   | 23.73    |    | 23.43    |       | 22.34    |       | 20.14    |       | 19.61    |       |
| Cash Dividends                                       |   | 1.53     |    | 1.50     |       | 1.44     |       | 1.34     |       | 1.18     |       |
|                                                 |   |     |    |     |       |     |       |     |       |     |       |
| Key Ratios                                           |   |     |    |     |       |     |       |     |       |     |       |
| Net Income To:                                       |   |     |    |     |       |     |       |     |       |     |       |
| Average Assets                                       |   | 1.06     | %       | 1.03     | %          | 1.36     | %          | 1.39     | %          | 1.43     | %          |
| Average Stockholders’  Equity                   |   | 10.37    | %       | 10.36    | %          | 13.36    | %          | 13.84    | %          | 13.99    | %          |
| Average Stockholders’  Equity to Average Assets |   | 10.25    | %       | 9.95     | %          | 10.15    | %          | 10.05    | %          | 10.22    | %          |
|                                                      |        |          |         |          |            |          |            |          |            |          |            |  |  |  |  |  |

 

13

----

 

TABLE II – RATEANALYSIS OF INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES

(In Thousands ofDollars)

 
|                                                                     |   | **2002**             | ** ** | **2001**              | ** ** | **2000**           | ** ** |
|--------------------------------------------------------------------------|--------|----------------------|------------|-----------------------|------------|--------------------|------------|
|                                                                     |   | **Average  Balance** |       | **Income  (Expense)** | ** ** | **Average  Yield** | ** ** | **Average  Balance** | ** ** | **Income  (Expense)** | ** ** | **Average  Yield** | ** ** | **Average  Balance** | ** ** | **Income  (Expense)** | ** ** | **Average  Yield** | ** ** |
| EARNING ASSETS:                                                          |   |                 |       |                  |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                                                    |   |                 |       |                  |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| (Net of Reserves & Discounts:)                                       |   |                 |       |                  |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                                                               |   | $                    | 44,680     |                  | $          | 3,103              |       | 6.94 | % | $ | 46,696 |   | $ | 4,209 |   | 9.01 | % | $ | 43,232 |   | $ | 3,955 |   | 9.15 | % |
| Real Estate                                                              |   | 53,180               |       | 4,262                 |       | 8.01               | %          | 52,514 |   | 4,376 |   | 8.33 | % | 52,215 |   | 4,302 |   | 8.24 | % |
| Consumer                                                                 |   | 12,564               |       | 1,154                 |       | 9.18               | %          | 14,079 |   | 1,397 |   | 9.92 | % | 13,348 |   | 1,257 |   | 9.42 | % |
|                                                                     |   |                 |       |                  |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Net Loans                                                          |   | 110,424              |       | 8,519                 |       | 7.71               | %          | 113,289 |   | 9,982 |   | 8.81 | % | 108,795 |   | 9,514 |   | 8.74 | % |
|                                                                     |   |                 |       |                  |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment Securities:                                                   |   |                 |       |                  |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                                                                  |   | 0                    |       | 0                     |       | 0.00               | %          | 0 |   | 0 |   | 0.00 | % | 0 |   | 0 |   | 0.00 | % |
| Available for Sale                                                       |   | 40,988               |       | 1,364                 |       | 3.33               | %          | 25,967 |   | 1,354 |   | 5.21 | % | 28,887 |   | 1,886 |   | 6.53 | % |
|                                                                     |   |                 |       |                  |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Investment Securities                                              |   | 40,988               |       | 1,364                 |       | 3.33               | %          | 25,967 |   | 1,354 |   | 5.21 | % | 28,887 |   | 1,886 |   | 6.53 | % |
|                                                                     |   |                 |       |                  |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal Funds sold and  Securities Purchased Under Option to resale |   | 13,106               |       | 206                   |       | 1.57               | %          | 20,540 |   | 754 |   | 3.67 | % | 1,728 |   | 108 |   | 6.25 | % |
|                                                                     |   |                 |       |                  |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Earnings Assets                                                    |   | $                    | 164,518    |                  | $          | 10,089             |       | 6.13 | % | $ | 159,796 |   | $ | 12,090 |   | 7.57 | % | $ | 139,410 |   | $ | 11,508 |   | 8.25 | % |
|                                                                     |   |                 |       |                  |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Liabliities:                                            |   |                 |       |                  |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings and Interest Bearing Demand                                      |   | $                    | 65,384     |                  | $          | 584                |       | 0.89 | % | $ | 57,807 |   | $ | 1,139 |   | 1.97 | % | $ | 55,169 |   | $ | 1,329 |   | 2.41 | % |
| Time Deposits                                                            |   | 60,861               |       | 2,024                 |       | 3.33               | %          | 64,549 |   | 3,522 |   | 5.46 | % | 59,505 |   | 3,430 |   | 5.76 | % |
| Federal Funds Purchased                                                  |   | 2,910                |       | 157                   |       | 5.39               | %          | 2,000 |   | 140 |   | 7.00 | % | 1,052 |   | 69 |   | 6.56 | % |
|                                                                     |   |                 |       |                  |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Interest Bearing Liabilities                                       |   | $                    | 129,155    |                  | $          | 2,765              |       | 2.14 | % | $ | 124,356 |   | $ | 4,801 |   | 3.86 | % | $ | 115,726 |   | $ | 4,828 |   | 4.17 | % |

 

14

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TABLE III. –VOLUME ANALYSIS OF CHANGE IN INTEREST INCOME AND INTEREST EXPENSE

(In Thousands ofDollars)

 
|                                                           |   |         |   |       | ** ** |        | ** ** | **2002  VS 2001** | ** ** |                 | ** ** | **2001  VS  2000** | ** ** |         | ** ** |
|----------------------------------------------------------------|--------|--------------|--------|------------|------------|-------------|------------|-------------------|------------|----------------------|------------|-------------------------|------------|--------------|------------|
|                                                           |   | **Interest** |   | **Income** | ** ** | **Expense** | ** ** | **Increase**      | ** ** | **(Decrease)**       |       | **Due  To**             | ** ** | **Increase** | ** ** | **(Decrease)** |   | **Due  To** | ** ** |
|                                                           |   | **2002**     |   | **2001**   | ** ** | **2000**    | ** ** | **Volume**        | ** ** | **Change  In  Rate** | ** ** | **Total**               | ** ** | **Volume**   | ** ** | **Change  In  Rate** | ** ** | **Total** | ** ** |
| INTEREST  INCOME ON EARNING ASSETS:                            |   |         |   |       |       |        |       |              |       |                 |       |                    |       |         |       |   |   |   |   |
| LOANS:                                                         |   |         |   |       |       |        |       |              |       |                 |       |                    |       |         |       |   |   |   |   |
| Commercial                                                     |   | $            | 3,103  |       | $          | 4,209       |       | $                 | 3,955      |                 | $          | (140                    | )          | $            | (966       | ) | $ | (1,106 | ) | $ | 317 |   | $ | (63 | ) | $ | 254 |   |
| Real  Estate                                                   |   | 4,262        |   | 4,376      |       | 4,302       |       | 54                |       | (168                 | )          | (114                    | )          | 25           |       | 49 |   | 74 |   |
| Consumer                                                       |   | 1,154        |   | 1,397      |       | 1,257       |       | (139              | )          | (104                 | )          | (243                    | )          | 69           |       | 71 |   | 140 |   |
|                                                           |   |         |   |       |       |        |       |              |       |                 |       |                    |       |         |       |   |   |   |   |
| Total  Loans                                                   |   | 8,519        |   | 9,982      |       | 9,514       |       | (225              | )          | (1,238               | )          | (1,463                  | )          | 411          |       | 57 |   | 468 |   |
|                                                           |   |         |   |       |       |        |       |              |       |                 |       |                    |       |         |       |   |   |   |   |
| SECURITIES                                                     |   |         |   |       |       |        |       |              |       |                 |       |                    |       |         |       |   |   |   |   |
| Held  to Mtturiey                                              |   | 0            |   |       |       |        |       |              |       |                 |       |                    |       |         |       |   |   |   |   |
| Taxable                                                        |   | 0            |   | 0          |       | 0           |       | 0                 |       | 0                    |       | 0                       |       | 0            |       | 0 |   | 0 |   |
| Available  for sale                                            |   | 1,364        |   | 1,354      |       | 1,886       |       | 500               |       | 490                  |       | 10                      |       | (190         | )          | (342 | ) | 532 |   |
| TOTAL  SECURITIES                                              |   | 1,364        |   | 1,354      |       | 1,886       |       | 500               |       | 490                  |       | 10                      |       | (190         | )          | (342 | ) | 532 |   |
|                                                           |   |         |   |       |       |        |       |              |       |                 |       |                    |       |         |       |   |   |   |   |
| FEDERAL  FUNDS SOLD AND SECURITIES PURCHASED:                  |   |         |   |       |       |        |       |              |       |                 |       |                    |       |         |       |   |   |   |   |
| Under  Agreement to  Resale                               |   | 206          |   | 754        |       | 108         |       | (117              | )          | (431                 | )          | (548                    | )          | 1,175        |       | (529 | ) | 646 |   |
|                                                           |   |         |   |       |       |        |       |              |       |                 |       |                    |       |         |       |   |   |   |   |
| TOTAL  INTEREST INCOME ON EARNING ASSETS                       |   | 10,089       |   | 12,090     |       | 11,508      |       | 158               |       | (2,159               | )          | (2,001                  | )          | 1,396        |       | (814 | ) | 582 |   |
|                                                           |   |         |   |       |       |        |       |              |       |                 |       |                    |       |         |       |   |   |   |   |
|                                                           |   |         |   |       |       |        |       |              |       |                 |       |                    |       |         |       |   |   |   |   |
| INTEREST  EXPENSE ON INTEREST BEARING LIABILITIES:             |   |         |   |       |       |        |       |              |       |                 |       |                    |       |         |       |   |   |   |   |
| Savings  & Interest Bearing Demand Deposits                |   | 584          |   | 1,139      |       | 1,329       |       | 68                |       | (623                 | )          | (555                    | )          | (63          | )          | (127 | ) | (190 | ) |
| Time  Deposits Repurchased                                     |   | 2,024        |   | 3,522      |       | 3,430       |       | (123              | )          | (1,375               | )          | (1,498                  | )          | 290          |       | (198 | ) | 92 |   |
| Purchased                                                      |   | 157          |   | 140        |       | 69          |       | 49                |       | (32                  | )          | 17                      |       | 62           |       | 9 |   | 71 |   |
|                                                           |   |         |   |       |       |        |       |              |       |                 |       |                    |       |         |       |   |   |   |   |
| TOTAL  INTEREST EXPENSE ON INTEREST  BEARING  LIABILITIES |   | 2,765        |   | 4,801      |       | 4,828       |       | (6                | )          | (2,030               | )          | (2,036                  | )          | 289          |       | (316 | ) | (27 | ) |
|                                                           |   |         |   |       |       |        |       |              |       |                 |       |                    |       |         |       |   |   |   |   |
| NET  INTEREST INCOME                                           |   | $            | 7,324  |       | $          | 7,289       |       | $                 | 6,680      |                 | $          | 164                     |       | $            | (129       | ) | $ | 35 |   | $ | 1,107 |   | $ | (498 | ) | $ | 609 |   |

 

15

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# LOANPORTFOLIO

 

The loan portfolio ofLogan county BancShares, Inc. and Subsidiary continues to represent the largestcomponent of earning assets.  Loanactivity has continued to increase due to the Bank’s emphasis on lending; asshown on Table IV, the Bank has contributed substantially to liquidity bystructuring the loan portfolio in such a manner as to have approximately 30.97%of the total loans due within one year.

 

TABLE IV – REMAININGMATURITIES OF LOANS AT DECEMBER 31, 2002

(In Thousands ofdollars)

 
|                                 |   | **Commercial,  Financial and  Agricultural** |   | **Real  Estate  Mortgages** | ** ** | **Installments** | ** ** | **Total** | ** ** |
|--------------------------------------|--------|----------------------------------------------|--------|-----------------------------|------------|------------------|------------|-----------|------------|
| MATURITIES                           |   |                                         |   |                        |       |             |       |      |       |
| Due  Within OneYear                  |   | $                                            | 19,029 |                        | $          | 12,169           |       | $         | 2,234      |   | 33,432 |   |
| Due  One to Five Years               |   | 14,143                                       |   | 12,784                      |       | 5,718            |       | 32,645    |       |
| Due  After Five Years                |   | 10,808                                       |   | 27,550                      |       | 3,498            |       | 41,856    |       |
|                                 |   |                                         |   |                        |       |             |       |      |       |
| Total  Loans                         |   | $                                            | 43,980 |                        | $          | 52,503           |       | $         | 11,450     |   | $ | 107,933 |   |
|                                 |   |                                         |   |                        |       |             |       |      |       |
| Due  After One Year at Fixed Rate    |   | $                                            | 24,951 |                        | $          | 40,334           |       | $         | 9,216      |   | 74,501 |   |
| Due  After One Year at Floating Rate |   | 0                                            |   | 0                           |       | 0                |       | 0         |       |
|                                 |   |                                         |   |                        |       |             |       |      |       |
| Total  Loans Due After One Year      |   | $                                            | 24,951 |                        | $          | 40,334           |       | $         | 9,216      |   | $ | 74,501 |   |

 

16

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LOAN LOSSES AND CREDIT RISKS

 

Theallowance for loan losses is established by charging expenses at an amount thatwill maintain the allowance for loan losses at a level sufficient to providefor potential loan losses.  Loan lossesare charged directly to the allowance when they occur and recoveries arecredited to the allowance.  The amount ofthe provision is based on pase loan loss experience, management’s evaluation ofthe loan portfolio under current economic conditions, and such other factors asin management’s best judgment deserve current recognition in estimating loanlosses.  Tables V and VI represent asummary of loan loss experience for the years 2002, 2001, 2000, 1999, and 1998.

 

TABLE V – ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

 
|                                                                  |   | **Year Ended  December 31** | ** ** |
|-----------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                  |   | **2002**                    | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** | **1998** | ** ** |
| Amount of Loans Outstanding****at End of Period                       |   | $                           | 107,933    |   | $ | 115,755 |   | $ | 112,939 |   | $ | 108,871 |   | $ | 94,402 |   |
|                                                                  |   |                        |       |   |   |   |   |   |   |   |   |
| Monthly Average Amount of Loans                                       |   | $                           | 110,174    |   | $ | 113,289 |   | $ | 109,447 |   | $ | 101,197 |   | $ | 89,182 |   |
|                                                                  |   |                        |       |   |   |   |   |   |   |   |   |
| Balance of Allowance for Possible Loan Losses at  Beginning of Period |   | $                           | 1,153      |   | $ | 702 |   | $ | 700 |   | $ | 701 |   | $ | 673 |   |
|                                                                  |   |                        |       |   |   |   |   |   |   |   |   |
| Loans Charged Off:                                                    |   |                        |       |   |   |   |   |   |   |   |   |
| Commercial                                                            |   | $                           | 9          |   | $ | 32 |   | $ | 0 |   | $ | 0 |   | $ | 14 |   |
| Real Estate                                                           |   | 16                          |       | 20 |   | 7 |   | 0 |   | 0 |   |
| Consumer                                                              |   | 73                          |       | 205 |   | 99 |   | 29 |   | 51 |   |
|                                                                  |   |                        |       |   |   |   |   |   |   |   |   |
| Total Loans Charged Off                                               |   | 98                          |       | 257 |   | 106 |   | 29 |   | 65 |   |
|                                                                  |   |                        |       |   |   |   |   |   |   |   |   |
| Recoveries of Loans Previously Charged Off:                           |   |                        |       |   |   |   |   |   |   |   |   |
| Commercial                                                            |   | 1                           |       | 1 |   | 0 |   | 1 |   | 1 |   |
| Real Estate                                                           |   | 1                           |       | 1 |   | 3 |   | 0 |   | 0 |   |
| Consumer                                                              |   | 28                          |       | 6 |   | 5 |   | 4 |   | 2 |   |
|                                                                  |   |                        |       |   |   |   |   |   |   |   |   |
| Total Recoveries                                                      |   | 30                          |       | 8 |   | 8 |   | 5 |   | 3 |   |
|                                                                  |   |                        |       |   |   |   |   |   |   |   |   |
| Net Loans Charged Off:                                                |   | 68                          |       | 249 |   | 98 |   | 24 |   | 62 |   |
|                                                                  |   |                        |       |   |   |   |   |   |   |   |   |
| Additions to Allowance:                                               |   |                        |       |   |   |   |   |   |   |   |   |
| Charged to Expense                                                    |   | 534                         |       | 700 |   | 100 |   | 23 |   | 90 |   |
|                                                                  |   |                        |       |   |   |   |   |   |   |   |   |
| Balance at End of Period                                              |   | $                           | 1,619      |   | $ | 1,153 |   | $ | 702 |   | $ | 700 |   | $ | 701 |   |
|                                                                  |   |                        |       |   |   |   |   |   |   |   |   |
| Ratio of Net Charge-Offs During Period to Average  Loans              |   | 0.062                       | %          | 0.220 | % | 0.089 | % | 0.024 | % | 0.069 | % |

 

17

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TABLE VI – ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

 
|        |   | **December 31, 2002** | ** ** | **December 31, 2001**                | ** ** | **December 31, 2000** | ** ** | **December 31, 1999**                | ** ** | **December 31, 1998** | ** ** |
|-------------|--------|-----------------------|------------|--------------------------------------|------------|-----------------------|------------|--------------------------------------|------------|-----------------------|------------|
|        |   | **Allowance**         |       | **% of  Outstanding  Loan  Balance** | ** ** | **Allowance**         | ** ** | **% of  Outstanding  Loan  Balance** | ** ** | **Allowance**         | ** ** | **% of  Outstanding  Loan  Balance** | ** ** | **Allowance** | ** ** | **% of  Outstanding  Loan  Balance** | ** ** | **Allowance** | ** ** | **% of  Outstanding  Loan  Balance** | ** ** |
| Commercial  |   | $                     | 854        |                                 | 1.94       | %                     | $          | 749                                  |       | 1.52                  | %          | $ | 464 |   | 0.98 | % | $ | 464 |   | 1.03 | % | 463 |   | 1.22 | % |
|        |   |                  |       |                                 |       |                  |       |                                 |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Real Estate |   | 623                   |       | 1.19                                 | %          | 288                   |       | 0.54                                 | %          | 163                   |       | 0.31 | % | 163 |   | 0.32 | % | 163 |   | 0.35 | % |
|        |   |                  |       |                                 |       |                  |       |                                 |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Consumer    |   | 142                   |       | 1.24                                 | %          | 116                   |       | 0.83                                 | %          | 75                    |       | 5.50 | % | 73 |   | 5.50 | % | 75 |   | 0.67 | % |
|        |   |                  |       |                                 |       |                  |       |                                 |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Total       |   | $                     | 1,619      |                                 | 1.50       | %                     | $          | 1,153                                |       | 0.97                  | %          | $ | 702 |   | 0.62 | % | $ | 700 |   | 0.64 | % | $ | 701 |   | 0.74 | % |
|             |        |                       |            |                                      |            |                       |            |                                      |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

18

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CONSOLIDATEDSUMMARY OF LOANS AND NON-PERFORMING ASSETS

 

Non-performing assetsconsist of (a) loans not accruing interest any longer due to doubts aboutfuture collectibility, (b) loans more than ninety days past due for the lastprincipal or interest payment, and (c) other real estate owned by the Bank takenoriginally as loan collateral.  TableVII. provides a five-year summary of the components involved in non-performingassets as of year end.

 

Loans are determined tobe non-accruing when it has been determined that the ability of the bank tocollect the unpaid balance of such loans is highly unlikely due to thefinancial position of the borrower and general economic conditions.  The determination of such classification ismade by bank management on a case-by-case basis for problem loans.  Generally, a review of each loan ninety daysor more past due is made monthly and such loans deemed uncollectible becomeclassified as non-accrual.

 

Loans are determined tobe ninety days delinquent when such a period of time has elapsed since the lastpayment of principal or interest was made. At such a time, consideration as to whether to classify the loan asnon-accruing is made.  However, untilsuch classification is made, interest will continue to be accrued.

 

Other real estateconsists of real property that the Bank originally took as collateral for loansbut has since acquired title to when the borrowers defaulted and the Bank bidon the property in question at public auction.

 

TABLE VII. –CONSOLIDATED SUMMARY OF LOANS AND NON-PERFORMING ASSETS

(In thousands of dollars)

 
|                           |   | **Year Ended December 31,** | ** ** |
|--------------------------------|--------|-----------------------------|------------|
|                           |   | **2002**                    |       | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** | **1998** | ** ** |
|                           |   |                        |       |   |   |   |   |   |   |   |   |
| Commercial  Loans              |   | $                           | 43,980     |   | $ | 49,211 |   | $ | 47,526 |   | $ | 45,069 |   | $ | 37,938 |   |
| Real  Estate Loans             |   | 52,503                      |       | 53,719 |   | 52,597 |   | 51,163 |   | 46,088 |   |
| Consumer  Loans                |   | 11,450                      |       | 13,978 |   | 13,518 |   | 13,339 |   | 11,114 |   |
|                           |   |                        |       |   |   |   |   |   |   |   |   |
| Subtotal                       |   | 107,933                     |       | 116,908 |   | 113,641 |   | 109,571 |   | 95,140 |   |
| Less:  Unearned Income         |   | 0                           |       | 0 |   | 0 |   | 0 |   | 36 |   |
|                           |   | 107,933                     |       | 116,908 |   | 113,641 |   | 109,571 |   | 95,104 |   |
| Subtotal                       |   |                        |       |   |   |   |   |   |   |   |   |
| Less:  Reserve for Loan Losses |   | 1,619                       |       | 1,153 |   | 702 |   | 700 |   | 701 |   |
|                           |   |                        |       |   |   |   |   |   |   |   |   |
| Net  Loans                     |   | $                           | 106,314    |   | $ | 115,755 |   | $ | 112,939 |   | $ | 108,871 |   | $ | 94,403 |   |
|                           |   |                        |       |   |   |   |   |   |   |   |   |
| Non-Performing  Assets         |   |                        |       |   |   |   |   |   |   |   |   |
| Non-Accruing  Loans            |   | $                           | 1,706      |   | $ | 864 |   | $ | 426 |   | $ | 555 |   | $ | 509 |   |
| Loans  Past Due 90 Days        |   | 617                         |       | 1,801 |   | 3,338 |   | 3,272 |   | 3,310 |   |
| Other  Real Estate Owned       |   | 196                         |       | 227 |   | 200 |   | 358 |   | 94 |   |
|                           |   |                        |       |   |   |   |   |   |   |   |   |
| Total  Non-Performing Assets   |   | $                           | 2,519      |   | $ | 2,892 |   | $ | 3,964 |   | $ | 4,185 |   | $ | 3,913 |   |

 

19

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SECURITIES

 

The securities portfolioof Logan County BancShares, Inc. is the second largest area of resourceallocation.  Investments provideliquidity and serve as a hedge off-setting the increased sensitivity ofdeposits caused by deregulation.  TheCompany has been shifting the concentration of the portfolio from held tomaturity securities into more flexible, higher-yielding available for saleinvestments.

 

Securities include thoseclassified as held to maturity and available for sale.  The change in securities in 2002 and 2001amounted to 30% of the portfolio and represented allocation of funds due tolower loan demand.

 

All debt securities, thatLogan County BancShares Subsidiary does not have the ability or management doesnot have the positive intent to hold to maturity, are classified as “securitiesavailable for sale” and are carried at market value.

 

TABLE VIII. –MATURITY DISTRIBUTION OF SECURITES AT DECEMBER 31, 2002

(In Thousands ofDollars)

 
| **December 31. 2001  Dollars in thousands** |   | **One  Year  or  Less** | ** ** | **Over  One Year  Through  Five  Years** | ** ** | **Over  Five  Years  Through  Ten  Years** | ** ** | **Over  Ten  Years** | ** ** | **Total** | ** ** | **Market  Value** | ** ** |
|---------------------------------------------|--------|-------------------------|------------|------------------------------------------|------------|--------------------------------------------|------------|----------------------|------------|-----------|------------|-------------------|------------|
|                                        |   |                    |       |                                     |       |                                       |       |                 |       |      |       |              |       |
| U.S.  Government:                           |   |                    |       |                                     |       |                                       |       |                 |       |      |       |              |       |
| Available  for Sale                         |   | $                       | 0          |                                     | $          | 3,972                                      |       | $                    | 0          |      | $          | 0                 |       | $ | 3,972 |   | $ | 4,075 |   |
| Held  to maturity                           |   | 0                       |       | 0                                        |       | 0                                          |       | 0                    |       | 0         |       | 0                 |       |
|                                        |   |                    |       |                                     |       |                                       |       |                 |       |      |       |              |       |
| U.S.  Federal Agency/and Equities           |   |                    |       |                                     |       |                                       |       |                 |       |      |       |              |       |
| Available  for sale                         |   | 14,033                  |       | 22,499                                   |       | 0                                          |       | 263                  |       | 36,795    |       | 37,230            |       |
| Held  to maturity                           |   | 0                       |       | 0                                        |       | 0                                          |       | 0                    |       | 0         |       | 0                 |       |
|                                        |   |                    |       |                                     |       |                                       |       |                 |       |      |       |              |       |
| Total  Securities:                          |   |                    |       |                                     |       |                                       |       |                 |       |      |       |              |       |
| Available  for sale                         |   | 14,033                  |       | 26,471                                   |       | 0                                          |       | 263                  |       | 40,767    |       | 0                 |       |
| Held  to maturity                           |   | 0                       |       | 0                                        |       | 0                                          |       | 0                    |       | 0         |       | 0                 |       |
| TOTAL                                       |   | $                       | 14,033     |                                     | $          | 26,471                                     |       | $                    | 0          |      | $          | 263               |       | $ | 40,767 |   | $ | 41,305 |   |
|                                        |   | 0                       |       |                                     |       |                                       |       |                 |       |      |       |              |       |
| Percent  of total                           |   | 6.78                    | %          | 44.07                                    | %          | 0.00                                       | %          | 0.00                 | %          | 100.00    | %          | 100.00            | %          |
|                                        |   |                    |       |                                     |       |                                       |       |                 |       |      |       |              |       |
| Weighted  average  yield               |   | 2.73                    | %          | 3.35                                     | %          | 0.00                                       | %          | 3.25                 | %          | 3.32      | %          | 3.28              | %          |

 

----

**  The weighted average yields are based oncarrying value and effective yields are weighted for the scheduled maturity ofeach security.

 

20

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OTHER INCOME

 

In2002 and 2001, the bank adjusted to a slower growth pace and evaluated servicefees on the various services rendered for customers.  As a result, the service fees increased by $29,000 and other feesby $75,000 in 2002 compared to 2001. These fees decreased between 2001 and 2000.

 

Table IX – OTHER INCOME

(In Thousands of Dollars)

 
|               |   |     |       |     |       |     |       | **Increase  (Decrease)** |       |
|--------------------|--------|----------|------------|----------|------------|----------|------------|--------------------------|------------|
|               |   |     | ** ** |     | ** ** |     | ** ** | **2002 Over  2001**      | ** ** | **2001 Over  2000** | ** ** |
|               |   | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **Amount**               | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Service Fee        |   | $        | 657        |     | $          | 628      |       | $                        | 669        |   | $ | 29 |   | 4.46 | % | $ | (41 | ) | -6.53 | % |
|               |   |     |       |     |       |     |       |                     |       |   |   |   |   |   |   |
| Other Fees         |   | 148      |       | 73       |       | 101      |       | 75                       |       | 102.74 | % | (28 | ) | -27.72 | % |
|               |   |     |       |     |       |     |       |                     |       |   |   |   |   |   |   |
| Securities:        |   |     |       |     |       |     |       |                     |       |   |   |   |   |   |   |
| Gain (Loss)        |   | 0        |       | 6        |       | 0        |       | (6                       | )          | -100.00 | % | 6 |   | 100.00 | % |
|               |   |     |       |     |       |     |       |                     |       |   |   |   |   |   |   |
| Total Other Income |   | $        | 805        |     | $          | 707      |       | $                        | 770        |   | $ | 98 |   | 13.86 | % | $ | (63 | ) | -8.91 | % |

 

21

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TABLE X – OTHEREXPENSES

(In Thousands ofDollars)

 
|                           |   |     |       |     |       |     |       | **2002 Over 2001** |       | **2001 Over 2000** |       |
|--------------------------------|--------|----------|------------|----------|------------|----------|------------|--------------------|------------|--------------------|------------|
|                           |   | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **Amount**         | ** ** | **Percent**        | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Salaries  and Benefits         |   | $        | 2,322      |     | $          | 2,217    |       | $                  | 2,148      |               | $          | 105 |   | 4.74 | % | $ | 69 |   | 3.21 | % |
| Taxes                          |   | 130      |       | 85       |       | 70       |       | 45                 |       | 52.94              | %          | 15 |   | 21.14 | % |
| Depreciation                   |   | 273      |       | 270      |       | 273      |       | 3                  |       | 1.12               | %          | 3 |   | 1.10 | % |
| Repairs  and Maintenance       |   | 230      |       | 223      |       | 179      |       | 7                  |       | 3.14               | %          | 44 |   | 24.58 | % |
| Fees  Paid to Directors        |   | 80       |       | 80       |       | 79       |       | 0                  |       | 0.00               | %          | 1 |   | 1.27 | % |
| Equipment  Rental              |   | 43       |       | 41       |       | 41       |       | 2                  |       | 4.88               | %          | 0 |   | 0.00 | % |
| FDIC  & Fidelity Insurance |   | 110      |       | 113      |       | 99       |       | (3                 | )          | -2.64              | %          | 14 |   | 14.14 | % |
| Data  Processing               |   | 533      |       | 514      |       | 475      |       | 19                 |       | 3.67               | %          | 39 |   | 8.21 | % |
| Bank  Stationery               |   | 143      |       | 163      |       | 119      |       | (20                | )          | -12.27             | %          | 44 |   | 36.97 | % |
| Bank  Operating Expenses       |   | 825      |       | 925      |       | 702      |       | (100               | )          | -10.81             | %          | 223 |   | 31.17 | % |
|                           |   |     |       |     |       |     |       |               |       |               |       |   |   |   |   |
| TOTAL                          |   | $        | 4,689      |     | $          | 4,631    |       | $                  | 4,185      |               | $          | 58 |   | 1.25 | % | $ | 446 |   | 10.65 | % |

 

22

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OTHER EXPENSES

 

In 2002 the otherexpenses grew by $58,000 or only 1.25% over 2001.  This small increase was primarily in salaries, benefits and taxesall relating to normal increases in these areas.  These were affected by decreases in operating expenses and banksupplies.

 

During 2001 the otherexpenses grew by $446,000 or 10.66% over 2000. The increase is directly related to the overall growth of the bank andits customer base.  A large portion ofthe increase were, salaries and wages of $69,000., repair and maintenance of$44,000., data processing cost of $39,000, and stationery and supplies of$44,000. all due to increase customer activity.  Bank operating expense increased by $223,000 due to donations ofreal estate to a non-profit group of $170,000.

 

In 2000 other expensesincreased $288,000. Or 7.39% compared to 1999. This increase was due to overall growth in 2000 and the operations ofthe new facility at Fountain Place.  Theincrease of salaries and benefits of $129,000., FDIC insurance of $21,000. Andbank operating expenses of $55,000. Are all a direct effect of the increasecustomer base.

 

In 2001 and 2000 thechanges in taxes were due to changes in property taxes.  Depreciation expense increased throughoutthe period.  This increase isattributable to the opening of two branch facilities at Man and Harts, WestVirginia and the Fountain Place facility late 1999.

 

Repairs and maintenance,directors’ fees, equipment rental, and Bank stationery expenses vary from yearto year based on the Company’s demand. These types of expenses are not directly related to the income functionand, therefore, increase or decrease sporadically.

 

23

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EARNINGS ANDDIVIDENDS

 

As demonstrated in TableXI., Logan County BancShares, Inc. strives to achieve a favorable dividendpayout rate to the shareholders.  In2002 the trend of recent years continued. Net income per share grew by 4.9% and dividends to shareholders by2.0%.  The company maintained a strongcapital position by increasing stockholders’ equity by 2.34%.  During 2001 the company grew 3.10% in termsof asset and stockholder’s equity and increased by 10.70%, along with increasesof .44% in net income and 3.44% increase in the dividend payout ratio.  These positive indicators reflect theoverall growth in size, service area and customer base.

 

TABLE XI. –THREE-YEAR SUMMARY OF EARNINGS AND DIVIDENDS

 
|   |   | **Per Share**        |       | **Percent Change Over Prior Years** |       |
|--------|--------|----------------------|------------|-------------------------------------|------------|
|   |   | **Dividend  Payout** | ** ** | **Net  Income**                     | ** ** | **Dividends** | ** ** | **Net  Income** | ** ** | **Dividends** | ** ** | **Total  Assets** | ** ** | **Equity** | ** ** |
| 1999   |   | 47.35                | %          | $                                   | 2.83       |   | $ | 1.34 |   | 7.17 | % | 13.56% |   | 9.67 | % | 2.74 | % |
| 2000   |   | 50.79                | %          | $                                   | 2.84       |   | $ | 1.44 |   | 0.44 | % | 7.46 | % | 3.10 | % | 10.70 | % |
| 2001   |   | 61.12                | %          | $                                   | 2.45       |   | $ | 1.50 |   | -13.73 | % | 4.17 | % | 8.96 | % | 4.91 | % |
| 2002   |   | 59.56                | %          | $                                   | 2.57       |   | $ | 1.53 |   | 4.90 | % | 2.00 | % | 0.91 | % | 2.34 | % |

 

24

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EARNING ASSETS

 

Table XII representsanalysis of average earning assets and interest-bearing liabilities for theyears ended December 31, 2002, 2001, and 2000.

 

In the period presented,average-earning assets grew by $4,722,000 in 2002, $20,386,000 in 2001, and$2,578,000 in 2000  This growthrepresented increases of 2.95% in 2002, 14.62% in 2001, and 1.88% in 2000.  The loan portfolio is the major component ofearning assets which declined by $2,865,000 in 2002 after growing by $4,494,000or 4.13% in 2001 and $6,880,000 or 6.65% in 2000.  The company also allocated to the investment portfolio a portionof the growth to maintain liquidy and fund future loan requirements.

 

INTEREST BEARINGLIABILITIES

 

Interest bearingliabilities include interest bearing demand deposits, savings accounts, timedeposits and borrowed funds.  These arethe prime sources of funds for Logan County BancShares, Inc. subsidiary tosupport earning assets.  Total averageinterest bearing liabilities increased $4,799,000 or 3.86% in 2002, $8,630,000or 7.46$ in 2001, and $3,612,000 or 3.22% in 2000.  In all years the Company has maintained a stable net interestmargin while experiencing growth in the underlying deposits.  The Company has been able to match earningyields with costs of funds over the past three years to maintain a stable netinterest margin.

 

25

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TABLE XII –ANALYSIS OF EARNING ASSETS AND INTEREST BEARING LIABILITIES

(In Thousands ofDollars)

 

 
|                     |   | **Year Ended 12/31/02** |       | **Year Ended 12/31/01** |       | **Year Ended 12/13/00** |       |
|--------------------------|--------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
|                     |   | **Average  Balance**    | ** ** | **Interest**            | ** ** | **Yield/  Rate**        | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** |
| ASSETS                   |   |                    |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| EARNING ASSETS:          |   |                    |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| LOANS:                   |   |                    |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial               |   | $                       | 44,680     |                    | $          | 3,103                   |       | 6.94 | % | $ | 46,696 |   | $ | 4,209 |   | 9.01 | % | $ | 43,232 |   | $ | 3,955 |   | 9.15 | % |
| Real Estate              |   | 53,180                  |       | 4,262                   |       | 8.01                    | %          | 52,514 |   | 4,376 |   | 8.33 | % | 52,215 |   | 4,302 |   | 8.24 | % |
| Consumer                 |   | 12,564                  |       | 1,154                   |       | 9.18                    | %          | 14,079 |   | 1,397 |   | 9.92 | % | 13,348 |   | 1,257 |   | 9.42 | % |
|                     |   |                    |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Loans              |   | $                       | 110,424    |                    | $          | 8,519                   |       | 7.71 | % | $ | 113,289 |   | $ | 9,982 |   | 8.81 | % | $ | 108,795 |   | $ | 9,514 |   | 8.74 | % |
|                     |   |                    |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| INVESTMENT SECURITIES    |   |                    |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Held to Maturity         |   | 0                       |       | 0                       |       | 0.00                    | %          | 0 |   | 0 |   | 0.00 | % | 0 |   | 0 |   | 0.00 | % |
| Available for Sale       |   | 40,988                  |       | 1,364                   |       | 3.32                    | %          | 25,967 |   | 1,354 |   | 5.21 | % | 28,887 |   | 1,886 |   | 6.53 | % |
|                     |   |                    |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Securities         |   | 40,988                  |       | 1,364                   |       | 3.32                    | %          | 25,967 |   | 1,354 |   | 5.21 | % | 28,887 |   | 1,886 |   | 6.53 | % |
|                     |   |                    |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| FEDERAL FUNDS SOLD       |   | 13,106                  |       | 206                     |       | 1.57                    | %          | 20,540 |   | 754 |   | 3.67 | % | 1,728 |   | 108 |   | 6.25 | % |
|                     |   |                    |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| TOTAL EARNING ASSETS     |   | $                       | 164,518    |                    | $          | 10,089                  |       | 6.13 | % | $ | 159,796 |   | $ | 12,090 |   | 7.57 | % | $ | 139,410 |   | $ | 11,508 |   | 8.25 | % |
|                     |   |                    |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                     |   |                    |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| NON-EARNING ASSETS:      |   |                    |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and Due From Banks  |   | 5,187                   |       |                    |       |                    |       | 5,027 |   |   |   |   |   | 4,467 |   |   |   |   |   |
| Bank Premises            |   | 3,337                   |       |                    |       |                    |       | 3,561 |   |   |   |   |   | 3,765 |   |   |   |   |   |
| Other Assets             |   | 408                     |       |                    |       |                    |       | 1,997 |   |   |   |   |   | 2,373 |   |   |   |   |   |
|                     |   |                    |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| TOTAL NON-EARNING ASSETS |   | $                       | 8,932      |                    |       |                    |       |   | $ | 10,585 |   |   |   |   |   | $ | 10,605 |   |   |   |   |   |
|                     |   |                    |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| TOTAL ASSETS             |   | $                       | 173,450    |                    |       |                    |       |   | $ | 170,381 |   |   |   |   |   | $ | 150,015 |   |   |   |   |   |
|                          |        |                         |            |                         |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

26

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TABLE XII –ANALYSIS OF EARNING ASSETS AND INTEREST BEARING LIABILITIES

(In Thousands ofDollars)

 
|                                                      |   | **Year Ended 12/31/02** |       | **Year Ended 12/31/01** |       | **Year Ended 12/13/00** |       |
|-----------------------------------------------------------|--------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
|                                                      |   | **Average  Balance**    | ** ** | **Interest**            | ** ** | **Yield/  Rate**        | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Rate** |   |
|                                                      |   |                    |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| INTEREST BEARING  LIABILITIES:                            |   |                    |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| DDA                                                       |   | $                       | 65,384     |                    | $          | 584                     |       | 0.89 | % | $ | 57,807 |   | $ | 1,139 |   | 1.97 | % | $ | 55,169 |   | $ | 1,329 |   | 2.41 | % |
| Time Deposits                                             |   | 60,861                  |       | 2,024                   |       | 3.33                    | %          | 64,549 |   | 3,522 |   | 5.46 | % | 59,505 |   | 3,430 |   | 5.76 | % |
| Federal Funds Purchased                                   |   | 2,910                   |       | 157                     |       | 5.39                    | %          | 2,000 |   | 140 |   | 7.00 | % | 1,052 |   | 69 |   | 6.56 | % |
|                                                      |   |                    |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Interest Bearing  Liabilities                       |   | $                       | 129,155    |                    | $          | 2,765                   |       | 2.14 | % | $ | 124,356 |   | $ | 4,801 |   | 3.86 | % | $ | 115,726 |   | $ | 4,828 |   | 4.17 | % |
|                                                      |   |                    |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| NON-INTEREST BEARING  LIABILITIES AND CAPITAL             |   |                    |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                      |   |                    |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand Deposits                                           |   | 25,559                  |       |                    |       |                    |       | 28,052 |   |   |   |   |   | 18,587 |   |   |   |   |   |
| Accrued Expenses                                          |   | 966                     |       |                    |       |                    |       | 1,023 |   |   |   |   |   | 470 |   |   |   |   |   |
| Capital                                                   |   | 17,770                  |       |                    |       |                    |       | 16,950 |   |   |   |   |   | 15,232 |   |   |   |   |   |
|                                                      |   |                    |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  Non-Interest Bearing Liabilities and  Capital |   | 44,295                  |       |                    |       |                    |       | 46,025 |   |   |   |   |   | 34,289 |   |   |   |   |   |
|                                                      |   |                    |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Liabilities and  Stockholders’ Equity          |   | $                       | 173,450    |                    |       |                    |       |   | $ | 170,381 |   |   |   |   |   | $ | 150,015 |   |   |   |   |   |
|                                                      |   |                    |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| NET INTEREST MARGIN                                       |   | $                       | 164,518    |                    | $          | 7,324                   |       | 4.45 | % | $ | 159,796 |   | $ | 7,289 |   | 4.56 | % | $ | 134,410 |   | $ | 6,680 |   | 4.97 | % |

 

27

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# INTERESTRATE SENSITIVITY ANALYSIS

 

Asset and liabilitymanagement is responsible for the planning, implementation, and control processfor determining asset mix and maturity features relative to liabilitymaturities in such a way that net interest margin will be maximized.  A major tool for such a process is gapmanagement of the Bank’s interest sensitive assets to interest sensitiveliabilities.

 

The negative gap positionas presented in the following table for maturities of one year or less is offsetby the substantial positive gap position for maturities greater that oneyear.  The earnings of Logan CountyBancShares, Inc. are sufficient to withstand the short-term negative gapposition.  Should a large fluctuationoccur, increasing the costs of funds, management would consider increasingservice charges and non-interest fees which management determines the marketwould bear in order to negate increased rate costs.  An additional response, at the option of management, would beliquidation of certain long-term investments, and conversion of those fundsinto short-term securities.

 

Bank managementrecognized the concentration of large certificates of deposit.  The Bank’s policy of asset-liabilitymanagement matches both rates and maturities so the Bank will not have aliquidity problem or allow income to be affected by a change in rates.

 

All demand and savingsdeposits are considered highly volatile, although experience has shown theseaccounts to be stable regardless of economic cycles.  Interest on savings and other transactional accounts havegenerally remained constant over periods of interest rate changes.  Therefore, deposits and savings areclassified as “over one year” to represent a more realistic rate sensitive gap.

 

28

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TABLE XIII –INTEREST RATE SENSITIVITY ANALYSIS

(In Thousands ofdollars)

 
|                                                                      |   | **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    |   |
| Fed.  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    | %      |

 

29

----

 

TABLE XIV –AVERAGE BALANCE SHEET

(In Thousands ofDollars)

 
|                                               |   | **2002** |    | **2001** |   | **2000** |   | **1999** |    | **1998** |   |
|----------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|----------|---------|----------|--------|
| ASSETS:                                            |   |     |    |     |   |     |   |     |    |     |   |
| Cash  & Due from Banks                         |   | $        | 5,187   |     | $      | 5,027    |   | $        | 4,467   |     | $      | 4,400 |   | $ | 4,168 |   |
|                                               |   |     |    |     |   |     |   |     |    |     |   |
| Investment  Securities:                            |   |     |    |     |   |     |   |     |    |     |   |
| Available  for Sale                                |   | 40,988   |    | 25,967   |   | 28,887   |   | 29,045   |    | 18,763   |   |
| Held  to Maturity                                  |   | 0        |    | 0        |   | 0        |   | 1,080    |    | 3,245    |   |
|                                               |   |     |    |     |   |     |   |     |    |     |   |
| Total  Investments                                 |   | 40,988   |    | 25,967   |   | 28,887   |   | 30,125   |    | 22,008   |   |
|                                               |   |     |    |     |   |     |   |     |    |     |   |
| Federal  Funds Sold                                |   | 13,106   |    | 20,540   |   | 1,728    |   | 4,792    |    | 13,203   |   |
| Loans                                              |   |     |    |     |   |     |   |     |    |     |   |
| Real  Estates                                      |   | 53,180   |    | 52,514   |   | 52,215   |   | 49,235   |    | 43,454   |   |
| Installment                                        |   | 12,564   |    | 14,079   |   | 13,348   |   | 12,212   |    | 10,459   |   |
| Commercial  & Other                            |   | 44,680   |    | 46,696   |   | 43,884   |   | 40,468   |    | 36,041   |   |
|                                               |   | 110,424  |    | 113,289  |   | 109,447  |   | 101,915  |    | 89,954   |   |
| Less:  Unearned Discount                      |   | 0        |    | 0        |   | 0        |   | 0        |    | 65       |   |
|                                               |   | 110,424  |    | 113,289  |   | 109,447  |   | 101,915  |    | 89,889   |   |
| Allowance  For Loan Losses                         |   | (1,250   | )       | (788     | )      | (652     | )      | (718     | )       | (707     | )      |
|                                               |   |     |    |     |   |     |   |     |    |     |   |
| Net  Loans                                         |   | 109,174  |    | 112,501  |   | 108,795  |   | 101,197  |    | 89,182   |   |
|                                               |   |     |    |     |   |     |   |     |    |     |   |
| Banking  Premises                                  |   | 3,337    |    | 3,561    |   | 3,765    |   | 2,824    |    | 2,113    |   |
| Accrued  Interest and Other Assets                 |   | 1,658    |    | 2,785    |   | 2,373    |   | 2,136    |    | 1,608    |   |
| TOTAL  ASSETS                                      |   | $        | 173,450 |     | $      | 170,381  |   | $        | 150,015 |     | $      | 145,474 |   | $ | 132,282 |   |
|                                               |   |     |    |     |   |     |   |     |    |     |   |
| LIABILITIES  & STOCKHOLDERS’ EQUITY       |   |     |    |     |   |     |   |     |    |     |   |
| Deposits:                                          |   |     |    |     |   |     |   |     |    |     |   |
| Demand  Deposits                                   |   | $        | 48,419  |     | $      | 48,524   |   | $        | 40,135  |     | $      | 39,585 |   | $ | 35,332 |   |
| Savings  Deposits                                  |   | 42,524   |    | 37,335   |   | 33,621   |   | 31,413   |    | 30,054   |   |
| Time  Deposits                                     |   | 60,861   |    | 64,549   |   | 59,505   |   | 58,167   |    | 52,055   |   |
|                                               |   |     |    |     |   |     |   |     |    |     |   |
| Total  Deposits                                    |   | 151,804  |    | 150,408  |   | 133,261  |   | 129,165  |    | 117,441  |   |
|                                               |   |     |    |     |   |     |   |     |    |     |   |
| Federal  Funds Purchased                           |   | 2,910    |    | 2,000    |   | 1,052    |   | 834      |    | 0        |   |
| Other  Liabilities                                 |   | 966      |    | 1,023    |   | 470      |   | 851      |    | 1,014    |   |
|                                               |   |     |    |     |   |     |   |     |    |     |   |
| TOTAL  LIABILITIES                                 |   | 155,680  |    | 153,431  |   | 134,783  |   | 130,850  |    | 118,455  |   |
|                                               |   |     |    |     |   |     |   |     |    |     |   |
| STOCKHOLDERS’  EQUITY                         |   | 17,770   |    | 16,950   |   | 15,232   |   | 15,624   |    | 13,827   |   |
|                                               |   |     |    |     |   |     |   |     |    |     |   |
| TOTAL  LIABILITIES & STOCKHOLDERS’ EQUITY |   | $        | 173,450 |     | $      | 170,381  |   | $        | 150,015 |     | $      | 146,474 |   | $ | 132,282 |   |

 

30

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ITEM – 8 FINANCIAL STATEMENTS ANDSUPPLEMENTAL DATA

 
| Management’s Report on  Financial Statements                                                                     |
|-----------------------------------------------------------------------------------------------------------------------|
|                                                                                                                  |
| Report of Independent Certified Public  Accountants                                                                   |
|                                                                                                                  |
| Financial Statements:                                                                                                 |
|                                                                                                                  |
| Logan  County BancShares, Inc. and Subsidiary:                                                                        |
|                                                                                                                  |
| Consolidated  Statement of Condition as of December 31, 2002 and 2001                                                 |
|                                                                                                                  |
| Consolidated Statement  of Income as of December 31, 2002, 2001 and 2000                                              |
|                                                                                                                  |
| Consolidated  Statement of Changes in Stockholders’ Equity for the Years Ended December 31,  2002, 2001 and 2000 |
|                                                                                                                  |
| Consolidated  Statement of Cash Flows for the Years Ended December 31, 2002, 2001, and 2000                           |
|                                                                                                                  |
| Notes to  Consolidated Financial Statements                                                                           |

 

31

----

 

To Our Shareholders,Customers and Friends:

 

We are proud to presentthe 2002 annual report of Logan County BancShares, Inc. and its Subsidiary,Logan Bank and Trust Company.  Eventhough 2002 saw the economy continuing its downturn, we were positioned to showa continued earnings growth.  Net incomefor 2002 was $1,841,832 compared to $1,755,621. for 2001.  Earnings per common share totaled $2.57 in2002 versus $2.45 in 2001.  This growthwas largely from cost containment and proper asset liability management.  All of this in a year when loan demand wasslower due to economic conditions, and low interest rates causing a squeeze onthe net interest margins. The return on average assets of 1.06% and return onequity of 10.37% are excellent returns of capital in today’s financial markets.

 

2002 presented our teamwith some challenges not seen in decades. We were faced with a continuingly weakened economy in the country ingeneral and in southern West Virginia in particular.  However, our commitment to the area did not waiver, nor did ourprinciple of making sound and prudent investments.  By continuously updating our financial models to position theBank to anticipate the fluctuations in the ever-changing economy of today’sworld we were able to move with the market – not respond to it, but actuallymove with it.  We are pleased to reportwe were successful:  dividends toshareholders were up in 2002, loan loss provision was increased and wecontinued to show a stable earning stream. Not a small feat in the current market situation.  Management’s effort this past year wereconcentrated in improving asset quality and providing services to thecommunities in three areas:  (1)affordable home loans, (2) innovative business lending and (3) meeting thecustomers needs for financial services. Our management realizes the continued success of our Holding Company hasa direct correlation to the faith our customers have in our ability to providethat “hometown bank” feel and continue to provide our special “personal touch”;the one they have come to expect, while continuing to provide sound financialproducts.

 

Our employees havecontinued to be a familiar sight in local organizations, schools andchurches.  Their support and commitmentto the local communities is inspiring in today’s world; embracing not only thechallenges in today’s market, but the opportunities to make our world a betterplace.

 

We again want to expressour sincere thanks to our employees for their commitment, to our shareholdersfor their support, to our directors for their leadership and for the confidenceof our customers.  We are firm in ourcontinued commitment to our markets and look forward to facing any newchallenges as your only locally owned bank in the Southern West Virginiatradition of giving our best to the best!

 

Respectively,

 

 
|               |   |                          |
|--------------------|--------|-------------------------------|
| Harvey H. Oakley   |   | Eddie Canterbury              |
| Chairman/President |   | Executive  Vice-President/CEO |

 

32

----

 

[LETTERHEAD OF McNEAL,WILLIAMSON & CO.]

 

INDEPENDENT AUDITORS’ REPORT

 

To the Board of Directors and Stockholdersof Logan County BancShares, Inc. and Subsidiary

 

We have audited the accompanying consolidatedstatements of condition of Logan County BancShares, Inc., and Subsidiary as ofDecember 31, 2002, and 2001, and the related consolidated statements of income,changes in stockholders’ equity and cash flows for each of the three years inthe period ended December 31, 2002. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with auditingstandards generally accepted in the United States of America.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the  financial statements.  An  audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.

 

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Logan County BancShares, Inc. and Subsidiary as of December 31,2002, and 2001, and the consolidated results of its operations and  cash flows for each of the three years inthe period ended December 31, 2002, in conformity with accounting principlesgenerally accepted in the United States of America.

 
| /s/ McNeal, Williamson & Co. |   |
|----------------------------------|--------|
| Logan, West Virginia             |
| February 26, 2003                |

 

33

----

 

Logan County BancShares,Inc. and Subsidiary

Consolidated Statement of Condition

December 31, 2002 and2001

 

ASSETS

 
|                          |   | **2002**    |        | **2001**    |   |
|-------------------------------|--------|-------------|-------------|-------------|--------|
|                          |   |        |        |        |   |
| CASH AND DUE  FROM BANKS      |   | $           | 5,967,423   |        | $      | 7,072,209 |   |
|                          |   |        |        |        |   |
| INVESTMENT  SECURITIES:       |   |        |        |        |   |
| Available for  sale           |   | 41,305,138  |        | 36,355,332  |   |
| Held to maturity              |   | 0           |        | 0           |   |
|                          |   |        |        |        |   |
| Total Investment  Securities  |   | 41,305,138  |        | 36,355,332  |   |
|                          |   |        |        |        |   |
| FEDERAL FUNDS  SOLD           |   | 11,370,000  |        | 7,150,000   |   |
|                          |   |        |        |        |   |
| LOANS:                        |   |        |        |        |   |
| Mortgage Loans                |   | 52,502,944  |        | 53,718,980  |   |
| Installment  Loans            |   | 11,449,826  |        | 13,977,895  |   |
| Commercial and  Other Loans   |   | 43,979,821  |        | 49,210,538  |   |
|                          |   |        |        |        |   |
| Total Loans                   |   | 107,932,591 |        | 116,907,413 |   |
|                          |   |        |        |        |   |
| Less: Unearned  Interest      |   | 0           |        | 0           |   |
|  Reserve for Loan Losses |   | 1,618,632   |        | 1,152,777   |   |
|                          |   |        |        |        |   |
|  Net Loans               |   | 106,313,959 |        | 115,754,636 |   |
|                          |   |        |        |        |   |
| BANK PREMISES  AND EQUIPMENT  |   | 3,217,324   |        | 3,383,539   |   |
|                          |   |        |        |        |   |
| INTEREST  RECEIVABLE          |   | 811,373     |        | 973,167     |   |
|                          |   |        |        |        |   |
| OTHER ASSETS                  |   | 713,556     |        | 738,933     |   |
|                          |   |        |        |        |   |
| TOTAL ASSETS                  |   | $           | 169,698,773 |        | $      | 171,427,816 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

34

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Logan County BancShares,Inc. and Subsidiary

Consolidated Statement ofCondition

December 31, 2002 and2001

 

LIABILITIES ANDSTOCKHOLDERS’ EQUITY

 
|                                                                                                                    |   | **2002**    |        | **2001**    |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|-------------|-------------|-------------|--------|
|                                                                                                                    |   |        |        |        |   |
| DEPOSITS                                                                                                                |   |        |        |        |   |
| Non-Interest  Bearing                                                                                                   |   | $           | 25,076,180  |        | $      | 27,571,238 |   |
| Interest Bearing                                                                                                        |   | 21,851,348  |        | 21,370,908  |   |
| Savings Deposits                                                                                                        |   | 44,864,222  |        | 39,803,797  |   |
| Time  Certificates                                                                                                      |   | 58,651,287  |        | 63,282,186  |   |
|                                                                                                                    |   |        |        |        |   |
| Total Deposits                                                                                                          |   | 150,443,037 |        | 152,028,129 |   |
|                                                                                                                    |   |        |        |        |   |
| REPURCHASED  AGREEMENTS                                                                                                 |   | 1,000,000   |        | 2,000,000   |   |
|                                                                                                                    |   |        |        |        |   |
| ACCRUED AND  OTHER LIABILITIES                                                                                          |   | 1,046,326   |        | 617,322     |   |
|                                                                                                                    |   |        |        |        |   |
| FEDERAL INCOME  TAXES PAYABLE:                                                                                          |   |        |        |        |   |
| Current                                                                                                                 |   | (9,878      | )           | (17,765     | )      |
| Deferred                                                                                                                |   | 26,687      |        | —      |   |
|                                                                                                                    |   |        |        |        |   |
| TOTAL  LIABILITIES                                                                                                      |   | 152,506,172 |        | 154,627,686 |   |
|                                                                                                                    |   |        |        |        |   |
| STOCKHOLDERS’  EQUITY:                                                                                             |   |        |        |        |   |
| Common Stock -  $1.67 par value; Authorized - 780,000 shares, Outstanding - 703,991 shares in  2002 and 716,991 in 2001 |   | 1,300,000   |        | 1,300,000   |   |
| Surplus                                                                                                                 |   | 2,408,426   |        | 2,408,426   |   |
| Retained  Earnings                                                                                                      |   | 14,630,049  |        | 13,916,868  |   |
| Net unrealized  amortization on securities available for sale                                                           |   | 260,324     |        | 35,034      |   |
| Treasury Stock                                                                                                          |   | (1,406,198  | )           | (860,198    | )      |
|                                                                                                                    |   |        |        |        |   |
| TOTAL  STOCKHOLDERS’ EQUITY                                                                                        |   | 17,192,601  |        | 16,800,130  |   |
|                                                                                                                    |   |        |        |        |   |
| TOTAL LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                        |   | $           | 169,698,773 |        | $      | 171,427,816 |   |

 

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

 

35

----

 

Logan County BancShares,Inc. and Subsidiary

Consolidated Statement of Income

For the Years EndedDecember 31, 2002, 2001, and 2000

 
|                                                 |   | **2002**   |      | **2001**   |   | **2000**   |   |
|------------------------------------------------------|--------|------------|-----------|------------|--------|------------|--------|
|                                                 |   |       |      |       |   |       |   |
| INTEREST INCOME                                      |   |       |      |       |   |       |   |
| Loans, Including fees                                |   | $          | 8,518,297 |       | $      | 9,981,814  |   | $ | 9,513,879 |   |
|                                                 |   |       |      |       |   |       |   |
| Investment Securities:                               |   |       |      |       |   |       |   |
| Available for Sale                                   |   | 1,363,725  |      | 1,354,163  |   | 1,885,787  |   |
| Held to Maturity                                     |   | 0          |      | 0          |   | 0          |   |
|                                                 |   |       |      |       |   |       |   |
| FEDERAL FUNDS SOLD                                   |   | 205,786    |      | 753,745    |   | 108,011    |   |
| Total Interest Income                                |   | 10,087,808 |      | 12,089,722 |   | 11,507,677 |   |
|                                                 |   |       |      |       |   |       |   |
| INTEREST EXPENSE:                                    |   |       |      |       |   |       |   |
|                                                 |   |       |      |       |   |       |   |
| Deposits                                             |   | 2,607,604  |      | 4,661,023  |   | 4,758,575  |   |
| Other Borrowings                                     |   | 156,508    |      | 140,000    |   | 68,950     |   |
|                                                 |   |       |      |       |   |       |   |
| Total Interest Expense                               |   | 2,764,112  |      | 4,801,023  |   | 4,827,525  |   |
|                                                 |   |       |      |       |   |       |   |
| NET INTEREST INCOME                                  |   | 7,323,696  |      | 7,288,699  |   | 6,680,152  |   |
|                                                 |   |       |      |       |   |       |   |
| PROVISION FOR LOAN LOSSES                            |   | 533,819    |      | 700,000    |   | 100,000    |   |
|                                                 |   |       |      |       |   |       |   |
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES  |   | 6,789,877  |      | 6,588,699  |   | 6,580,152  |   |
|                                                 |   |       |      |       |   |       |   |
| OTHER INCOME:                                        |   |       |      |       |   |       |   |
| Service Fees                                         |   | 656,160    |      | 628,220    |   | 668,719    |   |
| Other                                                |   | 148,407    |      | 72,694     |   | 100,516    |   |
| Securities Gains (Losses)                            |   | 0          |      | 6,248      |   | 0          |   |
|                                                 |   | 804,567    |      | 707,162    |   | 769,235    |   |
|                                                 |   |       |      |       |   |       |   |
| OTHER EXPENSES:                                      |   |       |      |       |   |       |   |
| Salaries and Benefits                                |   | $          | 2,321,908 |       | $      | 2,216,849  |   | $ | 2,147,995 |   |
| Taxes Other Than Payroll & Income                |   | 129,951    |      | 84,970     |   | 69,879     |   |
| Depreciation                                         |   | 273,928    |      | 269,956    |   | 273,478    |   |
| Repairs and Maintenance                              |   | 230,105    |      | 222,734    |   | 178,994    |   |
| Feed Paid to Directors                               |   | 80,125     |      | 79,950     |   | 78,850     |   |
| Equipment Rental                                     |   | 42,739     |      | 41,384     |   | 40,963     |   |
| FDIC & Fidelity Insurance                        |   | 109,544    |      | 112,347    |   | 98,603     |   |
| Data Processing                                      |   | 532,884    |      | 513,965    |   | 475,161    |   |
| Bank Stationery and Printing                         |   | 142,992    |      | 162,939    |   | 119,180    |   |
| Professional Fees                                    |   | 113,925    |      | 86,235     |   | 71,273     |   |
| Other Operating Expenses                             |   | 710,734    |      | 839,321    |   | 631,022    |   |
|                                                 |   | $          | 4,688,835 |       | $      | 4,630,650  |   | $ | 4,185,398 |   |
|                                                 |   |       |      |       |   |       |   |
| INCOME BEFORE TAXES                                  |   | 2,905,609  |      | 2,665,211  |   | 3,163,989  |   |
|                                                 |   |       |      |       |   |       |   |
| INCOME TAXES:                                        |   |       |      |       |   |       |   |
| Current                                              |   | 1,194,397  |      | 1,123,259  |   | 1,132,515  |   |
| Deferred                                             |   | (130,620   | )         | (213,669   | )      | (1,247     | )      |
| NET INCOME                                           |   | $          | 1,841,832 |       | $      | 1,755,621  |   | $ | 2,032,721 |   |
|                                                 |   |       |      |       |   |       |   |
| NET INTEREST INCOME AFTER PER SHARE OF COMMON STOCK: |   |       |      |       |   |       |   |
| NET INCOME                                           |   | $          | 2.57      |       | $      | 2.45       |   | $ | 2.84 |   |

 

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

 

36

----

 

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

**Consolidated Statement of Stockholders’ Equity**

**For The Years Ended December 31, 2002, 2001, and 2000**

 
|                                                 |   | **COMMON  STOCK** |      | **SURPLUS** |   | **RETAINED  EARNINGS** |   | **TREASURY  STOCK** |       | **ACCUMULATED  OTHER  COMPREHENSIVE  INCOME, NET** |   | **TOTAL**  |   |
|------------------------------------------------------|--------|-------------------|-----------|-------------|--------|------------------------|--------|---------------------|------------|----------------------------------------------------|--------|------------|--------|
|                                                 |   |              |      |        |   |                   |   |                |       |                                               |   |       |   |
| Balance - December 31, 1999                          |   | $                 | 1,300,000 |        | $      | 2,408,426              |   | $                   | 12,236,479 |                                               | $      | (860,198   | )      | $ | (641,014 | ) | $ | 14,443,693 |   |
|                                                 |   |              |      |        |   |                   |   |                |       |                                               |   |       |   |
| Comprehensive Income                                 |   |              |      |        |   |                   |   |                |       |                                               |   |       |   |
| Net Income - 2000                                    |   |              |      |        |   | 2,032,721              |   |                |       |                                               |   | 2,032,721  |   |
| Net unrealized gain on securities available for Sale |   |              |      |        |   |                   |   |                |       | 570,269                                            |   | 570,269    |   |
|                                                 |   |              |      |        |   |                   |   |                |       |                                               |   |       |   |
| Total Comprehensive income                           |   |              |      |        |   | 2,032,721              |   |                |       | 570,269                                            |   | 2,602,990  |   |
|                                                 |   |              |      |        |   |                   |   |                |       |                                               |   |       |   |
| Dividends on 716,991 shares of Common Stock @ $1.44  |   |              |      |        |   | (1,032,467             | )      |                |       |                                               |   | (1,032,467 | )      |
|                                                 |   |              |      |        |   |                   |   |                |       |                                               |   |       |   |
| Balance - December 31, 2000                          |   | 1,300,000         |      | 2,408,426   |   | 13,236,733             |   | (860,198            | )          | (70,745                                            | )      | 16,014,216 |   |
|                                                 |   |              |      |        |   |                   |   |                |       |                                               |   |       |   |
| Comprehensive Income                                 |   |              |      |        |   |                   |   |                |       |                                               |   |       |   |
| Net Income - 2001                                    |   |              |      |        |   | 1,755,621              |   |                |       |                                               |   | 1,755,621  |   |
| Net unrealized gain on securities available for Sale |   |              |      |        |   |                   |   |                |       | 105,779                                            |   | 105,779    |   |
|                                                 |   |              |      |        |   |                   |   |                |       |                                               |   |       |   |
| Total Comprehensive income                           |   |              |      |        |   | 1,755,621              |   |                |       | 105,779                                            |   | 1,861,400  |   |
|                                                 |   |              |      |        |   |                   |   |                |       |                                               |   |       |   |
| Dividends on 716,991 shares of Common Stock @ $1.50  |   |              |      |        |   | (1,075,487             | )      |                |       |                                               |   | (1,075,487 | )      |
|                                                 |   |              |      |        |   |                   |   |                |       |                                               |   |       |   |
| Balance - December 31, 2001                          |   | 1,300,000         |      | 2,408,426   |   | 13,916,868             |   | (860,198            | )          | 35,034                                             |   | 16,800,129 |   |
|                                                 |   |              |      |        |   |                   |   |                |       |                                               |   |       |   |
| Correction of Error                                  |   |              |      |        |   | (31,416                | )      |                |       |                                               |   | (31,416    | )      |
|                                                 |   |              |      |        |   |                   |   |                |       |                                               |   |       |   |
| Comprehensive Income                                 |   |              |      |        |   |                   |   |                |       |                                               |   |       |   |
| Net Income - 2002                                    |   |              |      |        |   | 1,841,833              |   |                |       |                                               |   | 1,841,833  |   |
| Net unrealized gain on securities available for Sale |   |              |      |        |   |                   |   |                |       | 225,290                                            |   | 225,290    |   |
|                                                 |   |              |      |        |   |                   |   |                |       |                                               |   |       |   |
| Total Comprehensive income                           |   |              |      |        |   | 1,841,833              |   |                |       | 225,290                                            |   | 2,067,123  |   |
|                                                 |   |              |      |        |   |                   |   |                |       |                                               |   |       |   |
| Purchased 13,000 shares @ $42.00/share               |   |              |      |        |   |                   |   | (546,000            | )          |                                               |   |       |   |
| Dividends on 716,991 shares of Common Stock @ $1.53  |   |              |      |        |   | (1,096,996             | )      |                |       |                                               |   |       |   |
|                                                 |   |              |      |        |   |                   |   |                |       |                                               |   |       |   |
| Balance - December 31, 2002                          |   | $                 | 1,300,000 |        | $      | 2,408,426              |   | $                   | 14,630,289 |                                               | $      | (1,406,198 | )      | $ | 260,324 |   | $ | 17,192,841 |   |

 

The accompanying notes are an integral part ofthese consolidated financial statements

 

37

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Logan County BancShares,Inc. and Subsidiary

Consolidated Statement ofChange in Cash Flows

For the Years EndedDecember 31, 2002, 2001 and 2000

 

INCREASES (DECREASES) INCASH AND CASH EQUIVALENTS

 
|                                                                               |   | **2002**    |       | **2001**    |   | **2000**   |   |
|------------------------------------------------------------------------------------|--------|-------------|------------|-------------|--------|------------|--------|
|                                                                               |   |        |       |        |   |       |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |   |        |       |        |   |       |   |
| Net Income                                                                         |   | $           | 1,841,833  |        | $      | 1,755,621  |   | $ | 2,032,271 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |   |        |       |        |   |       |   |
| Depreciation and Amortization                                                      |   | 273,928     |       | 269,956     |   | 277,506    |   |
| Provision For Loan Losses                                                          |   | 533,819     |       | 700,000     |   | 100,000    |   |
| Provision for Deferred Taxes                                                       |   | (130,620    | )          | (213,669    | )      | (1,247     | )      |
| (Gain) Loss on Sale of Securities                                                  |   | 0           |       | (6,248      | )      | 0          |   |
| Premium Amortization and Accretion on Investment Securities                        |   | 66,565      |       | (3,356      | )      | (5,060     | )      |
| Increases (Decreases) in Income Taxes Payable                                      |   | 7,887       |       | (35,561     | )      | 35,373     |   |
| (Increases) Decreases in Interest Receivable and other Assets                      |   | 196,970     |       | 503,222     |   | 32,608     |   |
| Increases (Decreases) in InterestPayable and Other Liabilities                     |   | 373,122     |       | (44,715     | )      | (119,149   | )      |
| Market Value Adjustment Amortization                                               |   | —      |       | 4,028       |   | 4,028      |   |
|                                                                               |   |        |       |        |   |       |   |
| Net Cash Provided by Operating Activities                                          |   | 3,163,504   |       | 2,929,278   |   | 2,356,330  |   |
|                                                                               |   |        |       |        |   |       |   |
| CASH FLOWS FROM INVESTING ACTIVTIES:                                               |   |        |       |        |   |       |   |
| Proceeds from Sale of Investment Sec:                                              |   |        |       |        |   |       |   |
| Available for Sale                                                                 |   | 19,925,000  |       | 8,006,248   |   | 0          |   |
| Held to Maturity                                                                   |   | 0           |       | 0           |   | 0          |   |
| Proceeds from Maturities of Inv. Sec:                                              |   |        |       |        |   |       |   |
| Available for Sale                                                                 |   | 0           |       | 41,000,000  |   | 7,400,000  |   |
| Held to Maturity                                                                   |   | 0           |       | 0           |   | 0          |   |
| Purchase of Investment Securities:                                                 |   |        |       |        |   |       |   |
| Available for Sale                                                                 |   | (24,612,311 | )          | (55,583,423 | )      | (5,943,619 | )      |
| Held to Maturity                                                                   |   | 0           |       | 0           |   | 0          |   |
| Net (Increases) Decreases  Federal Funds Sold                                      |   | (4,220,000  | )          | (2,870,000  | )      | (4,280,000 | )      |
| Net (Increases) Decreases  Commercial Loans                                        |   | 5,230,717   |       | (1,684,868  | )      | (2,555,021 | )      |
| Net (Increases) Decreases  Real Estate Loans                                       |   | 1,216,036   |       | (1,122,206  | )      | (1,434,191 | )      |
| Net (Increases) Decreases  Insallment Loans                                        |   | 2,528,069   |       | (459,727    | )      | (178,648   | )      |
| Purchase of Bank Premises and Equipment                                            |   | (107,713    | )          | (59,493     | )      | (93,479    | )      |
|                                                                               |   |        |       |        |   |       |   |
| Net Cash Used by Investing Actvities                                               |   | (40,202     | )          | (12,773,469 | )      | (7,084,958 | )      |
|                                                                               |   |        |       |        |   |       |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |   |        |       |        |   |       |   |
|                                                                               |   |        |       |        |   |       |   |
| Net Increases (Decreases) in Demand Deposits                                       |   | $           | (2,014,618 | )           | $      | 6,163,724  |   | $ | 4,447,940 |   |
| Net Increases (Decreases) in Savings Deposits                                      |   | 5,060,425   |       | 7,516,489   |   | 1,263,647  |   |
| Net Increases (Decreases) in Time Deposits                                         |   | (4,630,899  | )          | (374,873    | )      | 5,392,497  |   |
| Net Increases (Decreases) in Repurchased Agreements                                |   | (1,000,000  | )          | 0           |   | (7,840,000 | )      |
| Purchase  of  Treasury Stock at Cost                                     |   | (546,000    | )          | 0           |   | 0          |   |
| Dividends Paid                                                                     |   | (1,096,996  | )          | (1,075,487  | )      | (1,032,437 | )      |
|                                                                               |   |        |       |        |   |       |   |
| Net Cash Provided by Financing Activities                                          |   | $           | (4,228,088 | )           | $      | 12,229,853 |   | $ | 2,231,647 |   |
|                                                                               |   |        |       |        |   |       |   |
| Net Increase (Decrease) in Cash and Cash Equivalents                               |   | (1,104,786  | )          | 2,385,662   |   | (2,496,977 | )      |
|                                                                               |   |        |       |        |   |       |   |
| Cash and Cash Equivalents at Beginning of Year                                     |   | 7,072,209   |       | 4,686,547   |   | 7,183,524  |   |
|                                                                               |   |        |       |        |   |       |   |
| Cash and Cash Equivalents at End of Year                                           |   | $           | 5,967,423  |        | $      | 7,072,209  |   | $ | 4,686,547 |   |
|                                                                               |   |        |       |        |   |       |   |
| Supplemental Disclosures of Cash Flow Infrmation Cash Paid for:                    |   |        |       |        |   |       |   |
|                                                                               |   |        |       |        |   |       |   |
| Interest                                                                           |   | $           | 2,836,084  |        | $      | 4,876,027  |   | $ | 4,762,739 |   |
| Income Taxes                                                                       |   | $           | 1,186,510  |        | $      | 1,118,983  |   | $ | 1,117,740 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

38

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Logan County BancShares,Inc. and Subsidiary

Notes to ConsolidatedFinancial Statements

December 31, 2002, 2001and 2000

 

1.               Summaryof Significant Accounting Policies:

 

A.           Basis of Consolidation:

 

The Consolidated FinancialStatements of Logan County BancShares, Inc. and its subsidiary include theaccounts of Logan County BancShares, Inc. a bank holding company and its whollyowned subsidiary, Logan Bank & Trust Company.  As further discussed in Note 13, the Company’s subsidiary wasmerged into Logan Bank & Trust Company on May 28, 1996.  The merger was accounted for under thepooling of Interest Method of accounting and no restatement was necessary.  All material intercompany balances andtransactions have been eliminated in consolidation.

 

B.             Nature of Operations:

 

The Bank operates underFederal charter, and provides full banking services.  As a Federal bank, the Bank is subject to regulation by theFederal Reserve System and the Federal Deposit Insurance Corporation. 

 

C.             Estimates in theFinancial Statements:

 

The presentation of thefinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates. 

 

D.            Cash and CashEquivalents:

 

For purposes of reportingcash flows, cash and cash equivalents include cash on hand and amounts due frombanks. 

 

E.              InvestmentSecurities:

 

The Banks’ InvestmentSecurities are classified in two categories and accounted for as follows: 

 

Securities Available forSale:  Securities available for saleconsist of bands, notes, debentures, and certain equity securities notclassified as securities held to maturity. These securities are carried at their fair value.  Unrealized gains and (losses), net of tax,are reported as a net amount in a separate component of Shareholders’ Equityuntil realized. 

 

39

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Securities to be Held toMaturity:  Bonds, notes and debenturesfor which the banks have the positive intent and ability to hold to maturityare reported at cost, adjusted for amortization of premiums and accretion ofdiscounts which are recognized in interest income, using the Constant YieldMethod, over the period to maturity.

 

Gains and losses on saleof securities available for sale are determined using theSpecific-Indentification Method.

 

F.              Loans:

 

Loans are stated at theamount of unpaid principal, reduced by unearned income and an allowance forloan losses.  Interest income on loansis recognized on the accrual basis except for those loans in a non-accrualincome status.  The accrual of intereston impaired loans is discontinued when management believes, after considerationof economic and business conditions and collection efforts, that the Borrowers’financial condition is such that collection of interest is doubtful.  When interest accrual is discontinued,interest income is subsequently recognized only to the extent cash payments arereceived. 

 

The reserve for loanlosses is established through a provision for loan losses charged toexpense.  The reserve is an amount thatmanagement believes will be adequate to absorb losses on existing loans thatmay become uncollectible based on evaluations of the collectibility of loansand prior loan loss experience.  Theevaluations take into consideration such factors as changes in the nature andvolume of the loan portfolio, overall portfolio quality, review of specific 

 

 

40

----

 

problem loans and current economic conditions that mayaffect the borrowers’ ability to pay. Loans are charged against the allowance for loan losses when managementbelieves the collection of the principal is unlikely. 

 

The allowance for loanlosses on impaired loans is determined using the present value of estimatedfuture cash flows of the loan, discounted at the loan’s effective interest rateor the fair value of the underlying collateral.  A loan is considered to be impaired when it is probable all principaland interest amounts will not be collected according to the loan contract.  The entire change in present value ofexpected cash flows is reported as provision for loan losses in the same mannerin which impairment initially was recognized or as a reduction in the amount ofprovision for loan losses that otherwise would be reported. 

 

Certain loan originationfees and direct origination costs are capitalized and recognized as anadjustment of the yield on the related loan. 

 

G.             Bank Premises andEquipment:

 

Bank premises andequipment are stated at cost, less accumulated depreciation.  Repairs and maintenance expenditures arecharged to operating expenses as incurred. Major improvements and additions to premises and equipment arecapitalized.  Depreciation is providedover the estimated useful lives of the assets as follows:

 
|                              |   | **Methods**   |   | **Range of Lives**               |
|-----------------------------------|--------|---------------|--------|----------------------------------|
|                              |   |          |   |                             |
| Banking House                     |   | S/L, CRS      |   | 10  -  40 years        |
|                              |   |          |   |                             |
| Furniture, Fixtures and Equipment |   | S/L,DDB, ACRS |   |   3  -   20 years |

 

41

----

 

 

H.            Real Estate AcquiredThrough Foreclosure:

 

Real estate acquiredthrough foreclosure is carried at the lower of the recorded investment in theproperty of its fair value.  The valueof the underlying loan is written down to the fair value of the real estate tobe acquired by a charge to the allowance for loan losses, if necessary.  Any subsequent write-downs are charged tooperating expenses.

 

I.                 Income Taxes:

 

The Company and itssubsidiary file a consolidated federal income tax return.  The Subsidiary is charged or credited anamount equal to the income tax that would have been applicable on a separatereturn basis.

 

The Company uses theliability method for computing deferred income taxes.  Under the liability method, deferred income taxes are based onthe change during the year in the deferred tax liability or asset establishedfor the expected future tax consequences of differences in the financialreporting and tax bases of assets and liabilities.  The differences relate principally to premises and equipment,unrealized gains and losses on investment securities available for sale, andthe allowance for loan losses.

 

J.                Per ShareInformation:

 

Primary earnings pershare are computed by dividing net income by the weighted average number ofshares of common stock outstanding and the number of shares of common stockthat would be assumed outstanding under the treasury-stock method.

 

K.            Comprehensive Income:

 

Comprehensive incomeconsists of net income and other comprehensive income.  Other comprehensive income includesunrealized gains and losses on securities available for sale, which are alsorecognized as a separate component of equity. The accounting standard that requires reporting comprehensive incomefirst applies for 2000, with prior information restated to be comparable.

 

L.              New AccountingPronouncements:

 

Beginning January 1,2000, a new accounting standard will require all derivatives to be recorded atfair value.  Unless designated ashedges, changes in these fair values will be recorded in the incomestatement.  Fair value changes involvinghedges will generally be recorded by offsetting gains and losses on the hedgeand on the hedged item, even if the fair value of the hedged item is nototherwise recorded.  This is notexpected to have a material effect, but the effect will depend on derivativeholdings when this standard applies.

 

42

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2.               InvestmentSecurities:

 

The carrying amounts ofinvestment in securities as shown in the consolidated balance sheets of thebank and their approximate full values at December 31 were as follows:

 
|                                          |   | **Amortized  Cost** |       | **Gross  Unrealized  Gains** |    | **Gross  Unrealized  Loss** |   | **Fair  Value** |      |
|-----------------------------------------------|--------|---------------------|------------|------------------------------|---------|-----------------------------|--------|-----------------|-----------|
|                                          |   |                |       |                         |    |                        |   |            |      |
| VALUES FOR THE YEAR  ENDED DECEMBER 31, 2002: |   |                |       |                         |    |                        |   |            |      |
|                                          |   |                |       |                         |    |                        |   |            |      |
| Securities Available for Sale                 |   |                |       |                         |    |                        |   |            |      |
| Federal Agency Securities                     |   | $                   | 36,532,502 |                         | $       | 284,636                     |   | $               | 18        |   | $ | 36,817,120 |   |
| U.S. Treasury Securities                      |   | 3,971,774           |       | $                            | 103,226 |                        | 0      |            | 4,075,000 |   |
| Tax Exempt Federal Reserve Stock              |   | 81,000              |       | $                            | 0       |                        | 81,000 |            |      |   |
| Equity Securities                             |   | 263,152             |       | $                            | 68,866  |                        | 0      |            | 332,018   |   |
|                                          |   | $                   | 40,848,428 |                         | $       | 456,728                     |   | $               | 18        |   | $ | 41,305,138 |   |
|                                          |   |                |       |                         |    |                        |   |            |      |
| VALUES FOR THE YEAR  ENDED DECEMBER 31, 2001  |   |                |       |                         |    |                        |   |            |      |
|                                          |   |                |       |                         |    |                        |   |            |      |
| Securities Available for Sale                 |   |                |       |                         |    |                        |   |            |      |
| U.S. Treasury Securities                      |   | $                   | 3,490,661  |                         | 0       |                        | 1,131  |            | $         | 3,489,530 |   |
| Federal Agency Securities                     |   | 32,553,208          |       | 62,594                       |    | 0                           |   | 32,615,802      |      |
| Equity Securities                             |   | 250,000             |       | 0                            |    | 0                           |   | 250,000         |      |
|                                          |   | $                   | 36,293,869 |                         | $       | 62,594                      |   | $               | 1,131     |   | $ | 36,355,332 |   |

 

Federal Reserve Bank stockis an equity security which is included in securities available for sale in theaccompanying consolidated financial statement. Such securities are carried at cost, since they may only be sold back tothe issuer or another member at par value.

 

43

----

 

 

The proceeds from sales,calls and maturities of securities, and the related gross gain and lossesrealized are as follows:

 
|                         |   | **Proceeds  From** |   | **Gross  Realized**       |   |
|------------------------------|--------|--------------------|--------|---------------------------|--------|
| **Year Ended  December 31,** |   | **Sales**          |   | **Calls and  Maturities** |   | **Gain** |   | **Losses** |   |
|                         |   |               |   |                      |   |   |   |   |   |
| 2002 Available  for Sale     |   | $                  | 0      |                      | $      | 19,925,000 |   | $ | 0 |   | $ | 0 |   |
|                         |   |               |   |                      |   |   |   |   |   |
| 2001 Available  for Sale     |   | $                  | 0      |                      | $      | 49,006,248 |   | $ | 6,248 |   | $ | 0 |   |
|                         |   |               |   |                      |   |   |   |   |   |
| 2000 Available  for Sale     |   | $                  | 0      |                      | $      | 7,400,000 |   | $ | 0 |   | $ | 0 |   |

 

The par value ofsecurities pledged to secure public deposits and for other purposes amounted to$26,056,196 in 2002 and $14,598,233 in 2001.

 

The amortized cost andestimated market value of investment in debt securities at December 31, 2002,by contractual maturity, are shown below. Expected maturities will differ from contractual maturities becauseborrowers may have the right to call or prepay obligations with or without callas prepayment penalties.

 
|                         |   | **Securities  to be Held  to Maturity** |   | **Securities  Available  For Sale** |   |
|------------------------------|--------|-----------------------------------------|--------|-------------------------------------|--------|
|                         |   |                                    |   |                                |   |   |   |   |   |
|                         |   | **Amortized  Cost**                     |   | **Fair  Value**                     |   | **Amortized  Cost** |   | **Fair  Value** |   |
|                         |   |                                    |   |                                |   |   |   |   |   |
| Due in one yr or less        |   | $                                       | 0      |                                | $      | 0 |   | $ | 13,032,878 |   | $ | 13,116,620 |   |
|                         |   |                                    |   |                                |   |   |   |   |   |
| Due from one yr to five yrs  |   | $                                       | 0      |                                | $      | 0 |   | $ | 27,471,398 |   | $ | 27,775,500 |   |
|                         |   |                                    |   |                                |   |   |   |   |   |
| Due from five yrs to ten yrs |   | $                                       | 0      |                                | $      | 0 |   | $ | 0 |   | $ | 0 |   |
|                         |   |                                    |   |                                |   |   |   |   |   |
| Due after ten yrs            |   | $                                       | 0      |                                | $      | 0 |   | $ | 0 |   | $ | 0 |   |
|                         |   |                                    |   |                                |   |   |   |   |   |
| Equity Securities            |   | $                                       | 0      |                                | $      | 0 |   | $ | 344,152 |   | $ | 413,018 |   |
|                         |   | $                                       | 0      |                                | $      | 0 |   | $ | 40,848,428 |   | $ | 41,305,138 |   |

 

44

----

 

 

3.               Restrictionon Cash, Due from Banks and contingent Liabilities:

 

The Bank is required tomaintain average balances with the Federal Reserve Bank.  The average required reserve balances were$1,131,000 and $1,383,000 for 2002 and 2001 respectively.  The Bank has various claims and suitspending at December 31, 2002 arising in the ordinary course of itsbusiness.  It is the opinion ofmanagement and legal counsel that such litigation will not materially affectthe Bank’s financial position or earnings.

 

4.               Loans:

 

Major classifications ofloans at December 31, 2002 and 2000 are as follows:

 
|                              |   | **2002**    |       | **2001**    |   |
|-----------------------------------|--------|-------------|------------|-------------|--------|
|                              |   |        |       |        |   |
| Mortgage Loans                    |   | $           | 52,502,944 |        | $      | 53,718,980 |   |
| Installment Loans                 |   | 11,449,826  |       | 13,977,895  |   |
| Commercial and Other Loans        |   | 43,979,821  |       | 49,210,538  |   |
|                              |   | 107,932,591 |       | 116,907,413 |   |
| Less:  Reserve for Loan Loss |   | 1,618,632   |       | 1,152,777   |   |
|                              |   | 106,313,959 |       | 115,754,636 |   |
|                                   |        |             |            |             |        |  |  |

 

Loans on which accrual ofinterest has been discontinued or reduced, amounted to $1,705,845 and $796,477at December 31, 2002 and 2001 respectively. Had the above loans not been placed on a non-accrual status, income forthe Company would have increased approximately $89,407 and $55,753 for the twoyears.

 

The Company’s recordedinvestment in impaired loans was approximately $1,058,478 at December 31, 2002and $923,483 at December 31, 2001.  Ofthat amount in 2002, $854,889 represents loans for which an allowance for loanlosses, amounting to $504,554, has been established under SFAS 114.  The average recorded investment in impairedloans was approximately $992,980 for 2002 and $990,550 for 2001.  Interest income recognized on impaired loanswas approximately $50,741 for the year ended December 31, 2002.

 

45

----

 

 

Reserve for Loan Losses:

 

Transactions in the reserve for loan losses for theyears were as follows:

 
|                                    |   | **2002** |      | **2001** |   | **2000**  |   |
|-----------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|
|                                    |   |     |      |     |   |      |   |
| Balance at Beginning of Year            |   | $        | 1,152,777 |     | $      | 702,008   |   | $ | 700,553 |   |
| Provision Charged to Operating Expenses |   | 533,818  |      | 700,000  |   | 100,000   |   |
| Recoveries credited to Reserve          |   | 29,565   |      | 7,890    |   | 7,125     |   |
| Losses Charged to Reserve               |   | (97,529  | )         | (257,121 | )      | (105,670  | )      |
|                                    |   |     |      |     |   |      |   |
| Balance at End of Year                  |   | $        | 1,618,631 |     | $      | 1,152,777 |   | $ | 702,008 |   |

 

The balance of thereserve for loan losses for income tax purposes was $281,723. at December 31,2002 and 2001.

 

Certain directors andexecutive officers of the Bank and companies in which they have beneficialownership, were loan customers of the Bank during 2002 and 2001.  Such loans were made in the ordinary courseof business at the Bank’s normal credit terms and interest rates.  An analysis of the 2002 activity withrespect to all director and executive officer loans is as follows:

 
| **Balance  2001** |      | **New Loans  2002** |   | **Loan  Payments  2002** |   | **Balance  2002** |      |
|-------------------|-----------|---------------------|--------|--------------------------|--------|-------------------|-----------|
|              |      |                |   |                     |   |              |      |
| $                 | 3,057,006 |                | $      | 2,742,081                |   | $                 | 2,612,029 |   | $ | 3,187,058 |   |
|                   |           |                     |        |                          |        |                   |           |  |  |  |  |

 

46

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5.               BankPremises and Equipment:

 

Bank premises andequipment are summarized as follows:

 
|                                 |   | **2002**  |      | **2001**  |   |
|--------------------------------------|--------|-----------|-----------|-----------|--------|
|                                 |   |      |      |      |   |
| Land                                 |   | $         | 949,972   |      | $      | 949,972 |   |
| Banking House                        |   | 3,277,794 |      | 3,183,011 |   |
| Furniture, Fixtures and Equipment    |   | 2,445,398 |      | 2,432,565 |   |
|                                 |   | 6,673,164 |      | 6,565,548 |   |
| Less:  Accumulated Depreciation |   | 3,455,840 |      | 3,182,009 |   |
|                                 |   |      |      |      |   |
| Bank Premises and Equipment          |   | $         | 3,217,324 |      | $      | 3,383,539 |   |

 

Depreciation expenseamounted to $273,928, $269,956, and $277,506 in 2002, 2001 and 2000respectively.  Expenditures formaintenance and repairs are charged against operations as incurred.

 

6.               OperatingLease Commitments:

 

The Company has enteredinto lease agreements for certain premises at three of its facilitylocations.  Future minimum leasepayments under the leases during the five years subsequent to December 31, 2002are as follows:

 
| **Year** |   | **Amount** |   |
|----------|--------|------------|--------|
|     |   |       |   |
| 2003     |   | $          | 21,400 |   |
| 2004     |   | $          | 21,400 |   |
| 2005     |   | $          | 21,400 |   |
| 2006     |   | $          | 21,400 |   |
| 2007     |   | $          | 21,400 |   |

 

47

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7.               Deposits:

 

The following is asummary of interest bearing deposits by type as of December 31, 2002 and 2001:

 
|                                                    |   | **2002** |        | **2001** |   |
|---------------------------------------------------------|--------|----------|-------------|----------|--------|
|                                                    |   |     |        |     |   |
| NOW and Super  NOW accounts                             |   | $        | 17,356,352  |     | $      | 16,976,091 |   |
| Money market  accounts                                  |   | $        | 4,494,996   |     | $      | 4,394,817 |   |
| Savings accounts                                        |   | $        | 44,864,222  |     | $      | 39,803,796 |   |
| Regular  certificates of deposit                        |   | $        | 53,256,894  |     | $      | 58,197,285 |   |
| Individual  retirement accounts and other time deposits |   | $        | 5,394,393   |     | $      | 5,084,901 |   |
|                                                    |   |     |        |     |   |
| Total                                                   |   | $        | 125,366,857 |     | $      | 124,456,890 |   |

 

Time certificates ofdeposit in denominations of $100,000 or more totaled $16,886,987 and$19,815,003 at December 31, 2002 and 2001. Interest paid on all time certificates totaled $2,024,089, $3,662,286and $3,429,508 for the years ended December 31, 2002, 2001 and 2000,respectively.

 

48

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The following is asummary of the maturity distribution of certificates of deposit in amounts of$100,000 or more as of December 31, 2002:

 
|                       |   | **Amount** |       | **Percent** |   |
|----------------------------|--------|------------|------------|-------------|--------|
|                       |   |       |       |        |   |
| Three months or  less      |   | $          | 0          |        | 0.0    | % |
| Three through  six months  |   | $          | 842,136    |        | 4.9    | % |
| Six through  twelve months |   | $          | 3,004,194  |        | 17.8   | % |
| Over twelve  months        |   | $          | 13,020,657 |        | 77.3   | % |
|                       |   |       |       |        |   |
| Total                      |   | $          | 16,866,987 |        | 100.0  | % |

 

At December 31, 2002, thescheduled maturities of time are as follows:

 
| 2003          |   | $      | 17,304,535 |   |
|---------------|--------|--------|------------|--------|
| 2004          |   | $      | 16,786,257 |   |
| 2005          |   | $      | 6,813,298  |   |
| 2006          |   | $      | 6,473,589  |   |
| 2007 and over |   | $      | 5,879,215  |   |
|          |   |   |       |
|          |   | $      | 53,256,894 |   |

 

49

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8.               PurchasedAgreements:

 

At December 31, thebalance of securities sold under repurchase agreements amounted to$1,000,000.  The following tablesummarizes the information on the repurchase agreements:

 
|                          |   | **2002** |      | **2001** |   |
|-------------------------------|--------|----------|-----------|----------|--------|
|                          |   |     |      |     |   |
| Average balance  for the year |   | $        | 2,910,324 |     | $      | 2,000,000 |   |
| Average interest  rate        |   | 5.377    | %         | 7.000    | %      |
| Maximun month  end balance    |   | $        | 3,000,000 |     | $      | 2,000,000 |   |

 

50

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9.               FederalIncome Taxes:

 

The Provisions forFederal income taxes for the years ended December 31, 2002, 2001, and 2000 wereless than the respective amounts that would result from applying the statutoryFederal and State Income Tax rates, due primarily to the Banks’ investmentincome and expense accruals.

 

A reconciliation of thedifference between the U.S. statutory income tax rate and the effective taxrates with resulting dollar amounts are shown in the following table:

 
|                                 |   | **2002**   |    | **2001**    |   | **2000**   |   |
|--------------------------------------|--------|------------|---------|-------------|--------|------------|--------|
|                                 |   | **Amount** |    | **Percent** |   | **Amount** |   | **Percent** |   | **Amount** |   | **Percent** |   |
|                                 |   |       |    |        |   |       |   |   |   |   |   |   |   |
| Tax Expense at Statutory Rate        |   | $          | 987,907 |        | 34.00  | %          | $      | 907,953 |   | 34.00 | % | $ | 1,044,203 |   | 34.00 | % |
| State income tax net of tax benefits |   | 112,647    |    | 3.87        | %      | 78,724     |   | 3.89 | % | 92,802 |   | 3.02 | % |
|                                 |   | 1,100,554  |    | 37.87       | %      | 986,677    |   | 37.89 | % | 1,137,005 |   | 37.02 | % |
|                                 |   |       |    |        |   |       |   |   |   |   |   |   |   |
| Security Transactions                |   | (13,357    | )       | -0.46       | %      | 0          |   | 0.00 | % | — |   | 0.00 | % |
| Loan Loss Provision                  |   | 176,512    |    | 6.07        | %      | 153,262    |   | 5.74 | % | (1,457 | ) | -0.05 | % |
| Pension Accruals                     |   | 4,443      |    | 0.15        | %      | 4,443      |   | 0.17 | % | 4,338 |   | 0.14 | % |
| Other                                |   | (73,755    | )       | -2.54       | %      | (21,123    | )      | -0.79 | % | (7,371 | ) | -0.24 | % |
| Deferred Income Tax                  |   | (130,620   | )       | -4.48       | %      | (213,669   | )      | -8.00 | % | (1,247 | ) | 0.04 | % |
|                                 |   | 1,063,777  |    | 36.61       | %      | 909,590    |   | 35.01 | % | 1,131,268 |   | 36.91 | % |
|                                      |        |            |         |             |        |            |        |  |  |  |  |  |  |  |  |  |

 

The tax effect ofsignificant temporary differences, which comprise non-current, deferred taxassets and liabilities as of December 31, 2002 and 2001 are as follows:

 
|                     |   | **2002** |    | **2001** |   |
|--------------------------|--------|----------|---------|----------|--------|
|                     |   |     |    |     |   |
| Assets:                  |   |     |    |     |   |
| Market Value Allowance   |   | $        | —  |     | $      | 24,897 |   |
| Reserve for Loan Loss    |   | 588,240  |    | 374,553  |   |
|                     |   |     |    |     |   |
| Gross Deferred Tax Asset |   | 588,240  |    | 399,450  |   |
|                     |   |     |    |     |   |
| Liablities:              |   |     |    |     |   |
| Property and Equipment   |   | 175,141  |    | 116,971  |   |
| Allowance for Investment |   | 166,773  |    | 54,492   |   |
|                     |   |     |    |     |   |
| Total Liabilities        |   | 341,914  |    | 171,463  |   |
|                     |   |     |    |     |   |
| Net Deferred Tax Asset   |   | $        | 246,326 |     | $      | 227,987 |   |

 

51

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10.   EmployeeBenefit Plans:

 

During 1997, the Companyterminated the qualified defined benefit pension plan.  The Company’s subsidiary adopted a qualifiedprofit sharing and 401K employee benefit plan covering substantially allemployees.  The contributions to theplans are at the discretion of the plan’s advisory board and amounted to$121,121 in 2002 and $125,165 in 2001.

 

11.   FinancialInstruments with Off-Balance-Sheet Risk and Financial Instruments withConcentration of Credit Risk:

 

The Bank is party tofinancial instruments with off-balance-sheet Risk in the normal course ofbusiness to meet the financing needs of its customers.  These financial instruments include loancommitments, unused credit loan limits, and standby letters of credit.  The instruments involve, to varying degrees,elements of credit and interest rate risk in excess of the amount recognized inthe financial statements.

 

The Bank’s exposure tocredit loss in the event of nonperformance by the other party to the financialinstrument for loan commitments and standby letters of credit is represented bythe contractual amount of those instruments. The Bank uses the same credit policies in making commitments andconditional obligations as it does for on-balance-sheet instruments.

 

Commitments to extendcredit are agreements to lend to a customer as long as there is no violation ofany condition established in the contract. Commitments generally have fixed expiration dates of other terminationclauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawnupon, the total commitment amounts do not necessarily represent future cashrequirements.  The exposure to creditloss in the event of nonperformance by the other party to the financialinstrument for these commitments is represented by the contractual amount.  The credit risk involved in issuing lettersof credit is essentially the same as that involved in extending loan commitmentsto customers.

 

52

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The total amounts ofOff-Balance-Sheet financial instruments with credit risk are As follows:

 
|                       |   | **December  31,** |       |
|----------------------------|--------|-------------------|------------|
|                       |   | **2002**          |       | **2001** |   |
| Loan commitments           |   | $                 | 11,061,000 |   | $ | 10,281,000 |   |
| Standby letters  of credit |   | $                 | 802,000    |   | $ | 990,000 |   |

 

The Bank subsidiarygrants retail, commercial and commercial real estate  loans to customers located throughout West Virginia and EasternKentucky.

 

The Bank evaluates eachcustomer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by theBank upon extension of the customer. Collateral held varies but may include accounts receivable, inventory,property, plant and equipment and income-production commercial properties.  Although the Bank has a diversified loanportfolio, a substantial portion of the debtors’ ability to honor theircontracts is dependent upon the economic conditions in each loan’s respectivelocation.

 

12.   RegulatoryMatters

 

The various regulatoryagencies having supervisory authority over financial institutions have adoptedrisk-based capital guidelines which define the adequacy   of the capital levels of regulatedinstitutions.  These risk basedcapital   guidelines require minimumlevels of capital based upon the risk rating of assets   and certain off-balance-sheet items.  Assets and off-balance-sheet items areassigned regulatory risk-weights ranging from 0% to 100% depending on theirlevel of credit risk.  The guidelinesclassify capital in two tiers, Tier I and Tier II, the sum of which is totalcapital.  Tier I capital is essentiallycommon equity less intangible assets. Tier II capital is essentially qualifying long-term debt and a portionof the reserve for loan losses.

 

53

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The Company’s and Bank’sactual capital amounts and ratios are presented below in thousands of dollars:

 
|                                            |   |     |   | **For Capital  Adequacy  Purposes** |   | **To Be Well  Capitalized** |   |
|-------------------------------------------------|--------|----------|--------|-------------------------------------|--------|-----------------------------|--------|
|                                            |   | **Amt.** |   | **Ratio**                           |   | **Amt.**                    |   | **Ratio** |   | **Amt.** |   | **Ratio** |   |
| As of December 31, 2002                         |   |     |   |                                |   |                        |   |   |   |   |   |   |   |
|                                            |   |     |   |                                |   |                        |   |   |   |   |   |   |   |
| Total Capital (to Risk Weighted Assets)         |   | 17,193   |   | 17.61                               | %      | 7,809                       |   | 8.00 | % | 9,761 |   | 10.00 | % |
| Tier I  Capital (to Risk  Weighted Assets) |   | 16,943   |   | 17.36                               | %      | 3,904                       |   | 4.00 | % | 5,857 |   | 6.00 | % |
| Tier I  Capital (to Risk  Average Assets)  |   | 16,948   |   | 9.79                                | %      | 6,924                       |   | 4.00 | % | 4,881 |   | 5.00 | % |
|                                            |   |     |   |                                |   |                        |   |   |   |   |   |   |   |
| As of December 31, 2001                         |   |     |   |                                |   |                        |   |   |   |   |   |   |   |
| Total Capital (to Risk Weighted Assets)         |   | 16,800   |   | 16.21                               | %      | 8,290                       |   | 8.00 | % | 10,362 |   | 10.00 | % |
| Tier I  Capital (to Risk Weighted  Assets) |   | 16,147   |   | 15.04                               | %      | 4,295                       |   | 4.00 | % | 6,442 |   | 6.00 | % |
| Tier I  Capital (to Risk  Average Assets)  |   | 16,147   |   | 10.31                               | %      | 6,265                       |   | 4.00 | % | 7,831 |   | 5.00 | % |

 

The Company’s principalsource of funds for dividend payments is dividends received from the subsidiaryBank.  Banking regulations limit theamount of dividends that may be paid without prior approval of regulatoryagencies.  Under these regulations, theamount of dividends that may be paid in any calendar year is limited to thecurrent year’s net profits, as defined, combined with the retained net profitsof the preceding two years, subject to the capital requirements as definedabove.  During 2002, the Bank could,without prior approval, declare dividends of approximately $1,891,306 plus any2003 net profits returned to the date of the dividend declaration.

 

54

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13.   Disclosuresabout Fair Value of Financial Instruments

 

The following methods areassumptions were used to estimate the fair value of each class of financialinstruments for which it is practicable to estimate the value:

 

Cash and Cash Equivalents - For those short-terminstruments, the carrying amount is a reasonable estimate of fair value.

 

Investment Securities - For investment securities,fair values are based on quoted market prices or dealer quotes.

 

Loans - Fair value is estimated by discounting thefuture cash flows using the current rates at which similar loans would be madeto borrowers with similar credit ratings and for the same remaining maturities.

 

Deposit Liabilities - The fair value of demanddeposits, savings accounts, and certain money market deposits is the amountpayable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated bydiscounting future cash flows using the rates currently offered for deposits ofsimilar remaining maturities.

 

Securities Sold Under Agreements to Repurchase - Forthese short-term instruments, the carrying amount is a reasonable estimate offair value.

 

Federal Home Loan Bank Advances - Rates currentlyavailable to the Company for advances with similar terms and remainingmaturities are used to estimate fair value of existing debt.

 

Note Payable - the carrying value of variable rateborrowed funds is a reasonable estimate of fair value.

 

Commitments to Extend Credit and Standby Letters ofCredit - Commitments to extend credit and standby letters of credit representagreements to lend to a customer at the market rate when the loan is extended,thus the commitments and letters of credit are not considered to have a fairvalue.

 

55

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The fair values of the Company’s financial instrumentsat December 31, 2002 are as follows:

 
|                       |   | **Carrying  Amount** |        | **Fair  Value** |   |
|----------------------------|--------|----------------------|-------------|-----------------|--------|
| Financial Assets:          |   |                 |        |            |   |
| Cash and cash  equivalents |   | $                    | 5,967,423   |            | $      | 5,967,423 |   |
| Investmet  scurities       |   | 41,305,138           |        | 41,305,138      |   |
| Federal funds  sold        |   | 11,370,000           |        | 11,370,000      |   |
| Loans                      |   | 107,932,591          |        | 109,106,568     |   |
| Interest  receivable       |   | 811,373              |        | 811,373         |   |
|                       |   | $                    | 167,386,525 |            | $      | 168,560,502 |   |
|                       |   |                 |        |            |   |
| Financial  liabilities:    |   |                 |        |            |   |
| Deposits                   |   | $                    | 150,443,037 |            | $      | 151,823,589 |   |

 

14.   Stockholders’ Equity :

 

On June 16, 1999, the Board of Directors declared a stock dividend of threeshares of common stock for each two shares of common stock outstanding.  All related financial information includingearnings per share gives retroactive effect to issurance of this stockdividend.  This results in a totalauthorized common stock of 780,000 shares and 716,991 shares outstanding.  In December 2002, the company purchased13,000 shares of treasury stock.  Thisresulted in 703,991 outstanding in 2002 and 716,991 in 2001.

 

56

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15.   Parent OnlyCondensed Financial Information:

 
|                                |   | **December  31,** |       |
|-------------------------------------|--------|-------------------|------------|
|                                |   | **2002**          |       | **2001** |   | **2000** |   |
| Condensed Balance Sheet:            |   |              |       |   |   |   |   |
|                                |   |              |       |   |   |   |   |
| Assets:                             |   |              |       |   |   |   |   |
| Cash                                |   | $                 | 369,744    |   | $ | 420,887 |   | $ | 360,466 |   |
| Other Assets                        |   | 378,886           |       | 268,295 |   | 254,875 |   |
| Investment In Subsidiary            |   | 16,869,078        |       | 16,510,065 |   | 15,692,172 |   |
|                                |   |              |       |   |   |   |   |
|                                |   | $                 | 17,617,708 |   | $ | 17,199,247 |   | $ | 16,307,513 |   |
|                                |   |              |       |   |   |   |   |
| Liabilities and Equity:             |   |              |       |   |   |   |   |
| Accrued Liablities                  |   | $                 | 425,107    |   | $ | 399,117 |   | $ | 293,297 |   |
| Common Stock                        |   | 1,300,000         |       | 1,300,000 |   | 1,300,000 |   |
| Surplus                             |   | 2,408,426         |       | 2,408,426 |   | 2,408,426 |   |
| Retained Earnings                   |   | 14,890,373        |       | 13,951,902 |   | 13,165,988 |   |
| Treasury Stock                      |   | (1,406,198        | )          | (860,198 | ) | (860,198 | ) |
|                                |   |              |       |   |   |   |   |
|                                |   | $                 | 17,617,708 |   | $ | 17,199,247 |   | $ | 16,307,513 |   |
|                                |   |              |       |   |   |   |   |
| Condensed Statement of Income:      |   |              |       |   |   |   |   |
| Equity in Net Earnings of Subsdiary |   | $                 | 1,852,880  |   | $ | 1,787,359 |   | $ | 2,062,681 |   |
| Other Income                        |   | 67,285            |       | 8,208 |   | 7,203 |   |
| Operating Expenses                  |   | 78,332            |       | 39,946 |   | 37,163 |   |
|                                |   |              |       |   |   |   |   |
| Net Income                          |   | $                 | 1,841,833  |   | $ | 1,755,621 |   | $ | 2,032,721 |   |

 

57

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|                                                                                      |   | **December  31,** |      |
|-------------------------------------------------------------------------------------------|--------|-------------------|-----------|
|                                                                                      |   | **2002**          |      | **2001** |   | **2000** | ** ** |
| Condensed  Statement of Changes in Cash Flow                                              |   |              |      |   |   |   |   |
| Cash Flows From  Increases (Decreases) in Cash and Cash Equivalents Operating Activities: |   |              |      |   |   |   |   |
| Net Income                                                                                |   | $                 | 1,841,833 |   | $ | 1,755,621 |   | $ |  2,032,721 |   |
| Net Change in  Other Assets                                                               |   | (110,591          | )         | (13,420 | ) | 9,799 |   |
| net Change in  Accrued Liabilities                                                        |   | 25,990            |      | 105,820 |   | 5,131 |   |
|                                                                                      |   |              |      |   |   |   |   |
| Net Cash  Provided by Operating Activities                                                |   | 1,757,232         |      | 1,848,021 |   | 2,047,651 |   |
|                                                                                      |   |              |      |   |   |   |   |
| Cash Flows From  Investing Activities:                                                    |   |              |      |   |   |   |   |
| NetChange in  Investment in Subsidiary                                                    |   | (165,379          | )         | (712,113 | ) | (1,030,214 | ) |
|                                                                                      |   |              |      |   |   |   |   |
| Net Cash  Provided (Used) in Investing Activities                                         |   | (165,379          | )         | (712,113 | ) | (1,030,214 | ) |
| Cash Flows From  Financing Activities:                                                    |   |              |      |   |   |   |   |
| Purchase  Treasury Shares                                                                 |   | (546,000          | )         |   |   |   |   |
| Dividends                                                                                 |   | (1,096,996        | )         | (1,075,487 | ) | (1,032,467 | ) |
|                                                                                      |   |              |      |   |   |   |   |
| Net Cash Used in  Financing Activities                                                    |   | (1,642,996        | )         | (1,075,487 | ) | (1,032,467 | ) |
|                                                                                      |   |              |      |   |   |   |   |
| Net Change in  Cash and Cash Equivalents During the Year                                  |   | (51,143           | )         | 60,421 |   | (15,030 | ) |
|                                                                                      |   |              |      |   |   |   |   |
| Cash Account:                                                                             |   |              |      |   |   |   |   |
| Beginning of  Year                                                                        |   | 420,887           |      | 360,466 |   | 375,496 |   |
|                                                                                      |   |              |      |   |   |   |   |
| End of Year                                                                               |   | $                 | 369,744   |   | $ | 420,887 |   | $ |  360,466 |   |

 

58

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ITEM 9– DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

PART III.

 

ITEM 10– DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

The information appearing on Page of the Corporation’sProxy Statement, dated May 7, 2003, is incorporated herein by reference inresponse to this item.

 

Executive Officers Of The Registrant:

 
| **Name**            |   | **Age** |   | **Position  and office**                                                                                                                                                                                                      |
|---------------------|--------|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |    |   |                                                                                                                                                                                                                          |
| Harvey Oakley       |   | 81      |   | Chairman of the Board and President, Logan County  BancShares, Inc. Mr. Oakley has been an Officer and Director of Logan Bank  & Trust Company since 1963, a attorney at law, and Circuit Judge, State  of West Virginia. |
|                |   |    |   |                                                                                                                                                                                                                          |
| Eddie D. Canterbury |   | 53      |   | Executive Vice President and CEO                                                                                                                                                                                              |
|                |   |    |   | of Logan County BancShares, Inc. Mr. Canterbury has  been President/CEO of Logan Bank & Trust Company since 1998 and Sr. Vice  President since 1980.  He is a  Director of Logan Bank & Trust Company.           |

 

59

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ITEM 11 – EXECUTIVE COMPENSATION

 

The information appearing in the Corporation’sDefinitive Proxy Statement,  dated May7, 2003, is incorporated herein by reference in response to this item.

 

ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT

 

The information appearing in the Corporation’sDefinitive Proxy Statement, dated May 7, 2003, is incorporated herein byreference in response to this item.

 

ITEM 13 – CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS

 

The information appearing in the Corporation’sDefinitive Proxy Statement, dated May 7, 2003, is incorporated herein byreference in response to this item.

 

ITEM 14 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES ANDREPORTS ON FORM 8-K

 

None.

 

60

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May 7, 2003

 

 

Dear Stockholder:

 

Your Board of Directors is pleased to invite you toattend the Annual Meeting of Stockholders of Logan County BancShares, Inc. onMay 27, 2003, at 3:00 p.m.  The Noticeof Meeting and Proxy Statement are attached.

 

The meeting will be held at Logan Bank and TrustCompany’s lobby, Washington and Main Street, Logan, West Virginia. The businessof the meeting will be the election of the Directors and to transact such otherbusiness as may properly come before the meeting.

 

We hope that you can attend the meeting.  In any event, please mark, date and sign theenclosed proxy and return it in the accompanying envelope.

 

 

LOGAN COUNTY BANCSHARES,INC.

 

 
| Harvey Oakley      |   | Eddie Canterbury              |
|--------------------|--------|-------------------------------|
| President/Chairman |   | Executive Vice  President/CEO |

 

61

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LOGAN COUNTY BANCSHARES,INC.P.O. BOX 597LOGAN, WEST VIRGINIA  25601

 

MAY 7, 2003

 

PROXY STATEMENT

 

SOLICITATION AND REVOCABILITY OF PROCESS

 

This Proxy Statement is furnished in connection withthe solicitation by the Board of Directors of Logan County BancShares, Inc.(Corporation) of proxies for the Annual Meeting of Stockholders of thecorporation to be held May 27, 2003, and any adjournment thereof.  Shares represented by properly executedproxies which are received in time and not revoked will be voted at the meetingin the manner described in the proxies. Any proxy may be revoked at any time before it is exercised.

 

INFORMATION AS TO VOTING SECURITIES

 

The Board of Directors has fixed the close of businesson April 25, 2003, as the record date for the determination of stockholdersentitled to notice of and to vote at the Annual Meeting.  At the record date, 703,991 shares of CommonStock of the Corporation were outstanding and entitled to be voted at themeeting.  Each share of Common Stock isentitled to one vote.

 

ELECTION OF DIRECTORS

 

The Board of Directors of the Corporation has, inaccordance with the bylaws, fixed the number of Directors of the Corporation atnot less than three.  Accordingly, nineDirectors are proposed to be elected to serve until the next Annual Meeting ofStockholders and until their respective successors are duly elected and havequalified.  It is intended that sharesrepresented by proxies solicited by the Board of Directors will, unlesscontrary instructions are given, be voted in favor of the election as Directorsof the nominees listed below.  If anynominee is unavailable for election, the shares may be voted for a substitutenominee.  The following nominees havebeen proposed to serve as Directors of the Corporation.  They are:

 

62

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| **NAME**          |   | **AGE** |   | **PRINCIPAL  OCCUPATION**                                                                                                                   |   | **COMMON  STOCK  BENEFICIALLY OWNED** |
|-------------------|--------|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|
|              |   |    |   |                                                                                                                                        |   |                                  |   |   |
| Harvey Oakley     |   | 82      |   | President/Chairman of the Board, Logan County  BancShares, Inc.; Attorney at Law; Chairman of the Board of Logan Bank and  Trust .          |   | (A)                                   |   | 53,346 |
|              |   |    |   |                                                                                                                                        |   |                                  |   |   |
| Clell Peyton      |   | 66      |   | Director, Logan Bank and Trust Retired, Nationwide  Insurance Company.                                                                      |   |                                  |   | 10,773 |
|              |   |    |   |                                                                                                                                        |   |                                  |   |   |
| Earle B. Queen    |   | 75      |   | Director, Logan Bank and Trust; President, James  Funeral Home.                                                                             |   | (B)                                   |   | 19,755 |
|              |   |    |   |                                                                                                                                        |   |                                  |   |   |
| LaVeta Jean Ray   |   | 71      |   | Retired Counselor, Chapmanville High School.                                                                                                |   | (C)                                   |   | 7,428 |
|              |   |    |   |                                                                                                                                        |   |                                  |   |   |
| William W. Wagner |   | 70      |   | Director, Logan Bank and Trust; Former Director and  Executive Comm., United Bancshares; Former Chairman Eagle Bancorp, Inc.                |   | (D)                                   |   | 16,900 |
|              |   |    |   |                                                                                                                                        |   |                                  |   |   |
| Eddie Canterbury  |   | 54      |   | Director and Executive Vice President/ CEO, Logan  County BancShares, Inc.; Director and President/CEO Logan Bank and Trust.                |   | (E)                                   |   | 7,650 |
|              |   |    |   |                                                                                                                                        |   |                                  |   |   |
| Walter D. Vance   |   | 52      |   | Vice President, Logan County BancShares, Inc.; Vice  President, Aracoma Drug Company.                                                       |   | (F)                                   |   | 4,569 |
|              |   |    |   |                                                                                                                                        |   |                                  |   |   |
| Glenn T. Yost     |   | 45      |   | Director, Logan Bank and Trust; President, W.W.  McDonald Land Co.; President, Triadelphia Land Co.; President, Bruce McDonald  Holding Co. |   | (G)                                   |   | 29,063 |
|              |   |    |   |                                                                                                                                        |   |                                  |   |   |
| David McCormick   |   | 55      |   | Director, Logan Bank and Trust; President,  McCormick’s, Inc.; President, Bodaco, Co.                                                  |   | (H)                                   |   | 38,058 |

 

 

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(A)      Includes 6,982 sharesjointly owned with spouse.

 

(B)        Includes 18,000 sharesowned by Earle B. Queen, Trust, 355 shares owned by Funeral Services, Inc. and400 shares owned by Queen Brothers, Inc.

 

(C)        Includes 1,428 sharesjointly owned with sister, Erma Ray Butcher.

 

(D)       Includes 654 shares jointlyowned with spouse.

 

(E)         Includes 357 shares ownedin IRA, 50 shares custodian for Alexis Jo Canterbury, and 100 shares jointlyowned with spouse.

 

(F)         Includes 849 shares ownedby Aracoma Drug Company.

 

(G)        Includes 1,225 sharesjointly owned with spouse; and 27,163 shares for which voting and investmentpowers are deemed; 20,625 shares owned by W.W. McDonald Land Company; 5,863shares owned by Bruce McDonald Holding Company; 675 shares owned by TriadelphiaLand Company.

 

(H)       Includes 37,908 sharesowned by Bodaco, Co.

 

EXECUTIVE COMPENSATION

 

All Executive Officers of Logan County BancShares,Inc. were compensated  $7,200.00 inDirector’s fees during 2002.

 

OTHER MATTERS

 

As of the date of this Proxy Statement, the Board ofDirectors was not aware of any matters not referred to in the form proxy thatwould be presented for action at the meeting. If any other business comes before the meeting, the persons named in theproxy will have discretionary authority to vote the shares represented by themin accordance with their best judgement.

 

DATE FOR SUBMISSION OF STOCKHOLDER PROPOSALS

 

All proposals must be submitted to the Board ofDirectors 30 days prior to the Annual Meeting of Stockholders.

 

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**NOTICEOF ANNUAL MEETING OF STOCKHOLDERS**

 

 

**MAY 7,2003**

 

 

The Annual Meeting of Stockholders of Logan CountyBancShares, Inc. will be held at Logan Bank and Trust Company’s lobby at 3:00p.m. on May 27, 2003, for the following purposes:

 

1.               To elect Directorsof the Corporation.

 

2.               To transact suchother business as may properly come before the meeting.

 

Only stockholders of record at the close of businesson April 25, 2003, are entitled to notice of and to vote at the meeting.

 

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SIGNATURES

 

Pursuant to the requirements of section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|   |   |   |   |   |   | LOGAN COUNTY BANCSHARES, INC.   |
|--------|--------|--------|--------|--------|--------|---------------------------------|
|   |   |   |   |   |   | (Registrant)                    |   |
|   |   |   |   |   |   |                            |   |
|   |   |   |   | /s/    |   | Eddie Canterbury                |   |
|   |   |   |   |   |   | Eddie Canterbury  President/CEO |
|   |   |   |   |   |   |                            |   |
|   |   |   |   |   |   | April 28, 2003                  |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed on the dates indicated.

 

SIGNATURE

 
| Frank H. Oakley                  |   | Director                        |                   |                 |
|----------------------------------|--------|---------------------------------|------------------------|----------------------|
|                             |   |                            |                   |                 |
| Harvey Oakley                    |   | Director, Chairman of the Board |                   |                 |
|                             |   |                            |
| Clell Peyton                     |   | Director By:               |                   | /s/ Eddie Canterbury |   |
|                             |   |                            |                   |                 |   |
|                             |   |                            |                   | Eddie Canterbury     |   |
| Earle B. Queen                   |   | Director                        |                   | Attorney in Fact     |   |
|                             |   |                            |                   | April 28, 2003       |   |
| Lavetta J. Ray                   |   | Director                        |                   |                 |
|                             |   |                            |                   |                 |
| Walter D. Vance                  |   | Director                        |                   |                 |
|                             |   |                            |                   |                 |
| William W. Wagner                |   | Director                        |                   |                 |
|                             |   |                            |
|   /s/ Eddie Canterbury |   |                            | President and Director |
| Eddie Canterbury  Director       |   |                            |
|                                  |        |                                 |                        |                      |  |  |  |  |

 

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CERTIFICATIONS

 

I, Mark Mareske, certify that:

 

1.               I have reviewedthis annual report on Form 10-K of Logan County Bancshares, Inc.

 

2.               Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact omit to state a material fact necessary to make the statementsmade, in light of the circumstances  under which such statements were made, not misleading with respect tothe period covered by this annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)              presented in thisannual report our conclusions about the effectiveness of  the disclosure controls and procedures basedon our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the  registrant’sauditors and the audit committee of registrant’s board of directors (or persons   performing the equivalent functions):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to report, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls;  and

 

6.               The registrant’sother certifying officers and I have indicated in this annual report whetherthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date  of our most recent evaluation, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

 

 
| Date: | April 25, 2003 |   | /s/ Mark Mareske |   | Vice President & CFO |   |
|-------|----------------|--------|------------------|--------|--------------------------|--------|

 

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CERTIFICATIONS

 

I, Eddie D. Canterbury, certify that:

 

1.               I have reviewedthis annual report on Form 10-K of Logan County Bancshares, Inc.

 

2.               Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact omit to state a material fact necessary to make the statementsmade, in light of the circumstances  under which such statements were made, not misleading with respect tothe period covered by this annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)              presented in thisannual report our conclusions about the effectiveness of  the disclosure controls and procedures basedon our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the  registrant’sauditors and the audit committee of  registrant’s board of directors (or persons   performing the equivalent functions):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to report, process, summarize and reportfinancial data and have identified for the registrant’s auditors any materialweaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls;  and

 

6.               The registrant’sother certifying officers and I have indicated in this annual report whetherthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date  of our most recent evaluation, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

 

 
| Date: | April 25, 2003 |   | /s/ Eddie D. Canterbury |   | President & CEO |   |
|-------|----------------|--------|-------------------------|--------|---------------------|--------|

 

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