**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-K**

 

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

 

**For the calendar year ended:**

**December 31,2004**

 

**Commission File Number:  2-95114**

 

**LOGAN COUNTY BANCSHARES, INC.******(Exact name of Registrant as specified in its Charter)

 
| **West Virginia**                                                                             | ** ** | **55-0660015**                        |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of Incorporation or organization)                               | ** ** | (I.R.S. Employer  Identification No.) |
|                                                                                          | ** ** | ** **                            |
| **P. O. Box 597, Logan, West Virginia**                                                       | ** ** | **25601**                             |
| (Address of principal  executive offices)                                                     | ** ** | (Zip Code)                            |
|                                                                                          |
| **(304) 752-2080**                                                                            |
| (Registrant’s telephone  number, including area code)                                    |
|                                                                                          |
| Securities Registered  Pursuant to Section 12(g) of the Securities Exchange Act of 1934: |

 

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| **NONE**         |
|------------------|
| (Title of Class) |

 

Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.  ý Yes  o No.

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.  ý Yes  o No.

 

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

 

Indicate the number of sharesoutstanding of each of the registrant’s classes of common stock as of thelatest practicable date:

 
| Class Outstanding at March 29,  2005 |
|-------------------------------------------|
|                                      |
| Common Stock ($1.67 Par Value)            |   | 703,991 Shares |

 

The aggregate market value of thevoting stock held by non-affiliates of registrant as of March 29, 2005,was $12,472,548, which was based on the last-known trade price of $44.00.

 

Documents Incorporated byReference:  **None**

 

 

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**LOGAN COUNTYBANCSHARES, INC.**

 

**Table of Contents**

 
|    | PART I                                                                                                             |   |
|---------|--------------------------------------------------------------------------------------------------------------------|--------|
|    |                                                                                                               |   |
| 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 REGISTRANT’S COMMON STOCK, RELATED SHAREHOLDER MATTERS AND ISSUER  PURCHASES OF EQUITY SECURITIES |   |
|    |                                                                                                               |   |
|    | PART II                                                                                                            |   |
|    |                                                                                                               |   |
| ITEM 6  | SELECTED FINANCIAL  DATA                                                                                           |   |
|    |                                                                                                               |   |
| ITEM  7 | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION                         |   |
|    |                                                                                                               |   |
| ITEM 7A | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                        |   |
|    |                                                                                                               |   |
| ITEM 8  | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                                       |   |
|    |                                                                                                               |   |
| ITEM 9  | CHANGES IN  AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                              |   |
|    |                                                                                                               |   |
| ITEM 9A | CONTROLS  AND PROCEDURES                                                                                           |   |
|    |                                                                                                               |   |
| ITEM 9B | OTHER  INFORMATION                                                                                                 |   |
|    |                                                                                                               |   |
|    | PART  III                                                                                                          |   |
|    |                                                                                                               |   |
| ITEM 10 | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                                |   |
|    |                                                                                                               |   |
| ITEM 11 | EXECUTIVE  COMPENSATION                                                                                            |   |
|    |                                                                                                               |   |
| ITEM 12 | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER  MATTERS                   |   |
|    |                                                                                                               |   |
| ITEM 13 | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS                                                                    |   |
|    |                                                                                                               |   |
| ITEM 14 | PRINCIPAL  ACCOUNTING FEES AND SERVICES                                                                            |   |

 

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|    | PART IV                                  |   |
|---------|------------------------------------------|--------|
|    |                                     |   |
| ITEM 15 | EXHIBITS,  FINANCIAL STATEMENT SCHEDULES |   |

 

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**PART I**

 

ITEM 1 – BUSINESS

 

LOGAN COUNTY BANCSHARES, INC.

 

Logan County Bancshares, Inc. (the “Corporation”) is abank holding company, which was organized under the laws of the State of WestVirginia in 1985. On May 17, 1985, the Corporation acquired all the outstandingcapital stock of Logan Bank & Trust Company (LB&T) and also all of theoutstanding stock of Bank of Chapmanville (BC). Both of these subsidiaries arebanking corporations organized under the laws of the State of West Virginia. OnMay 28, 1996, the subsidiary banks, Logan Bank & Trust Company and Bank ofChapmanville entered into a merger agreement whereby they would be merged intoLogan Bank & Trust Company. The merger was completed after properregulatory approval and was accounted for under the pooling of interest methodof accounting.

 

Logan Bank & Trust Company was organized in 1963,and still operates at its original location at the corner of Washington andMain Streets in Logan, West Virginia. LB&T also has a separate drive-upfacility and mini-bank also located on Main Street in Logan, and in early February 1996,opened a new full-service branch in the Man area. In November 1996, thebank acquired a branch facility from another financial institution located atHarts, West Virginia. In December, 1999, the Fountain Place Branch wasopened.  The facility at Route 10 North,Harts, is operated as a full service branch of the bank. Logan Bank & TrustCompany is a member of the Federal Reserve System and deposits are insuredpursuant to the Federal Deposit Insurance Act.

 

Logan Bank & Trust Company provides a completerange of retail banking services to individuals and small and medium sizebusinesses. Their services include checking, savings, NOW, certificates ofdeposit and money market deposit accounts, business loans, individual loans,mortgage loans, home equity loans, consumer loans for various other purposes,other consumer-oriented financial services including safety deposit boxaccounts, IRA accounts and night depository. LB&T also operates severalautomatic teller machines at four strategic locations in Logan County, whichprovide 24-hour working services to customers of Logan Bank & trustCompany. LB&T is a member of the Cirrus ATM network which has over 100locations in West Virginia and more than 10,000 locations in 47 states.

 

Logan Bank & Trust Company provides depositorylending and related financial services to commercial, 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 Chapmanville branch of LB&T Bank has onelocation situated on Railroad Avenue in Chapmanville, West Virginia. Thisfacility also provides a complete range of retail banking services toindividuals and small and medium sized businesses. These services includechecking, savings, NOW, certificates of deposit and money market accountdeposits, business loans, individual loans, mortgage loans, home equity loans,consumer loans for various other purposes are provided as well. In addition,the Bank offers consumer oriented financial services such as IRA accounts,night depository, safety deposit boxes and other banking related services.

 

The branch also provides depository, lending andrelated financial services to commercial, retail, industrial, financial andgovernmental customers. The lending function includes short and medium-termloans, letters of credit, inventory and accounts receivable financing, and realestate construction lending, as do all the branches of Logan Bank & TrustCompany.

 

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COMPETITION

 

Vigorous competition exists in the market area ofLogan 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. There is also competition for deposits andrelated financial services from non-bank institutions such as savings andloans, insurance companies and brokerage firms, all of which are active in thearea. Those institutions, in addition to the finance companies, provide loans.Since the Bank Holding Company Act, passed by the West Virginia Legislature in1982, local banks have been joining bank holding companies around the State. Ofthe five banks located in Logan County, only one is a unit bank. The other fourare members of various multi-bank holding companies. Logan County BancShares,Inc. has been able to compete effectively within the county by having oneinstitution located in the county seat (Logan Bank & Trust Company), andbranches located in the high-growth area of the county. Also, to stimulategrowth, Logan County BancShares, Inc. is the only bank holding company ownedand controlled from within the county.

 

SUPERVISION AND REGULATION

 

The Corporation is a bank holding company within themeaning of the Bank Holding Company Act of 1956 (the Act) and is registered assuch with the Board of Governors of the Federal Reserve System (the ReserveBoard). As a bank holding company, the Corporation is required to file with theFederal Reserve Board an annual report and such other information as may berequired. The Federal Reserve Board may also make examinations of theCorporation. In addition, the Federal Reserve Board has the authority (which ithas not exercised) to regulate provisions of certain bank holding company debt.

 

The Act requires every bank holding company to obtainthe prior approval of the Federal Reserve Board before acquiring substantiallyall the assets of or direct or indirect ownership or control of more than 5% ofthe voting shares of any bank, which is not 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 theprincipal exceptions to these prohibitions is for engaging or acquiring sharesof a company engaged in activities found by the Federal Reserve Board by orderor regulation to be so closely related to banking or managing banks as to be aproper incident thereto. The Act prohibits the acquisition by a bank holdingcompany of more that 5% of the outstanding voting shares of a bank locatedoutside the State in which the operations of its banking subsidiaries areprincipally conducted, unless such an acquisition is specifically authorized bystatute of the State in which the bank acquired is located. The Act andregulations of the Federal Reserve Board also prohibit a bank holding companyand its subsidiaries from engaging in certain tie-in arrangements in connectionwith any extension of credit or provision of any property or services.

 

Logan Bank & Trust Company is an insured bank,organized under the Banking Law of the State of West Virginia and is a memberof the Federal Reserve System. Accordingly, its operations are subject toFederal and State laws applicable to commercial banks with trust powers and toregulation by the West Virginia State Banking Commissioner, the Federal ReserveBoard and the Federal Deposit Insurance Corporation. 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, theapproval of the Federal Reserve Board is required for dividends declared by astate member bank which in any year exceeds the net profits of such bank forthat year, as defined, combined with retained net profits for the two precedingyears.

 

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GOVERNMENT MONETARY POLICIES AND ECONOMICCONTROLS

 

The earnings and growth of the banking industry and ofLogan Bank & Trust Company is affected by the credit policies of monetaryauthorities including the Federal Reserve System. 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 instrumentsof monetary policy used by the Federal Reserve to implement these objectivesare open market operations in the U. S. Government securities, changes in thediscount rate on member bank borrowings, and changes in reserve requirementsagainst member bank deposits. These means are used in varying combinations toinfluence overall growth of bank loans, investments and deposits and may alsoaffect interest rates charged on loans or paid for deposits. The monetarypolicies of the Federal Reserve authorities have had a significant effect onthe operating results of commercial banks in the past and are expected tocontinue to have such an effect in the future.

 

In view of changing conditions in the national economyand in the money markets, as well as the effect of actions by monetary andfiscal authorities, including the Federal Reserve system, no prediction can bemade as to possible future changes in interest rates, deposit levels, loandemand of their effect on the business and earnings of the Corporation, andLogan Bank & Trust Company.

 

FOREIGN OPERATIONS

 

The corporation and subsidiary have no foreignoperations.

 

EXECUTIVE OFFICERS

 

For information concerning the Executive Officers ofthe Corporation, please see Item 10.

 

EMPLOYEES

 

As of December 31, 2004, the Corporation and itssubsidiaries had approximately 64 full-time equivalent employees. None of theseemployees are represented by a collective bargaining unit and managementconsiders employee relations to be excellent. 

 

FINANCIAL INFORMATION

 

The Corporation’s revenue is derived from interest andfees on loans, interest on investment securities, interest on federal fundssold, service charges and other fees, gains on securities and other sources ofincome.  The breakdown of revenue is setforth in the Management’s Discussion and Analysis of Financial Condition andResults of Operations appearing on pages 12 through 25 herein.

 

AVAILABLE INFORMATION

 

The Corporation files Annual Reports on Form 10-K,Quarterly Reports on Form 10-Q, current reports on Form 8-K, and amendments tosuch reports with the Securities and Exchange Commission (the “SEC”).  The public may read and copy any materialsthe Corporation files with the SEC at the SEC’s Public Reference Room at 450Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the PublicReference Room by calling the SEC at 1-800-SEC-0330.  The SEC maintains an Internet site thatcontains reports, proxy and information statements, and other informationregarding issuers that file electronically with the SEC.  The address of this Internet site  is http://www.sec.gov.  

 

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The Corporation does not have an Internetwebsite.  Accordingly, you may not accessthe Corporation’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,current reports on Form 8-K, and amendments to such reports filed with theSEC.  The Corporation will provide papercopies of these reports free of charge upon request.

 

ITEM 2 – PROPERTIES

 

The principal offices of the Corporation are sharedwith those of Logan Bank & Trust Company and are situated in Logan, WestVirginia. This building, a two-story bank and office building, is owned byLogan Bank & Trust Company, as is a mini-bank and drive-up facility whichis located nearby. In addition, a one-story office and bank building is locatedon Railroad Avenue in Chapmanville, West Virginia. During 1996 the Bank openedtwo other branch facilities in West Virginia. Both are one-story office andbank buildings located at Rt. 10, South Man, West Virginia and Rt. 10 North atHarts, West Virginia.  The Fountain PlaceBranch was opened during December, 1999.

 

All of the office buildings and branches of theCorporation are owned by Logan Bank & Trust Company.  Logan Bank & Trust Company leases theland on which its branch at Route 10, South Man, West Virginia, is located.

 

ITEM 3 - LEGAL PROCEEDINGS

 

There are no legal actions or proceedings to which theCorporation, or its subsidiary is a party. 

 

ITEM 4 - SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS 

 

No matters were submitted to a vote of securityholders during the fourth quarter of the fiscal year covered by this report..

 

ITEM 5 – MARKET FOR REGISTRANT’S COMMON STOCK, RELATEDSHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The shares of Logan County BancShares, Inc. areinfrequently traded in the over-the-counter market and are not listed on theNational Association of Security Dealers Automated Quotation System (NASDAQ) oron any exchange. Management is not aware of any security dealer, which makes amarket in the stock; therefore, no active trading market should be deemed toexist.

 

The sales price for Logan County BancShares, Inc.stock is determined by negotiations between individual buyers and sellers.Although company keeps no records of sale prices paid for Company stock and hasno direct knowledge of such prices, for purposes of presentation, Corporation’smanagement estimates the approximate market value ranges for 2004 and 2003 tobe as follows:

 
| ** **                    | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|-------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| Sale Price                    |       |               |       |                |       |               |       |                |       |
| 2004 Common  Stock            |       | $44-$46            |       | $44-$46             |       | $44-$46            |       | $44-$46             |       |
| 2003 Common  Stock            |       | $42-$42            |       | $42-$42             |       | $42-$42            |       | $42-$42             |       |
|                          |       |               |       |                |       |               |       |                |       |
| Per Share  Dividends Declared |       |               |       |                |       |               |       |                |       |
| 2004 Common  Stock            |       | $0.36              |       | $0.36               |       | $0.37              |       | $0.52               |       |
| 2003 Common  Stock            |       | $0.35              |       | $0.35               |       | $0.36              |       | $0.51               |       |

 

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As of March 29, 2005, therewere approximately 376 shareholders of record of Logan County BancShares Inc.’scommon stock.

 

No purchases of our equitysecurities, either as part of a publicly announced plan or otherwise, were madeduring any month of the fourth quarter 2004.

 

5

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**PART II**

 

ITEM 6 - SELECTED FINANCIALDATA

 

LOGANCOUNTY BANCSHARES, INC. AND SUBSIDIARY

 

(In Thousands of Dollars)

 
| **YEAR ENDED DECEMBER 31:**  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Total  Interest Revenue           |       | $        | 8,285      |     | $          | 8,766    |       | $        | 10,088     |     | $          | 12,090 |   | $ | 11,508 |   |
| Total  Interest Expense           |       | 1,753    |       | 2,087    |       | 2,764    |       | 4,801    |       | 4,828    |       |
|                              |       |     |       |     |       |     |       |     |       |     |       |
| Net Interest  Revenue             |       | 6,532    |       | 6,679    |       | 7,324    |       | 7,289    |       | 6,680    |       |
| Provision  for Possible           |       |     |       |     |       |     |       |     |       |     |       |
| Loan Losses                       |       | (308     | )          | 3        |       | 534      |       | 700      |       | 100      |       |
|                              |       |     |       |     |       |     |       |     |       |     |       |
| Net Interest  Revenue After       |       |     |       |     |       |     |       |     |       |     |       |
| Provision  for Possible           |       |     |       |     |       |     |       |     |       |     |       |
| Loan Losses                       |       | 6,840    |       | 6,676    |       | 6,790    |       | 6,589    |       | 6,580    |       |
| Other  Operating Revenue          |       | 1,024    |       | 986      |       | 805      |       | 707      |       | 769      |       |
| Other  Operating Expense          |       | (5,330   | )          | (4,728   | )          | (4,689   | )          | (4,631   | )          | (4,185   | )          |
|                              |       |     |       |     |       |     |       |     |       |     |       |
| Income  Before Income Taxes       |       | 2,534    |       | 2,934    |       | 2,906    |       | 2,665    |       | 3,164    |       |
| Income Taxes                      |       | 976      |       | 1,033    |       | 1,064    |       | 909      |       | 1,131    |       |
|                              |       |     |       |     |       |     |       |     |       |     |       |
| Net Income                        |       | $        | 1,558      |     | $          | 1,901    |       | $        | 1,842      |     | $          | 1,756 |   | $ | 2,033 |   |
| Per Common  Share:                |       |     |       |     |       |     |       |     |       |     |       |
| Net Income                        |       | $        | 2.21       |     | $          | 2.70     |       | $        | 2.57       |     | $          | 2.45 |   | $ | 2.84 |   |
| Cash  Dividends Declared          |       | $        | 1.61       |     | $          | 1.57     |       | $        | 1.53       |     | $          | 1.50 |   | $ | 1.44 |   |
|                              |       |     |       |     |       |     |       |     |       |     |       |
| At December 31:              |       |     |       |     |       |     |       |     |       |     |       |
| Total Loans                       |       | $        | 98,297     |     | $          | 101,615  |       | $        | 107,933    |     | $          | 116,907 |   | $ | 113,641 |   |
| Total Assets                      |       | 181,668  |       | 173,603  |       | 169,329  |       | 171,599  |       | 157,480  |       |
|                              |       |     |       |     |       |     |       |     |       |     |       |
| Total  Deposits                   |       | 161,211  |       | 152,255  |       | 150,073  |       | 152,028  |       | 138,723  |       |
| Short-Term  Debt                  |       | 2,000    |       | 3,000    |       | 1,000    |       | 2,000    |       | 2,000    |       |
| Total  Shareholders’ Equity  |       | 17,927   |       | 17,790   |       | 17,193   |       | 16,800   |       | 16,014   |       |
| Selected  Ratios:                 |       |     |       |     |       |     |       |     |       |     |       |
| Rate of  Return on Average:       |       |     |       |     |       |     |       |     |       |     |       |
| Total Assets                      |       | 0.86     | %          | 1.06     | %          | 1.06     | %          | 1.03     | %          | 1.36     | %          |
| Shareholders’  Equity        |       | 9.39     | %          | 10.24    | %          | 10.15    | %          | 10.36    | %          | 13.35    | %          |
| Tier 1  Capital to Total          |       |     |       |     |       |     |       |     |       |     |       |
| Assets at  Year End               |       | 10.04    | %          | 10.11    | %          | 9.58     | %          | 10.31    | %          | 10.25    | %          |
| Average  Total Shareholders’ |       |     |       |     |       |     |       |     |       |     |       |
| Equity to  Average Total Assets   |       | 9.10     | %          | 10.25    | %          | 10.25    | %          | 9.95     | %          | 10.15    | %          |
| Common  Dividend Payout Ratio     |       | 72.75    | %          | 58.15    | %          | 59.53    | %          | 61.22    | %          | 50.70    | %          |
| Nonaccrual  and Restructured      |       |     |       |     |       |     |       |     |       |     |       |
| Business  Loans as a              |       |     |       |     |       |     |       |     |       |     |       |
| Percentage  of Total Loans        |       | 0.74     | %          | 1.04     | %          | 1.58     | %          | 0.74     | %          | 0.37     | %          |

 

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ITEM 7 – MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

INTRODUCTION

 

The following discussion and analysis presents thesignificant changes in financial condition and the results of operations atLogan County Bancshares, Inc. and its subsidiary (the Company).

 

It should be read in conjunction with the auditedconsolidated financial statements and the accompanying notes, along with theselected financial data presented elsewhere in this report.  Management is not aware of any market orinstitutional trends, events or uncertainties that will have or are reasonablylikely to have a material effect on the liquidity, capital resources oroperations of the Company, except as discussed herein.  Management is also not aware of any currentrecommendations by any regulatory authorities, which would have such a materialeffect if implemented.

 

FORWARD-LOOKINGSTATEMENTS

 

This report may contain certain forward-lookingstatements, including certain plans, expectations, goals and projections, whichare subject to numerous assumptions, risks and uncertainties.  Actual results could differ materially fromthose contained in or implied by such statements for a variety of factorsincluding: changes in economic conditions which may affect the Company’sprimary market area; rapid movements in interest rates; competitive pressureson product pricing and services; success and timing of business strategies; thenature and extent of governmental actions and reforms; and rapidly changingtechnology and evolving financial industry standards.

 

CORPORATESTRUCTURE AND ACQUISITIONS

 

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 Companyacquired 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 werebanking corporations organized under the laws of the State of West Virginia.  The subsidiaries each had one businesssegment, community banking.  On October 7,1996, the subsidiary banks combined and Bank of Chapmanville merged into LoganBank & Trust Company.  

 

CRITICALACCOUNTING POLICIES

 

The Company’s accounting and reporting policies areintegral to understanding the results reported. Accounting policies are described in detail in Note 1 to theConsolidated Financial Statements.  TheCompany’s accounting and reporting policies are in accordance with accountingprinciples generally accepted in the United States of America, and they conformto general practices within the financial services industry.  The Company’s most complex accountingpolicies require management’s judgment to ascertain the valuation of assets,liabilities, commitments and contingencies. The Company has established detailed policies and control proceduresthat are intended to ensure valuation methods are well controlled and appliedconsistently from period to period.  Inaddition, the policies and procedures are intended to ensure that the processfor changing methodologies occurs in an appropriate manner.  The following is a brief description of theCompany’s current accounting policies involving significant managementvaluation judgments.

 

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Allowance for Loan Losses

 

The Company considers that the determination of theallowance for loan losses involves a higher degree of judgment and complexitythan its other significant accounting policies. The balance in the allowance for loan losses is determined based onmanagement’s review and evaluation of the loan portfolio in relation to pastloss experience, the size and composition of the portfolio, current economicevents and conditions and other pertinent factors, including management’sassumptions as to future delinquencies, recoveries and losses.  All of these factors may be susceptible tosignificant change.  Among the manyfactors affecting the allowance for loan losses; some are quantitative whileothers require qualitative judgment. Although management believes its process for determining the allowanceadequately considers all of the potential factors that could potentially resultin credit losses, the process includes subjective elements and may besusceptible to significant change.  Tothe extent actual outcomes differ from management’s estimates, additionalprovisions for loan losses may be required that would adversely impact theCorporation’s financial condition or earnings in future periods.

 

## Deferred Tax Assets

 

The Company uses anestimate of future earnings to support theposition that the benefit of deferred tax assets will be realized. If futureincome should prove non-existent or less than the amount of the deferred taxassets within the tax years to which they may be applied, the asset may not berealized and net income will be reduced. Deferred tax assets are describedfurther in Note 10 of the consolidated financial statements. 

 

ACCOUNTING,LEGISLATIVE AND REGULATORY MATTERS 

 

In December 2003, the Financial AccountingStandards Board (“FASB”) revised Statement of Financial Accounting Standards (“FAS”)No. 132, *Employers’ Disclosures about Pension and OtherPostretirement Benefit.* Thisstatement retains the disclosures required by FAS No. 132, which standardizedthe disclosure requirements for pensions and other postretirement benefits tothe extent practicable and requires additional information on changes in thebenefit obligations and fair value of plan assets.  Additional disclosures include informationdescribing the types of plan assets, investment strategy, measurement date(s),plan obligations, cash flows, and components of net periodic benefit costrecognized during interim periods.  Thisstatement retains reduced disclosure requirements for nonpublic entities fromFAS No. 132, and it includes reduced disclosure for certain of the newrequirements.  This statement iseffective for financial statements with fiscal years ending after December 15,2003.  The interim disclosures requiredby this statement are effective for interim periods beginning after December 15,2003.  The adoption of this statement didnot have a material effect on the Company’s disclosure requirements.

 

During the first quarter of 2003, the Securities andExchange Commission promulgated rules to implement several provisions of TheSarbanes-Oxley Act of 2002.  These rulesincluded conditions for using financial measures that exclude information thatwould be required under generally accepted accounting principles, (“non-GAAPfinancial measures”).  Additionally, newrules expand the number of events that require current reporting on Form8-K.  Furthermore, new rules have beenissued pertaining to an audit committee and its need for a financial expert andcode of ethics requirements for senior management.  Also, new rules were issued defining auditcommittee responsibility for external auditor retention and determination ofexternal auditor independence. Management anticipates additional costs to implement the variousprovisions of this law; however, it is difficult to determine the full impactof implementation until such time as all rules have been promulgated.

 

On December 11, 2003, the SEC staff announcedits intention to release a Staff Accounting Bulletin that would require allregistrants to account for mortgage loan interest rate lock commitments

 

8

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relatedto loans held for sale as written options, effective no later than forcommitments entered into after March 31, 2004.  This guidance, if issued, would require theCompany to recognize a liability on its balance sheet equal to the fair valueof the commitment at the time the loan commitment is issued.  As a result, this guidance would delay therecognition of any revenue related to these commitments until such time as theloan is sold, however, it would have no effect on the ultimate amount ofrevenue or cash flows recognized over time. Management does not anticipate this guidance to have a material impacton the Company’s consolidated financial position or consolidated results ofoperations.

 

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“FAS”)No. 123 (Revised 2004), *Share-Based Payment.*  The statement requires that compensation costrelating to share-based payment transactions be recognized in financialstatements and that this cost be measured based on the fair value of the equityor liability instruments issued.  FAS No.123 (Revised 2004) covers a wide range of share-based compensation arrangementsincluding share options, restricted share plans, performance-based awards,share appreciation rights, and employee share purchase plans.  The Company will adopt FAS No. 123 (Revised2004) on July 1, 2005, although the adoption of the standard is notexpected to have a material impact on the Company’s results of operations.

 

In October 2003, the American Institute ofCertified Public Accountants issued SOP 03-3, *Accountingfor Loans or Certain Debt Securities Acquired in a Transfer. *SOP 03-3 applies to a loan that isacquired where it is probable, at acquisition, that a transferee will be unableto collect all contractually required payments receivable.  SOP 03-3 requires the recognition, asaccretable yield, of the excess of all cash flows expected at acquisition overthe investor’s initial investment in the loan as interest income on alevel-yield basis over the life of the loan. The amount by which the loan’s contractually required payments exceedthe amount of its expected cash flows at acquisition may not be recognized asan adjustment to yield, a loss accrual, or a valuation allowance for creditrisk.  SOP 03-3 is effective for loansacquired in fiscal years beginning after December 31, 2004.  Early adoption is permitted.  The adoption of SOP 03-3 is not expected tohave a material impact on the consolidated financial statements.  

 

EARNINGSOVERVIEW

 

Net income for 2004, was $1,558,173 or $2.21 pershare, a decrease of $343,000 or 18.04% from the $1,901,000 or $2.70 per shareearned in 2003.  These earnings reflect adecrease in net interest income of $164,000 or 2.45%, due primarily tolimitations in the opportunity to reduce interest expense on deposits in ahistorically low interest rate environment relative to the investment optionsfor loans and investment securities. Other factors contributing to the decline in net income were increasenon-interest expenses, partially offset by a benefit in the provision for loanlosses and increased non-interest income. 

 

EARNINGS PER SHARE

 

The Earnings Per Share Table summarizes theprincipal sources of changes in earnings per share for 2004.

 
| Net income  per share – 2003      |   | $      | 2.70   |   |
|----------------------------------------|--------|--------|--------|--------|
|                                   |   |   |   |
| Increase  (decrease) due to change in: |   |   |   |
| Net interest  income                   |   | (0.21  | )      |
| Provision  for loan losses             |   | 0.44   |   |
| Other  operating income                |   | 0.05   |   |
| Operating  expense                     |   | (0.85  | )      |
| Tax expense                            |   | 0.08   |   |
| Net income  per share – 2004      |   | $      | 2.21   |   |

 

9

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**CONDENSEDSTATEMENTS OF FINANCIAL CONDITIONStatistical Summary 2004 - 2000**

 
| **(Dollars in Thousands, except** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| **per share data)**               | ** ** | **2004**              | ** ** | **%** | ** ** | **2003** | ** ** | **%** | ** ** | **2002** | ** ** | **%** | ** ** | **2001** | ** ** | **%** | ** ** | **2000** | ** ** | **%** | ** ** |
| Loans                             |       | $                     | 98,297     |   | 55 |   | $ | 101,615 |   | 58 |   | $ | 107,933 |   | 63 |   | $ | 116,907 |   | 69 |   | $ | 113,641 |   | 71 |   |
| Investments                       |       | 65,919                |       | 36 |   | 47,892 |   | 28 |   | 41,224 |   | 25 |   | 36,355 |   | 21 |   | 29,318 |   | 19 |   |
| Federal  Funds Sold               |       | 5,990                 |       | 3 |   | 13,385 |   | 8 |   | 11,370 |   | 7 |   | 7,150 |   | 4 |   | 4,280 |   | 3 |   |
|                              |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-Earning  Assets          |       | $                     | 170,250    |   | 94 |   | $ | 162,892 |   | 94 |   | $ | 160,527 |   | 95 |   | $ | 160,412 |   | 94 |   | $ | 147,239 |   | 93 |   |
|                              |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and Due  from Banks          |       | 5,995                 |       | 3 |   | 5,342 |   | 3 |   | 5,597 |   | 3 |   | 7,072 |   | 4 |   | 4,687 |   | 3 |   |
| Premises and  Equipment           |       | 3,191                 |       | 2 |   | 3,103 |   | 2 |   | 3,217 |   | 2 |   | 3,384 |   | 2 |   | 3,594 |   | 2 |   |
| Other Assets                      |       | 3,539                 |       | 2 |   | 3,847 |   | 2 |   | 1,607 |   | 1 |   | 1,884 |   | 1 |   | 2662 |   | 2 |   |
| Reserve for  Loan Losses          |       | (1,263                | )          | -1 |   | (1,581 | ) | -1 |   | (1,619 | ) | -1 |   | (1,153 | ) | -1 |   | (702 | ) | 0 |   |
| Total Assets                      |       | $                     | 181,668    |   | 100 |   | $ | 173,603 |   | 100 |   | $ | 169,329 |   | 100 |   | $ | 171,599 |   | 100 |   | $ | 157,480 |   | 100 |   |
|                              |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings  & Interest DDA       |       | $                     | 70,224     |   | 39 |   | $ | 64,939 |   | 38 |   | $ | 66,716 |   | 39 |   | $ | 61,174 |   | 36 |   | $ | 51,723 |   | 33 |   |
| Time  Deposits                    |       | 56,995                |       | 31 |   | 57,595 |   | 33 |   | 58,651 |   | 34 |   | 63,282 |   | 37 |   | 63,657 |   | 41 |   |
| Short-Term  Debt                  |       | 2,000                 |       | 1 |   | 3,000 |   | 2 |   | 1,000 |   | 1 |   | 2,000 |   | 1 |   | 2,000 |   | 1 |   |
|                              |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-Bearing  Liabilities     |       | $                     | 129,219    |   | 71 |   | $ | 125,534 |   | 73 |   | $ | 126,367 |   | 74 |   | $ | 126,456 |   | 74 |   | $ | 117,380 |   | 75 |   |
|                              |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand  Deposits                  |       | 33,992                |       | 19 |   | 29,721 |   | 17 |   | 24,706 |   | 15 |   | 27,571 |   | 16 |   | 23,343 |   | 15 |   |
| Other  Liabilities                |       | 530                   |       | 0 |   | 558 |   | 0 |   | 1,063 |   | 1 |   | 772 |   | 0 |   | 743 |   | 0 |   |
|                              |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  Liabilities                |       | $                     | 163,741    |   | 90 |   | $ | 155,813 |   | 90 |   | $ | 152,136 |   | 90 |   | $ | 154,799 |   | 90 |   | $ | 141,466 |   | 90 |   |
|                              |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Shareholders’  Equity  |       | 17,927                |       | 10 |   | 17,790 |   | 10 |   | 17,193 |   | 10 |   | 16,800 |   | 10 |   | 16,014 |   | 10 |   |
|                              |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  Liabilities & Equity   |       | $                     | 181,668    |   | 100 |   | $ | 173,603 |   | 100 |   | $ | 169,329 |   | 100 |   | $ | 171,599 |   | 100 |   | $ | 157,480 |   | 100 |   |
|                              |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  Deposits                   |       | $                     | 161,211    |   |   |   | $ | 152,255 |   |   |   | $ | 150,073 |   |   |   | $ | 152,027 |   |   |   | $ | 138,723 |   |   |   |
|                              |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Book Value  per Share             |       | $                     | 25.46      |   |   |   | $ | 25.27 |   |   |   | $ | 24.42 |   |   |   | $ | 23.86 |   |   |   | $ | 22.75 |   |   |   |

 

10

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**SUMMARY OFOPERATIONSStatistical Summary 2004 - 2000**

 
| **(Dollars in thousands except per share data)**               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Total  Interest Revenue                                        |       | $        | 8,285      |     | $          | 8,766    |       | $        | 10,088     |     | $          | 12,090 |   | $ | 11,508 |   |
| Total  Interest Expense                                        |       | 1,753    |       | 2,087    |       | 2,764    |       | 4,801    |       | 4,828    |       |
|                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Net Interest  Revenue                                          |       | $        | 6,532      |     | $          | 6,679    |       | $        | 7,324      |     | $          | 7,289 |   | $ | 6,680 |   |
| Provision  for Possible Loan Losses                            |       | -308     |       | 3        |       | 534      |       | 700      |       | 100      |       |
|                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Net Interest  Revenue After Provision for Possible Loan Losses |       | $        | 6,840      |     | $          | 6,676    |       | 6,790    |       | $        | 6,589      |   | $ | 6,580 |   |
| Other  Operating Revenue                                       |       | 1,024    |       | 986      |       | 805      |       | 707      |       | 769      |       |
| Other  Operating Expense                                       |       | (5,330   | )          | (4,728   | )          | (4,689   | )          | (4,631   | )          | (4,185   | )          |
|                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Income  Before Income Taxes                                    |       | $        | 2,534      |     | $          | 2,934    |       | 2,906    |       | $        | 2,665      |   | $ | 3,164 |   |
| Income Taxes                                                   |       | 976      |       | 1,033    |       | 1,064    |       | 909      |       | 1,131    |       |
|                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Net Income                                                     |       | $        | 1,558      |     | $          | 1,901    |       | $        | 1,842      |     | $          | 1,756 |   | $ | 2,033 |   |
| Per Common  Shares: Net Income                                 |       | $        | 2.21       |     | $          | 2.70     |       | $        | 2.57       |     | $          | 2.45 |   | $ | 2.84 |   |
| Cash  Dividends Declared                                       |       | $        | 1.61       |     | $          | 1.57     |       | $        | 1.53       |     | $          | 1.50 |   | $ | 1.44 |   |
|                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Common  Dividend Payout                                        |       | 72.75    | %          | 58.15    | %          | 59.53    | %          | 61.22    | %          | 50.70    | %          |

 

11

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BALANCESHEET ANALYSIS

 

## Loans

 

Loans represent the largest assets on the Company’sbalance sheet.    Total loans decreasedby $3,318,000 or 3.3% in 2004 and approximately $6,318,000 or 5.9% in 2003,following a 7.7% decrease of $8,975.000 in 2002.  Competition in the Company’s market is veryaggressive for originating new loans. Although loan demand was relatively strong during most of 2004, asinterest rates remained at historically low levels, volume declined While otherfinancial institutions offered long-term fixed rate loans, management continuedto adhere to its philosophy of not offering such loans in this low interestrate cycle.  This has been a contributingfactor in the reduction in loan volume.  At year end 2004, loans accounted for 57.8% of total interest earningassets compared to 62.4% of total interest earning assets at December 31,2003.  The loan portfolio contributed83.5% of total interest income in 2004 and 86.5% in 2003 and 84.4% in2002.  See Note 4 to the ConsolidatedFinancial Statement for additional information on loans.

 

During 2004, the Company’s strong emphasis continuedto be on lending to local companies with known local management and excellentfinancial stability.  Most of thecommercial loans in the portfolio were made at variable rates of interest.  Additionally, the Company continued to makeloans available in an expanding retail marketplace.  Consistent with management’s philosophy onrelationship banking, most borrowers are also depositors and utilize otherbanking services.  The average yield ofthe loan portfolio decreased to an average rate of 6.96% in 2004 compared to7.30% in 2003.  This reflected thehistorically low interest rate environment during 2004 and 2003, and thecontinued repricing of loans at lower interest rates.

 

The commercial loan portfolio is generallydiversified and geographically dispersed within the Company’s market.  There are no concentrations, lines ofbusiness or industry that represent greater than 30% of the Company’sequity.  Within each specific industry,borrowers are diversified as to specialty, service or other unique feature ofthe overall industry.  A substantialportion of the customer’s ability to honor their contractual commitment islargely dependent upon the economic conditions of the borrowers’ respectiveindustries and overall economic conditions of southern West Virginia, which issomewhat less volatile than many areas of the country.

 

The consumer portion of the loan portfolio consistsof both secured and unsecured loans made to individuals and families forvarious reasons including the purchase of automobiles, home improvements,educational expenses and other purposes. The Company continues to carefully monitor the consumer sector duringthis period of economic weakness.  Asrecessionary pressures result in higher levels of unemployment, the likelihoodfor increased volatility arises in the consumer sector.

 

12

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Nonperforming assets, including nonaccrual loans,loans past-due 90 days or more, restructured loans and other real estate owned,decreased $653,000 or approximately 46%, from December 31, 2003 to December 31,2004.  These decreases reflect management’songoing efforts to enhance the quality of the loan portfolio.  This improvement was further enhanced by theCompany’s adhering to a stricter set of criteria in the determination ofgranting renewals and extensions.  TheCompany’s policy is to discontinue the accrual of interest on loans that arepast due more than 90 days, unless such loans are well collateralized and inprocess of collection.  Loans that are ona current payment status or past due less those 90 days may also be classifiedas nonaccrual if repayment of principal or interest is in doubt.  The Company’s holdings of other real estateowned decreased approximately $202,000 in 2004 resulting in no balance at December 31following an increase of 3%, or $6,000 in 2003. See the following schedule in this discussion and analysis titledNonperforming Assets and Loan Loss Analysis.

 

The Company maintains, through its provision, anallowance for loan losses believed by management to be adequate to absorbprobable credit losses inherent in the portfolio.  Management is committed to the earlyrecognition of problem loans, and to an appropriate and adequate level ofallowance.  The allowance for loan losseswas 1.28% of 2004 year-end loan balances after being 1.50% of year-end loans atDecember 31, 2003 and December 31, 2002.  The estimation of the adequacy of theallowance for loan losses is the most significant estimate determined bymanagement.  Different amounts couldresult under different conditions or assumptions.  The allowance for loan losses is alsoreviewed by banking regulators and the Company’s independent auditors.

 

The Company has instituted an internal loan reviewfunction.  This process includes athorough evaluation of the credit administration systems and personnel. Theobjective is to have an effective loan review system that provides managementwith information that will produce a more focused and effective approach inmanaging credit risk inherent in the loan portfolio.  As a part of this process, a system of loangrades is utilized to further support the adequacy of the loan loss allowance.

 

In addition to the review of credit quality throughthe credit review process, the Company constructs a comprehensive analysis ofthe allowance for loan losses for its loan portfolio at least quarterly.  The procedures that are utilized entailpreparation of a loan “watch” list and assigning each loan aclassification.  For those individuallysignificant loans where it is determined that it is not probable that theborrower will make all payments in accordance with the original loan agreement,management performs an impairment analysis as required by SFAS Nos. 114 and 118.  Specific reserves are recorded on impairedloans of $376,000 and $427,000 at December 31, 2004 and 2003,respectively.  Other classified loans arecategorized and allocated appropriate reserves. Other loans more than 90 days past due that have not been considered inthe aforementioned procedures are assigned a classification of Substandard andare reserved for accordingly.  Theremaining portfolio is segregated into consumer, commercial, and residentialreal estate loans, and the historical net charge off percentage of eachcategory is applied to the current amount outstanding in that category.  Also, a review of concentrations of credit,classes of loans and pledged collateral is performed to determine the existenceof any deterioration.  In addition, volumeand trends in delinquencies and nonaccural loans, off-balance sheet creditrisks, the loan portfolio composition, loan volume and maturity of theportfolio, national and local economic conditions and the experience, abilityand depth of lending management and staff are given consideration.  See Notes 4, 5 and 14 to the ConsolidatedFinancial Statements for additional information on loan quality, the allowancefor loan losses and concentration of credit risk.

 

13

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Loan Portfolio- Maturities and Sensitivities of Loans to Changes in Interest Rates

 

Thefollowing table presents the contractual maturities of loans as of December 31,2004 and 2003:

 
| ** **                                                          | ** ** | **December 31, 2004** | ** ** | **December 31, 2003**               | ** ** |
|---------------------------------------------------------------------|------------|----------------------------|------------|------------------------------------------|------------|
| ** **                                                          | ** ** | **In One  Year or Less**   | ** ** | **After One  Year  Through  Five Years** | ** ** | **After  Five Years** | ** ** | **In One  Year or Less** | ** ** | **After One  Year  Through  Five Years** | ** ** | **After  Five Years** | ** ** |
|                                                                |       |                       |       |                                     |       |   |   |   |   |   |   |   |   |
| Real estate  & residential                                      |       | $                          | 5,997,003  |                                     | $          | 10,382,406 |   | $ | 34,186,481 |   | $ | 4,269,154 |   | $ | 13,388,533 |   | $ | 32,521,203 |   |
|                                                                |       |                       |       |                                     |       |   |   |   |   |   |   |   |   |
| Commercial  real estate secured by nonfarm, nonresidential property |       | 4,342,284                  |       | 3,904,221                                |       | 7,524,736 |   | 5,786,915 |   | 4.111.061 |   | 7,223,984 |   |
|                                                                |       |                       |       |                                     |       |   |   |   |   |   |   |   |   |
| Commercial and other                                                |       | 14,309,467                 |       | 12,593,879                               |       | 5,056,678 |   | 13,355,444 |   | 13,355,885 |   | 6,532,715 |   |
|                                                                |       |                       |       |                                     |       |   |   |   |   |   |   |   |   |
| TOTAL                                                               |       | $                          | 24,648,754 |                                     | $          | 26,880,506 |   | $ | 46,767,895 |   | $ | 24, 480,326 |   | $ | 30,855,479 |   | $ | 46,278,702 |   |

 

The following table presentsan analysis of fixed and variable rate loans as of December 31, 2004 and2003, along with the contractual maturities.

 
| ** **      | ** ** | **December 31, 2004** | ** ** | **December 31, 2003**               | ** ** |
|-----------------|------------|----------------------------|------------|------------------------------------------|------------|
| ** **      | ** ** | **In One  Year or Less**   | ** ** | **After One  Year  Through  Five Years** | ** ** | **After  Five Years** | ** ** | **In One  Year or Less** | ** ** | **After One  Year  Through  Five Years** | ** ** | **After  Five Years** | ** ** |
| Fixed Rates     |       | $                          | 12,324,123 |                                     | $          | 26,880,506 |   | $ | 46,767,895 |   | $ | 11,276,276 |   | $ | 30,855,479 |   | $ | 46,278,902 |   |
| Variable  Rates |       | 12,324,651                 |       | —                                   |       | — |   | $ | 13,204,050 |   | — |   | — |   |
|            |       |                       |       |                                     |       |   |   |   |   |   |   |   |   |
| TOTAL           |       | $                          | 24,648,754 |                                     | $          | 26,880,596 |   | $ | 46,767,895 |   | $ | 24,480,326 |   | $ | 30,855,479 |   | $ | 46,278,902 |   |

 

 

## Allowance for LoanLosses

 

In all lending activities there is an inherent riskthat borrowers will be unable to repay their obligations. The Company maintainsan allowance for loan losses to absorb probable loan losses. The table belowincludes a five-year summary of the Allowance for Loan Losses. 

 

The Company has historically maintained theallowance for loan losses at a level greater than actual charge-offs. Althougha subjective evaluation is determined by management, the Company believes ithas appropriately assessed the risk of loans in the loan portfolio and hasprovided for an allowance which is adequate based on that assessment. Becausethe allowance is an estimate, any change in the economic conditions of theCompany’s market area could result in new estimates which could affect theCompany’s earnings. Management monitors the quality of the loan portfoliothrough reviews of past due loans and all significant loans which areconsidered to be potential problem loans on a monthly basis. The internal loanreview function provides for an independent review of commercial, real estate,and installment loans in order to measure the asset quality of the portfolio.Management’s review of the loan

 

14

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portfoliohas not indicated any material loans, not disclosed in the accompanying tables,discussions and notes to the financial statements which are known to havepossible credit problems that cause management to have serious doubts as to theability of each borrower to comply with their present loan repayment terms. 

 

The allowance for loan losses decreased $318,183 or20.1%, from $1,581,414 at December 31, 2003 to $1,263,231 at December 31,2004. The allowance for loan losses represented 1.3% and 1.6% of outstandingloans as of December 31, 2004 and 2003, respectively. Net loan charge-offswere $10,183 in 2004, compared to $40,070 in 2003 and $67,963 in 2002. The netloan charge-offs remain within historical ranges.  Because of the improved quality of the loanportfolio management reduced the allowance for loan losses in 2004 by $308,000through a credit to the provision for loan losses, while an expense of $2,852and $533,818 was charged to the provision for loan losses for the years ended December 31,2003 and 2002, respectively. The credit quality of the loan portfolio combinedwith the recent level of net charge-offs and nonperforming assets continue tobe considered in the calculation of the provision for loan losses. 

 

15

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**NONPERFORMINGASSETS AND LOAN LOSS ANALYSIS**

 
| ** **                                             | ** ** | **Year Ended December 31** | ** ** |
|--------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **2004**                        | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                             | ** ** | **(Dollars in Thousands)**      | ** ** |
| Amount of  Loans Outstanding at End of Period          |       | $                               | 98,297     |   | $ | 100,033 |   | $ | 106,314 |   | $ | 115,754 |   | $ | 112,938 |   |
|                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Average Amount  of Loans                               |       | $                               | 99,377     |   | $ | 103,873 |   | $ | 110,174 |   | $ | 110,289 |   | $ | 109,447 |   |
|                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Balance of  Allowance for  Possible Loan Losses:       |       |                            |       |   |   |   |   |   |   |   |   |
| Balance at  Beginning of   Year                        |       | $                               | 1,581      |   | $ | 1,619 |   | $ | 1,153 |   | $ | 702 |   | $ | 700 |   |
|                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Loans  Charged Off:  Commercial                        |       | $                               | 0          |   | $ | 0 |   | $ | 9 |   | $ | 32 |   | $ | 0 |   |
| Real Estate                                            |       | 17                              |       | 35 |   | 16 |   | 20 |   | 7 |   |
| Consumer                                               |       | 18                              |       | 49 |   | 73 |   | 205 |   | 99 |   |
|                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Total Loans  Charged Off                               |       | 35                              |       | 84 |   | 98 |   | 257 |   | 106 |   |
|                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Recovers of  Loans Previously                          |       |                            |       |   |   |   |   |   |   |   |   |
| Charged Off:                                           |       |                            |       |   |   |   |   |   |   |   |   |
| Commercial                                             |       | 0                               |       | 0 |   | 1 |   | 1 |   | 0 |   |
| Real Estate                                            |       | 0                               |       | 5 |   | 1 |   | 1 |   | 3 |   |
| Consumer                                               |       | 25                              |       | 38 |   | 28 |   | 6 |   | 5 |   |
|                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Total  Recoveries                                      |       | 25                              |       | 43 |   | 30 |   | 8 |   | 8 |   |
|                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Net Loans  Charged Off:                                |       | 10                              |       | 41 |   | 68 |   | 249 |   | 98 |   |
|                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Provision  for Loan Losses                             |       | -308                            |       | 3 |   | 534 |   | 700 |   | 100 |   |
|                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Balance at  End of Period                              |       | $                               | 1,263      |   | $ | 1,581 |   | $ | 1,619 |   | $ | 1,153 |   | $ | 702 |   |
|                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Ratio of net  Charge-Offs to Average Loans             |       | 0.01                            | %          | 0.04 | % | 0.06 | % | 0.23 | % | 0.09 | % |
|                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Allowance at  year end as a % of Loans                 |       | 1.28                            | %          | 1.58 | % | 1.52 | % | 1.00 | % | 0.62 | % |
|                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Provisions  for loan losses as a % of Loans            |       | -0.31                           | %          | 0.00 | % | 0.50 | % | 0.61 | % | 0.02 | % |
|                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Nonperforming  assets (at year end)                    |       |                            |       |   |   |   |   |   |   |   |   |
| Nonaccrual                                             |       | 727                             |       | 1,059 |   | 1,706 |   | 864 |   | 555 |   |
| Past-due  ninety days or  more and still accruing |       | 30                              |       | 149 |   | 617 |   | 1,801 |   | 3,272 |   |
| Troubled  debt restructurings                          |       | 0                               |       | 0 |   | 0 |   | 0 |   | 0 |   |
| Other real  estate owned                               |       | 0                               |       | 202 |   | 196 |   | 227 |   | 358 |   |
|                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Total  Nonperforming Assets                            |       | 757                             |       | 1,410 |   | 2,519 |   | 2,892 |   | 4,185 |   |
|                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Nonperforming  assets/total loans                      |       | 0.77                            | %          | 1.41 | % | 2.37 | % | 2.50 | % | 3.84 | % |
|                                                   |       |                            |       |   |   |   |   |   |   |   |   |
| Nonperforming  assets/total assets                     |       | 0.42                            | %          | 0.81 | % | 1.49 | % | 1.69 | % | 2.75 | % |

 

16

----

 

The Company has allocated the allowance forpossible loan losses to specific portfolio segments based upon historical netcharge-off experience, changes in the level of nonperforming assets, localeconomic conditions and management’s experience as presented in the followingtable.

 

**ALLOCATION OFALLOWANCE FOR LOAN LOSSES**

 
| ** **          | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** | **December 31, 2002** | ** ** | **December 31, 2001** | ** ** |
|---------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **          | ** ** | **(Dollars in Thousands)** | ** ** |
| **Types of  Loans** | ** ** | **Allowance**              | ** ** | **%  Loan  Class**         | ** ** | **Allowance**              | ** ** | **%  Loan  Class**         | ** ** | **Allowance** | ** ** | **%  Loan  Class** | ** ** | **Allowance** | ** ** | **%  Loan  Class** | ** ** |
| Commercial          |       | $                          | 687        |                       | 1.91       | %                          | $          | 854                        |       | 1.94 | % | $ | 854 |   | 1.94 | % | $ | 749 |   | 1.52 | % |
| Real Estate         |       | 465                        |       | 0.88                       | %          | 596                        |       | 1.19                       | %          | 623 |   | 1.19 | % | 288 |   | 0.54 | % |
| Consumer            |       | 111                        |       | 1.15                       | %          | 132                        |       | 1.24                       | %          | 142 |   | 1.24 | % | 116 |   | 0.83 | % |
| Total               |       | $                          | 1263       |                       | 1.29       | %                          | $          | 1581                       |       | 1.52 | % | $ | 1619 |   | 1.52 | % | $ | 1153 |   | 1.00 | % |

 

## Investment Securities

 

Investment securities, the second largest asset ofthe Company, increased by $18,028,000 or 37.64% during 2004 and $6,668,000 or16.2% during 2003.  As loan volumedeclined during the year management invested excess funds in securities.  In addition, as interest rates increased inthe 4th quarter of 2004, management shifted more funds fromshort-term federal funds sold into longer term U.S. Government Agency bonds inorder to enhance interest income.  At December 31,2004, securities comprised 38.7% of total interest-earning assets compared to29.4% and 25.7% at December 31, 2003 and 2002 respectively.  The composition of the Company’s securitiesportfolio reflects management’s investment strategy of maximizing theappropriate level of asset liquidity and providing management a tool to assistin controlling and managing the Company’s interest rate risk while at the sametime producing appropriate levels of interest income.  Management of the maturity of the securitiesportfolio is necessary to ensure adequate liquidity and manage interest raterisk.  During 2004 and 2003, in order tomaintain liquidity and flexibility, management continued categorizing allinvestments as available for sale. Management believes that the potential for increased loan demandrequires maintaining the liquidity of the securities portfolio.  See the following schedules in thisdiscussion and analysis for more information on the securities portfolio.  In addition, see Note 2 to the ConsolidatedFinancial Statements for additional information.

 

17

----

 

The following table shows the carrying values ofsecurities at the respective periods, which is market value for available forsale securities.  For additional informationsee Note 2 to the Consolidated Financial Statements.  There are no securities held to maturity.

 
| ** **                           | ** ** | **December 31,**     | ** ** |
|--------------------------------------|------------|---------------------------|------------|
| ** **                           | ** ** | **2004**                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                           | ** ** | **(Dollar in Thousands)** | ** ** |
| Securities  available for sale       |       |                      |       |   |   |   |   |   |   |   |
| U. S.  Government securities         |       | $                         | 0          |   | $ | 9,030 |   | $ | 3,972 |   |
| U. S.  Government agency securities  |       | 65,104                    |       | 38,511 |   | 36,532 |   |
| Other  securities                    |       | 816                       |       | 351 |   | 263 |   |
|                                 |       |                      |       |   |   |   |   |
| TOTAL  SECURITIES AVAILABLE FOR SALE |       | $                         | 65,920     |   | $ | 47,892 |   | $ | 40,767 |   |

 

The following table shows thematurity periods for Investment Securities as of December 31, 2004.  There were no securities held to maturity.

 
| **December 31, 2004** | ** ** | **One Year  or Less** | ** ** | **One Year  Through Five  Years** | ** ** | **Six Years  Through Ten  Years** | ** ** | **Over Ten Years** | ** ** | **Total** | ** ** |
|----------------------------|------------|-----------------------|------------|-----------------------------------|------------|-----------------------------------|------------|--------------------|------------|-----------|------------|
| **(Dollars in thousands)** |       |                  |       |                              |       |                              |       |               |       |      |       |
| U.S. Agency  Securities    |       | 19,361                |       | 45,743                            |       | 0                                 |       | 0                  |       | 65,733    |       |
| Equity  Securities         |       |                  |       |                              |       |                              |       | 816                |       | 816       |       |
|                       |       |                  |       |                              |       |                              |       |               |       |      |       |
| TOTAL                      |       | $                     | 19,361     |                              | $          | 45,743                            |       | $                  | 0          |      | $          | 816 |   | $ | 65,920 |   |
|                       |       |                  |       |                              |       |                              |       |               |       |      |       |
| Percent of  Total          |       | 29.37                 | %          | 69.39                             | %          | 0.00                              | %          | 1.24               | %          | 100.00    | %          |
|                       |       |                  |       |                              |       |                              |       |               |       |      |       |
| Weighted  average yield    |       | 1.94                  | %          | 2.60                              | %          |                              |       | 3.14               | %          | 2.41      | %          |
|                            |            |                       |            |                                   |            |                                   |            |                    |            |           |            |  |  |  |  |  |

 

Equity securities have no maturity and have beenincluded in the over ten year column in the table above.

 

Deposits

 

Deposits, the Company’s major source of funds,increased approximately $8,956,000 or 5.88% in 2004, after an increase of$2,181,000 or 1.45% in 2003 and an increase of $1,585,000 or .98% in 2002.  These increases occurred primarily in demanddeposits as management placed emphasis on attracting this type of account andproviding superior service for these customers. The average rate paid oninterest-bearing deposits in 2004 was 1.33%, 1.63% in 2003, and 2.14% in2002.  Strong competition for depositsexists in the Company’s primary markets among commercial banks, savings banks,thrift institutions, credit unions, mutual funds, brokerage houses, insurancecompanies, and certain national retailers. Despite this intense competition, management continues to evaluatepricing strategies that will ensure the Company’s long-term goal of maintainingmarket share without sacrificing profitability.

 

18

----

 

AVERAGE DEPOSITS

 

The following table shows average deposits and ratespaid for the years indicated:

 
| ** **                             | ** ** | **2004  Average** | ** ** | **2003  Average** | ** ** | **2002  Average** | ** ** |
|----------------------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| **(Dollars in Thousands)**             | ** ** | **Balance**       | ** ** | **Rates  Paid**   | ** ** | **Balance**       | ** ** | **Rates  Paid** | ** ** | **Balance** | ** ** | **Rates  Paid** | ** ** |
| Noninterest  bearing demand deposits   |       | $                 | 33,009     |              | N/A        |              | $          | 28,166 |   | N/A |   | $ | 25,559 |   | N/A |   |
| Interest  bearing Demand & Savings |       | 71,882            |       | 0.34              | %          | 67,047            |       | 0.47 | % | 65,384 |   | .89 | % |
| Time Deposits                          |       | 58,198            |       | 2.44              | %          | 58,224            |       | 2.87 | % | 60,861 |   | 3.33 | % |
| Repurchase  Agreements                 |       | 2,000             |       | 4.35              | %          | 2,285             |       | 3.51 | % | 2,910 |   | 5.39 | % |
| TOTAL  INTEREST-BEARING DEPOSITS       |       | $                 | 132,080    |              | 1.33       | %                 | $          | 128,123 |   | 1.63 | % | $ | 129,155 |   | 2.14 | % |

 

There are no foreign offices.  Average balances are computed on dailybalances.

 

MATURITIES OF TIME CERTIFCATES OF DEPOSITS OF $100,000 OR MORE

 

The following table shows the maturities ofcertificates of deposits of $100,000 or more at December 31, 2004:

 
| Under 3  months                                    |   | $      | 3,408  |   |
|----------------------------------------------------|--------|--------|--------|--------|
| 3 to 6 months                                      |   | 2,678  |   |
| 6 to 12  months                                    |   | 4,370  |   |
| Over 12  months                                    |   | 7,761  |   |
|                                               |   |   |   |
| TOTAL  CERTIFICATES OF DEPOSIT OF $100,000 OR MORE |   | $      | 18,217 |   |

 

RepurchaseAgreements

 

Short-term borrowings in the form of repurchaseagreements amounted to $2,000,000 at December 31, 2004, a $1,000,000decline from December 31, 2003. More detailed information about the Company’s repurchase agreementactivity is included in Note 9 to the financial statements.

 

## Earnings Analysis

 

## NET INTEREST INCOME

 

The major portion of the Company’s earnings isderived from net interest income, which is the interest income oninterest-earning assets less the interest expense on interest-bearingliabilities.  During 2004 net interestincome decreased $147,000 or 2.2%.  Thisdecrease followed an 8.8% decrease in 2003

 

19

----

 

anda .5% increase in 2002.  For the yearended December 31, 2004, interest income decreased $481,000, or 5.5%,compared to a decrease of $1,332,000 or 13.1% in 2003, and a decrease of $2,002,000or 16.6% in 2002.  The net interestmargin decreased from 4.01% in 2003 to 3.50% in 2004.  This follows a decrease in 2003 from 4.45% in2002.  A detailed analysis of the netinterest margin for each of these three years follows in this MD&A.  Interest on loans, which decreased $662,000or 8.7%, contributed to the decrease for 2004. Interest on securities increased $108,000 or 10.9% in 2004 afterdecreasing $359,000 or 26.3% in 2003. The overall decrease in interest income was accompanied by a decrease ininterest expense of $334,000 or 16.0% for 2004 and $677,000 or 24.5% for2003.  This followed a decrease ininterest expense of $2,037,000 or 42.4% for 2002.

 

Net interest income is affected by prevailing marketinterest rates.  Two other important factorsare the changes in the balances (volume) of the earnings assets and interestbearing liabilities and the spread between the various sources and uses offunds.  The performance for 2004 and 2003is indicative of the historically low interest rate environment that followedthe rapid decline in interest rates that prevailed throughout 2001 and early2002.  This is reflected in the followingvolume/rate analysis that shows how both interest rates and the volumes ofinterest earning assets and interest bearing liabilities combine to change thenet interest income.

 

20

----

 

**ANALYSIS OF NET INTEREST MARGIN FOR 2004:**

 
| ** **                                             | ** ** | **Year Ended 12/31/04** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|
| **(Dollars in Thousands)**                             | ** ** | **Average Balance**     | ** ** | **Interest** | ** ** | **Yield/Rate** | ** ** |
| ASSETS                                                 |       |                    |       |   |   |   |   |
| INTEREST EARNING ASSETS:                               |       |                    |       |   |   |   |   |
| LOANS:                                                 |       |                    |       |   |   |   |   |
| Commercial                                             |       | $                       | 38,113     |   | $ | 2,310 |   | 6.06 | % |
| Real Estate                                            |       | 51,482                  |       | 3,857 |   | 7.49 | % |
| Consumer                                               |       | 9,782                   |       | 750 |   | 7.67 | % |
| Total Loans                                            |       | $                       | 99,377     |   | $ | 6,917 |   | 6.96 | % |
|                                                   |       |                    |       |   |   |   |   |
| INVESTMENT SECURITIES                                  |       |                    |       |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| Available for Sale                                     |       | 53,002                  |       | 1,133 |   | 2.14 | % |
|                                                   |       |                    |       |   |   |   |   |
| Federal Funds Sold                                     |       | 19,274                  |       | 235 |   | 1.22 | % |
|                                                   |       |                    |       |   |   |   |   |
| Total Interest Earnings Assets                         |       | $                       | 171,653    |   | $ | 8,285 |   | 4.83 | % |
|                                                   |       |                    |       |   |   |   |   |
| Allowance for Loan Losses                              |       | (1,565                  | )          |   |   |   |   |
| Cash and Due From Banks                                |       | 5,283                   |       |   |   |   |   |
| Bank Premises                                          |       | 3,219                   |       |   |   |   |   |
| Other Assets                                           |       | 3,782                   |       |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| TOTAL ASSETS                                           |       | $                       | 182,372    |   |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY:             |       |                    |       |   |   |   |   |
| Interest-Bearing Demand Deposits and  Savings Deposits |       | $                       | 71,881     |   | $ | 246 |   | 0.34 | % |
| Time Deposits                                          |       | 58,198                  |       | 1,421 |   | 2.44 | % |
| Repurchase Agreement                                   |       | 2,000                   |       | 87 |   | 4.35 | % |
|                                                   |       |                    |       |   |   |   |   |
| Total Interest-Bearing Liabilities                     |       | $                       | 132,079    |   | $ | 1,754 |   | 1.33 | % |
|                                                   |       |                    |       |   |   |   |   |
| Demand Deposits - non-interest bearing                 |       | 33,009                  |       |   |   |   |   |
| Accrued Expenses                                       |       | 695                     |       |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| TOTAL LIABILITIES                                      |       | $                       | 165,783    |   |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| Stockholders’ Equity                              |       | 16,589                  |       |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY        |       | $                       | 182,372    |   |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| Average rate paid to fund earnings assets              |       |                    |       |   |   | 1.02 | % |
| NET INTEREST MARGIN                                    |       |                    |       | $ | 6,531 |   | 3.50 | % |

 

Forpurposes of this schedule, interest on nonaccural loans have been included onlyto the extent reflected in the income statement.  However, the nonaccrual loans balance isincluded in the average amount outstanding.

 

21

----

 

**ANALYSIS OF NET INTEREST MARGIN FOR 2003:**

 
| ** **                                             | ** ** | **Year Ended 12/31/03** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|
| **(Dollars in Thousands)**                             | ** ** | **Average Balance**     | ** ** | **Interest** | ** ** | **Yield/Rate** | ** ** |
| ASSETS                                                 |       |                    |       |   |   |   |   |
| INTEREST EARNING ASSETS:                               |       |                    |       |   |   |   |   |
| LOANS:                                                 |       |                    |       |   |   |   |   |
| Commercial                                             |       | $                       | 41,444     |   | $ | 2,665 |   | 6.43 | % |
| Real Estate                                            |       | 51,764                  |       | 4,004 |   | 7.74 | % |
| Consumer                                               |       | 10,665                  |       | 910 |   | 8.53 | % |
| Total Loans                                            |       | $                       | 103,873    |   | $ | 7,579 |   | 7.30 | % |
|                                                   |       |                    |       |   |   |   |   |
| INVESTMENT SECURITIES                                  |       |                    |       |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| Available for Sale                                     |       | 45,014                  |       | 1,005 |   | 2.23 | % |
|                                                   |       |                    |       |   |   |   |   |
| Federal Funds Sold                                     |       | 17,472                  |       | 182 |   | 1.04 | % |
|                                                   |       |                    |       |   |   |   |   |
| Total Interest Earnings Assets                         |       | $                       | 166,359    |   | $ | 8,766 |   | 5.27 | % |
|                                                   |       |                    |       |   |   |   |   |
| Allowance for Loan Losses                              |       | (1,582                  | )          |   |   |   |   |
| Cash and Due From Banks                                |       | 5,339                   |       |   |   |   |   |
| Bank Premises                                          |       | 3,145                   |       |   |   |   |   |
| Other Assets                                           |       | 1,882                   |       |   |   |   |   |
| TOTAL ASSETS                                           |       | $                       | 175,143    |   |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY:             |       |                    |       |   |   |   |   |
| Interest-Bearing Demand Deposits and  Savings Deposits |       | $                       | 67,047     |   | $ | 315 |   | 0.47 | % |
| Time Deposits                                          |       | 58,224                  |       | 1,672 |   | 2.87 | % |
| Repurchase Agreement                                   |       | 2,852                   |       | 100 |   | 3.51 | % |
|                                                   |       |                    |       |   |   |   |   |
| Total Interest-Bearing Liabilities                     |       | $                       | 128,123    |   | $ | 2,087 |   | 1.63 | % |
|                                                   |       |                    |       |   |   |   |   |
| Demand Deposits non-interest bearing                   |       | 28,166                  |       |   |   |   |   |
| Accrued Expenses                                       |       | 899                     |       |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| TOTAL LIABILITIES                                      |       | $                       | 157,188    |   |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| Stockholders’ Equity                              |       | 17,955                  |       |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY        |       | $                       | 175,143    |   |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| Average rate paid to fund earnings assets              |       |                    |       |   |   | 1.25 | % |
| NET INTEREST MARGIN                                    |       |                    |       | $ | 6,679 |   | 4.01 | % |

 

Forpurposes of this schedule, interest on nonaccural loans have been included onlyto the extent reflected in the income statement.  However, the nonaccrual loans balance isincluded in the average amount outstanding.

 

22

----

 

**ANALYSIS OF NET INTEREST MARGIN FOR 2002:**

 
| ** **                                             | ** ** | **Year Ended 12/31/02** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|
| **(Dollars in Thousands)**                             | ** ** | **Average Balance**     | ** ** | **Interest** | ** ** | **Yield/Rate** | ** ** |
| ASSETS                                                 |       |                    |       |   |   |   |   |
| INTEREST EARNING ASSETS:                               |       |                    |       |   |   |   |   |
| LOANS:                                                 |       |                    |       |   |   |   |   |
| Commercial                                             |       | $                       | 44,680     |   | $ | 3,103 |   | 6.94 | % |
| Real Estate                                            |       | 53,180                  |       | 4,262 |   | 8.01 | % |
| Consumer                                               |       | 12,564                  |       | 1,154 |   | 9.18 | % |
| Total Loans                                            |       | $                       | 110,424    |   | $ | 8,519 |   | 7.71 | % |
|                                                   |       |                    |       |   |   |   |   |
| INVESTMENT SECURITIES                                  |       |                    |       |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| Available for Sale                                     |       | 40,988                  |       | 1,364 |   | 3.32 | % |
|                                                   |       |                    |       |   |   |   |   |
| Federal Funds Sold                                     |       | 13,106                  |       | 206 |   | 1.57 | % |
|                                                   |       |                    |       |   |   |   |   |
| Total Interest Earnings Assets                         |       | $                       | 164,518    |   | $ | 10,089 |   | 6.13 | % |
|                                                   |       |                    |       |   |   |   |   |
| Allowance for Loan Losses                              |       | (1,250                  | )          |   |   |   |   |
| Cash and Due From Banks                                |       | 5,187                   |       |   |   |   |   |
| Bank Premises                                          |       | 3,337                   |       |   |   |   |   |
| Other Assets                                           |       | 1,658                   |       |   |   |   |   |
| TOTAL ASSETS                                           |       | $                       | 173,450    |   |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY:             |       |                    |       |   |   |   |   |
| Interest-Bearing Demand Deposits and  Savings Deposits |       | $                       | 65,384     |   | $ | 584 |   | 0.89 | % |
| Time Deposits                                          |       | 60,861                  |       | 2,024 |   | 3.33 | % |
| Repurchase Agreement                                   |       | 2,910                   |       | 157 |   | 5.39 | % |
|                                                   |       |                    |       |   |   |   |   |
| Total Interest-Bearing Liabilities                     |       | $                       | 129,155    |   | $ | 2,765 |   | 2.14 | % |
|                                                   |       |                    |       |   |   |   |   |
| Demand Deposits - non-interest bearing                 |       | 25,559                  |       |   |   |   |   |
| Accrued Expenses                                       |       | 966                     |       |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| TOTAL LIABILITIES                                      |       | $                       | 155,680    |   |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| Stockholders’ Equity                              |       | 17,770                  |       |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY        |       | $                       | 173,450    |   |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| Average rate paid to fund earnings assets              |       |                    |       |   |   | 1.68 | % |
| NET INTEREST MARGIN                                    |       |                    |       | $ | 7,324 |   | 4.45 | % |

 

Forpurposes of this schedule, interest on nonaccural loans have been included onlyto the extent reflected in the income statement.  However, the nonaccrual loans balance isincluded in the average amount outstanding.

 

23

----

 

**THE FOLLOWING TABLE IS AN ANALYSIS OF THE CHANGES ININTEREST INCOME AND INTEREST EXPENSE FOR THE DATES SHOWN.**

 
| ** **                                      | ** ** | **2004 vs 2003**             | ** ** | ** **                             | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|----------------------------------------|------------|
| **(Dollars in Thousands)**                      | ** ** | **Increase  Due to  Volume** | ** ** | **(Decrease)  Due to  Change in Rate** | ** ** | **Total** | ** ** |
| INTEREST INCOME ON LOANS:                       |       |                         |       |                                   |       |   |   |
| Commercial                                      |       | $                            | (214       | )                                      | $          | (141 | ) | $ | (355 | ) |
| Real Estate                                     |       | (19                          | )          | (128                                   | )          | (147 | ) |
| Consumer                                        |       | (76                          | )          | (84                                    | )          | (160 | ) |
|                                            |       |                         |       |                                   |       |   |   |
| TOTAL LOANS                                     |       | (309                         | )          | (353                                   | )          | (662 | ) |
|                                            |       |                         |       |                                   |       |   |   |
| SECURITIES                                      |       |                         |       |                                   |       |   |   |
|                                            |       |                         |       |                                   |       |   |   |
| Available for Sale                              |       | 177                          |       | (49                                    | )          | 128 |   |
|                                            |       |                         |       |                                   |       |   |   |
| TOTAL SECURITIES                                |       | 177                          |       | (49                                    | )          | 128 |   |
|                                            |       |                         |       |                                   |       |   |   |
| FEDERAL FUNDS SOLD                              |       |                         |       |                                   |       |   |   |
|                                            |       |                         |       |                                   |       |   |   |
| Federal Funds Sold                              |       | 18                           |       | 35                                     |       | 53 |   |
|                                            |       |                         |       |                                   |       |   |   |
| TOTAL INTEREST INCOME                           |       | (114                         | )          | (367                                   | )          | (481 | ) |
|                                            |       |                         |       |                                   |       |   |   |
| INTEREST EXPENSE ON:                            |       |                         |       |                                   |       |   |   |
| Savings & Interest Bearing  Demand Deposits |       | 22                           |       | (92                                    | )          | (70 | ) |
| Time Deposits                                   |       | (2                           | )          | (249                                   | )          | (251 | ) |
|                                            |       |                         |       |                                   |       |   |   |
| Repurchase Agreements                           |       | (30                          | )          | 17                                     |       | (13 | ) |
|                                            |       |                         |       |                                   |       |   |   |
| TOTAL INTEREST EXPENSE                          |       | (10                          | )          | (324                                   | )          | (334 | ) |
|                                            |       |                         |       |                                   |       |   |   |
| NET INTEREST INCOME                             |       | $                            | (104       | )                                      | $          | (43 | ) | $ | (147 | ) |

 

Changesdue to a combination of volume and rate have been proportionately allocated tovolume and rate.

 

24

----

 
| ** **                                      | ** ** | **2003 vs 2002**             | ** ** | ** **                             | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|----------------------------------------|------------|
| **(Dollars in Thousands)**                      | ** ** | **Increase  Due to  Volume** | ** ** | **(Decrease)  Due to  Change in Rate** | ** ** | **Total** | ** ** |
| INTEREST INCOME ON LOANS:                       |       |                         |       |                                   |       |   |   |
| Commercial                                      |       | $                            | (312       | )                                      | $          | (126 | ) | $ | (438 | ) |
| Real Estate                                     |       | (113                         | )          | (145                                   | )          | (258 | ) |
| Consumer                                        |       | (174                         | )          | (70                                    | )          | (244 | ) |
|                                            |       |                         |       |                                   |       |   |   |
| TOTAL LOANS                                     |       | (559                         | )          | (341                                   | )          | (940 | ) |
|                                            |       |                         |       |                                   |       |   |   |
| SECURITIES                                      |       |                         |       |                                   |       |   |   |
|                                            |       |                         |       |                                   |       |   |   |
| Available for Sale                              |       | 134                          |       | (493                                   | )          | (359 | ) |
|                                            |       |                         |       |                                   |       |   |   |
| TOTAL SECURITIES                                |       | 134                          |       | (493                                   | )          | (359 | ) |
|                                            |       |                         |       |                                   |       |   |   |
| FEDERAL FUNDS SOLD                              |       |                         |       |                                   |       |   |   |
|                                            |       |                         |       |                                   |       |   |   |
| Federal Funds Sold                              |       | 69                           |       | (93                                    | )          | (24 | ) |
|                                            |       |                         |       |                                   |       |   |   |
| TOTAL INTEREST INCOME                           |       | (396                         | )          | (927                                   | )          | (1,323 | ) |
|                                            |       |                         |       |                                   |       |   |   |
| INTEREST EXPENSE ON:                            |       |                         |       |                                   |       |   |   |
| Savings & Interest Bearing  Demand Deposits |       | 148                          |       | (417                                   | )          | (269 | ) |
| Time Deposits                                   |       | (88                          | )          | (264                                   | )          | (352 | ) |
|                                            |       |                         |       |                                   |       |   |   |
| Repurchase Agreements                           |       | (3                           | )          | (54                                    | )          | (57 | ) |
|                                            |       |                         |       |                                   |       |   |   |
| TOTAL INTEREST EXPENSE                          |       | 57                           |       | (735                                   | )          | (678 | ) |
|                                            |       |                         |       |                                   |       |   |   |
| NET INTEREST INCOME                             |       | $                            | (453       | )                                      | $          | (192 | ) | $ | (645 | ) |

 

Changesdue to a combination of volume and rate have been allocated proportionately tovolume and rate.

 

25

----

 
| ** **                                           | ** ** | **2002 vs 2001**             | ** ** | ** **                             | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|----------------------------------------|------------|
| **(Dollars in Thousands)**                           | ** ** | **Increase  Due to  Volume** | ** ** | **(Decrease)  Due to  Change in Rate** | ** ** | **Total** | ** ** |
| INTEREST INCOME ON LOANS:                            |       |                         |       |                                   |       |   |   |
| Commercial                                           |       | (140                         | )          | (966                                   | )          | $ | (1,106 | ) |
| Real Estate                                          |       | 54                           |       | (168                                   | )          | (114 | ) |
| Consumer                                             |       | (139                         | )          | (104                                   | )          | (243 | ) |
|                                                 |       |                         |       |                                   |       |   |   |
| TOTAL LOANS                                          |       | (225                         | )          | (1,238                                 | )          | (1,463 | ) |
|                                                 |       |                         |       |                                   |       |   |   |
| SECURITIES                                           |       |                         |       |                                   |       |   |   |
|                                                 |       |                         |       |                                   |       |   |   |
| Available for Sale                                   |       | 500                          |       | (490                                   | )          | 10 |   |
|                                                 |       |                         |       |                                   |       |   |   |
| TOTAL SECURITIES                                     |       | 500                          |       | (490                                   | )          | 10 |   |
|                                                 |       |                         |       |                                   |       |   |   |
| FEDERAL FUNDS SOLD                                   |       |                         |       |                                   |       |   |   |
|                                                 |       |                         |       |                                   |       |   |   |
| Federal Funds Sold                                   |       | (117                         | )          | (431                                   | )          | (548 | ) |
|                                                 |       |                         |       |                                   |       |   |   |
| TOTAL INTEREST INCOME                                |       | 158                          |       | (2,159                                 | )          | (2,001 | ) |
|                                                 |       |                         |       |                                   |       |   |   |
| INTEREST EXPENSE ON:                                 |       |                         |       |                                   |       |   |   |
| Savings & Interest Bearing Demand  Deposits |       | 68                           |       | (623                                   | )          | (555 | ) |
| Time Deposits                                        |       | (123                         | )          | (1,375                                 | )          | (1,498 | ) |
|                                                 |       |                         |       |                                   |       |   |   |
| Repurchase Agreements                                |       | $                            | 49         |                                   | $          | (32 | ) | $ | 17 |   |
|                                                 |       |                         |       |                                   |       |   |   |
| TOTAL INTEREST EXPENSE                               |       | (6                           | )          | (2,030                                 | )          | (2,036 | ) |
|                                                 |       |                         |       |                                   |       |   |   |
| NET INTEREST INCOME                                  |       | $                            | 164        |                                   | $          | (129 | ) | $ | 35 |   |

 

Changesdue to a combination of volume and rate have been allocated proportionately tovolume and rate.

 

26

----

 

## Provision for Loan Losses

 

In2004, after an in-depth review of the loan portfolio, the Company determinedthat the allowance for loan losses was over-funded.  Therefore the allowance was adjusted by anegative provision of $308,000.  TheCompany also experienced a significant decrease in the provision for loanlosses during 2003.  The provision forloan losses was $3,000 for 2003, compared to $534,000 for 2002.  Factors contributing to the decreasedprovision in 2003 included decreased charge-offs in certain commercial mortgageloans, along with fewer charge-offs in the retail sector.  In evaluating the loan portfolio at December 31,2004, with the improved level of nonaccrual and past-due loans, it isanticipated that loan losses will remain stable in 2005.

 

## Noninterest Income andExpense

 

Noninterestincome increased $38,000 or 3.85% in 2004, following a $182,000 or 22.6%increase in 2003 and a $97,000 or 13.8% increase in 2002.  The increase is primarily attributable toearnings on bank owned life insurance contracts of $65,000 in 2004 compared to$11,500 in 2003.  The life insurancecontracts were purchased in the 4th quarter of 2003.  The additional earnings in 2004 were causedby the added length of time that the assets were held in 2004.  The largest component of noninterest incomeis service charges on deposit accounts. These fees show a small decrease of $27,000 or 3.25% in 2004 afterincreasing approximately $201,000 or 30.6% in 2003, and an increase ofapproximately $28,000 or 4.5% in 2002.

 

During2004, noninterest expense increased 12.7% or $602,000, after remaining verystable for the past few years.  In 2003,the increase was .8% and in 2002 the increase was 1.3%.  Personnel expense is the largest component ofnoninterest expense.  The increase innoninterest expense was primarily caused by increases in expenses of loans andother real estate, data processing, and professional fees.  The largest increase in this category was a$276,000 increase in expenses of loans and other real estate owned.  During 2004 the bank incurred significantcosts to protect its interest in commercial real estate collateral.  To keep pace with changing technology, theCompany implemented a new Data Processing out-sourcing system in 2004.  Due to these changes, Data Processing grew by$171,000 or 30.6% in 2004.  The increasein professional fees is the result of costs associated with amending previoussecurities filings to conform with the requirements of the Sarbanes-Oxley Actof 2002.  In addition, in 2004 theCompany began to evaluate a corporate reorganization commonly known as a goingprivate transaction, which resulted in additional legal costs.  Management expects these costs to continue in2005.  Salaries and employee benefits,which is the largest component of noninterest expense, decreased .5% in 2004,after increasing 2.4% in 2003 and 4.7% in 2002.

 

Off-BalanceSheet Arrangements

 

Commitments to extend credit are agreements to lendto a customer provided there is no violation of any condition established inthe contract.  See Note 13 to theConsolidated Financial Statements for additional information on Commitments andContingencies.  Commitments generallyhave fixed expiration dates or other termination clause and may require thepayment of a fee.  Since many of thecommitments are expected to expire without being drawn upon, the total amountof commitments does not necessarily represent future cash requirements.  Logan Bank and Trust Company had outstandingcommitments to extend credit of approximately $14,822,000 at December 31,2004 and $12,696,000 at December 31, 2003. These commitments included unfunded loan commitments and unused lines ofcredit totaling $13,966,000 at December 31, 2004 and $11,669,000 at December 31,2003.  Additionally, standby letters ofcredit totaled $856,000 at December 31, 2004 and $1,027,000 at December 31,2003.  Financial standby letters ofcredit are conditional commitments issued by Logan Bank & Trust Company toguarantee the financial performance of a customer to a third party.  Those guarantees are primarily used tosupport public and private borrowing arrangements.

 

A table below in this discussion and analysisdetails the amount and expected maturities of significant commitments of as December 31,2004.

 

Thefollowing table presents the maturities of commitments and contingencies as of December 31,2004:

 
| ** **                | ** ** | **Amount of Commitment  Expiration Per Period** | ** ** |
|---------------------------|------------|-------------------------------------------------|------------|
| ** **                | ** ** | **1 Year or Less**                              | ** ** | **Over 1 Year** | ** ** |
| Loan Commitments          |       | $                                               | 10,961,000 |   | $ | 3,005,000 |   |
| Standby Letters of Credit |       | 856,000                                         |       | — |   |
| TOTAL                     |       | $                                               | 11,817,000 |   | $ | 3,005,000 |   |

 

27

----

 

Referto Note 13 of the consolidated financial statements for further discussion ofthe Company’s off-balance sheet arrangements.

 

## Income Taxes

 

Applicableincome taxes for 2004 decreased $57,000 or 5.5% after a decrease of $30,000 or2.9%in 2003 and an increase of $154,000 or 17.0% increase for 2002.  The decrease is directly attributable to thedecline in pre-tax income.  For acomplete discussion of the Company’s tax position, refer to Note 10 of theNotes to Consolidated Financial Statements, presented elsewhere in this report.

 

28

----

 

## Return on Equity and Assets

 

Thefollowing chart shows various percentages relating to equity and assets:

 
| ** **                                                                        | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                        | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                              |       |                  |       |   |   |   |   |
| Percentage of net income to:                                                      |       |                  |       |   |   |   |   |
|                                                                              |       |                  |       |   |   |   |   |
| Average stockholders’ equity                                                 |       | 9.39                  | %          | 10.24 | % | 10.15 | % |
|                                                                              |       |                  |       |   |   |   |   |
| Average total assets                                                              |       | 0.86                  | %          | 1.06 | % | 1.06 | % |
|                                                                              |       |                  |       |   |   |   |   |
| Percentage of dividends declared per common  share to net income per common share |       | 72.75                 | %          | 58.15 | % | 59.53 | % |
|                                                                              |       |                  |       |   |   |   |   |
| Percentage of average stockholders’ equity  to average total assets          |       | 9.10                  | %          | 10.25 | % | 10.25 | % |

 

CapitalResources

 

Cashdividends paid to stockholders during 2004 totaled $1,133,000, following$1,105,000 in 2003 and $1,097,000 in 2002. This represents a dividend pay-out ratio (dividends divided by netincome) of 73% in 2004, 58% in 2003 and 60% in 2002.  Cash dividends per share equaled $1.61 pershare in 2004, $1.57 per share in 2003 and $1.53 per share in 2002.  The Company is dependent upon dividends paidby its subsidiary bank to fund dividends to the stockholders and to cover otherHolding Company operating costs.  TheCompany’s board of directors considers historical financial performance, futureprospects, and anticipated needs for capital in formulating the dividendpayment policy.  Future dividends aredependent upon the Company’s financial results, future prospects, capitalrequirements and general economic conditions.

 

Oneof management’s primary objectives is to maintain a strong capitalposition.  Stockholders’ equity increased$137,000 or 1% in 2004 and $597,000 or 3.5% in 2003. These increases resultedprimarily from a net increase in retained earnings of $425,000 in 2004 and$796,000 in 2003 offset by a decrease in accumulated other comprehensive incomeof $287,000 in 2004 and $199,000 in 2003.

 

Thepercentage of earnings reinvested in the Company (net income less dividends asa percentage of net income) for the years 2004, 2003 and 2002 was 27%, 42% and40%  respectively.  The internal capital formation rate (netincome less dividends as a percentage of average stockholders’ equity)indicates the rate at which assets can grow while maintaining the current ratioof stockholders’ equity to assets.  Theinternal capital information rate was 2.6% in 2004, 4.4% in 2003 and 4.2% in2002.

 

Liquidity

 

Liquiditymanagement ensures that funds are available to meet loan commitments, depositwithdrawals, and operating expenses. Funds are provided by loan repayments,investment securities maturities, or deposits, and can be raised by liquidatingassets or through additional borrowings. The Company had investment securitieswith an estimated fair value of $66,000,000 classified as available for sale atDecember 31, 2004. These securities are available for sale at any timebased upon management’s assessment in order to provide necessary liquidity shouldthe need arise. In addition, the Company’s subsidiary bank, had a line ofcredit available with another financial institution in the aggregate amount of$10 million. There were no borrowings outstanding pursuant to this agreement asof December 31, 2004.

 

29

----

 

AtDecember 31, 2004 and December 31, 2003, the Company had outstandingloan commitments and unused lines of credit totaling $14,822,000 and$12,696,000, respectively. As of December 31, 2004, management placed ahigh probability for required funding within one year of approximately $3.8million. Approximately $11.0 million is principally unused home equity andcredit card lines on which management places a low probability for requiredfunding.

 

RegulatoryCapital

 

Asof December 31, 2004, the Company and its subsidiary bank were consideredwell capitalized by its primary regulator, the Federal Reserve Bank.  Management is not aware of any changes whichwould affect this classification.  Formore information, see Note 16 to the Consolidated Financial Statements.

 

Risk-basedcapital regulations require all banks and bank holding companies to have aminimum total risk-based capital ratio of 8% with half of the capital composedof core capital.  Conceptually,risk-based capital requirements assess the risk of a financial institution’sbalance sheet and off-balance sheet commitments in relation to itscapital.  Under the guidelines capitalstrength is measured in two tiers, which are used in conjunction withrisk-adjusted assets in determining the risk-based capital ratios.  The Company’s Tier I capital, which consistsof stockholders’ equity, adjusted for certain intangible assets, amounted to$18,235,000 at December 31, 2004 or 19.21% of total risk-weighted assets,compared to $17,755,000 at December 31, 2003, or 18.8% of totalrisk-weighted assets.  Tier II capital,or supplementary capital, includes capital components such as qualifyingallowance for loan losses, and can equal up to 100% of an institution’s Tier Icapital with certain limitations.  TheCompany’s Tier II capital amounted to $1,187,000 at December 31, 2004 and December 31,2003, or 1.25% of total risk-weighted assets in 2004 and 1.26% of totalrisk-weighted assets in 2003.

 

TheCompany’s total consolidated risk-based capital was $19,422,000 at December 31,2004, or 10.55% of total risk-weighted assets, compared to $18,942,000 at December 31,2003, or 10.75% of total risk-weighted assets. Additionally, risk-based capital guidelines require a minimum leverageratio (Tier I capital divided by average adjusted total consolidated assets) of4%, which may be increased for institutions with higher levels of risk or thatare experiencing or anticipating significant growth.  The Company has not been advised by anyregulatory agency of a higher leverage ratio applicable to it.  As of December 31, 2004 and 2003, theCompany’s leverage ratio was 9.9% and 10.75% respectively; therefore, theCompany exceeded all current minimum capital requirements.

 

30

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ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

 

ASSET AND LIABILITY MANAGEMENT AND INTEREST RATE SENSITIVITY

 

Theincome stream of the Company is subject to risk resulting from interest ratefluctuations to the extent there is a difference between the amount earned onthe Company’s interest-earning assets and the amount paid for interest-bearingliabilities.  Another important factor isthe timing of the maturity of these assets and liabilities including when theyare prepaid, withdrawn, mature or reprice in specified periods.  The goal of assets and liability managementis to maintain high quality and consistent growth of net interest income withacceptable levels of risk to changes in market interest rates.

 

Interestrate sensitivity varies with different types of interest-earning assets andinterest-bearing liabilities.  The ratesearned on overnight federal funds, on which rates change daily, and loans whichare tied to a prime interest rate, differ considerably from long-termsecurities and fixed rate loans. Similarly, time deposits of $100,000 and over, NOW accounts and moneymarket deposit accounts are much more interest sensitive than passbook savingsaccounts and other interest-bearing liabilities.  The Company uses a number of tools to measureinterest rate risk, including simulating net interest income under various ratescenarios, monitoring the change in present value of the asset and liabilityportfolios under the same rate scenarios and monitoring the difference or gapbetween rate sensitive assets and rate sensitive liabilities over various timeperiods.

 

Managementcontinues its efforts to generate variable rate loans.  However, with strong competition for loans,and in an historically low interest rate environment, customers are seekingmore fixed rate loans.  The results ofmanagement’s efforts to balance interest-earning assets againstinterest-bearing liabilities can be seen in the Analysis of Interest RateSensitivity table which follows this discussion.

 

Managementcontinues to monitor the Company’s asset/liability gap positions, whileincorporating more sophisticated risk measurement tools, including simulationmodeling which calculates expected net interest income based on projectedinterest-earning assets, interest-bearing liabilities and interest rates.  Utilizing simulation modeling allows theCompany to evaluate earnings and capital risk due to significant changes ininterest rates.

 

31

----

 

The following table presents the Company’s Interest Rate Sensitivityposition at December 31, 2004:

 

INTEREST RATE SENSITIVITY ANALYSIS TABLE

 

(In Thousands of dollars)

 

Asof December 31, 2004

 
| ** **                                                                | ** ** | **0-90** | ** ** | **91-180** | ** ** | **181-365** | ** ** | **Total  One Year** | ** ** | **Over  One year** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------|------------|----------|------------|------------|------------|-------------|------------|---------------------|------------|--------------------|------------|-----------|------------|
| Earning Assets                                                            |       |     |       |       |       |        |       |                |       |               |       |      |       |
| Loans                                                                     |       | $        | 16,449     |       | $          | 3,560       |       | $                   | 3,993      |               | $          | 24,002    |       | $ | 74,295 |   | $ | 98,297 |   |
| Investments                                                               |       | 500      |       | 1,745      |       | 17,116      |       | 19,361              |       | 46,559             |       | 65,920    |       |
| Federal Funds Sold                                                        |       | 5,990    |       | 0          |       | 0           |       | 5,990               |       | 0                  |       | 5,990     |       |
|                                                                      |       |     |       |       |       |        |       |                |       |               |       |      |       |
| Total Earning Assets                                                      |       | 22,939   |       | 5,305      |       | 21,109      |       | 49,353              |       | 120,854            |       | 170,207   |       |
|                                                                      |       |     |       |       |       |        |       |                |       |               |       |      |       |
| Interest Bearing Liabilities                                              |       |     |       |       |       |        |       |                |       |               |       |      |       |
| Demand Deposits                                                           |       | 23,675   |       | 0          |       | 0           |       | 23,675              |       | 0                  |       | 23,675    |       |
| Savings                                                                   |       | 13,034   |       | 10,241     |       | 23,274      |       | 46,549              |       | 0                  |       | 46,549    |       |
| CD’s of $100,000 and Over                                            |       | 3,408    |       | 2,337      |       | 4,711       |       | 10,456              |       | 12,981             |       | 23,437    |       |
| Other Time                                                                |       | 5,864    |       | 4,811      |       | 8,235       |       | 18,910              |       | 14,648             |       | 33,558    |       |
| Repurchase Agreements                                                     |       | 0        |       | 0          |       | 0           |       | 0                   |       | 2,000              |       | 2,000     |       |
|                                                                      |       |     |       |       |       |        |       |                |       |               |       |      |       |
| Total Interest Bearing Liability                                          |       | 45,981   |       | 17,389     |       | 36,220      |       | 99,590              |       | 29,629             |       | 129,219   |       |
|                                                                      |       |     |       |       |       |        |       |                |       |               |       |      |       |
| Interest Sensitivity Gap                                                  |       | $        | (23,042    | )          | $          | (12,084     | )          | $                   | (15,111    | )                  | $          | (50,237   | )          | $ | 91,225 |   | $ | 40,988 |   |
|                                                                      |       |     |       |       |       |        |       |                |       |               |       |      |       |
| Cumulative Gap                                                            |       | $        | (23,042    | )          | $          | (35,126     | )          | $                   | (50,237    | )                  | $          | (50,237   | )          | $ | 91,225 |   | $ | 40,988 |   |
|                                                                      |       |     |       |       |       |        |       |                |       |               |       |      |       |
| Rate Sensitive Assets/Rate Sensitive Liabilities  (Cumulative Percentage) |       | 49.89    | %          | 44.57      | %          | 49.56       | %          | 49.56               | %          | 131.72             | %          | 131.72    | %          |

 

32

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ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

**REPORT OFINDEPENDENT****REGISTERED PUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors and Stockholders

ofLogan County BancShares, Inc.

 

Wehave audited the accompanying consolidated balance sheets of Logan County BancShares, Inc.and Subsidiary as of December 31, 2004 and 2003, and the relatedconsolidated statements of income, changes in stockholders’ equity, and cashflows for the years then ended.  Theseconsolidated financial statements are the responsibility of the company’smanagement.  Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.  The consolidated statements ofincome, changes in stockholders’ equity, and cash flows for the year ended December 31,2002, were audited by other auditors whose report dated February 26, 2003,expressed an unqualified opinion on those statements.

 

Weconducted our audits in accordance with standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we perform the audits to obtain reasonableassurance about whether the consolidated financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe consolidated financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Logan CountyBancShares, Inc. and subsidiary, as of December 31, 2004 and 2003,and the results of their operations and their cash flows for the years thenended, in conformity with U.S. generally accepted accounting principles.

 
| /s/  S. R. SNODGRASS, A.C. |   |
|----------------------------|--------|
|                       |
| Wheeling,  West Virginia   |
| February 3,  2005     |

 

33

----

 

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

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                            | ** ** | **December 31,** | ** **  |
|-----------------------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                                            | ** ** | **2004**              | ** **  | **2003** | ** ** |
| **ASSETS**                                                            | ** ** | ** **            | ** **  | ** ** | ** ** |
| Cash and cash equivalents:                                            |       |                  |        |   |   |
| Cash and due from banks                                               |       | $                     | 5,994,550   |   | $ | 5,342,353 |   |
| Federal funds sold                                                    |       | 5,990,000             |        | 13,385,000 |   |
| Total cash and cash equivalents                                       |       | 11,984,550            |        | 18,727,353 |   |
| Investment securities:                                                |       |                  |        |   |   |
| Available-for-sale (at fair value)                                    |       | 65,919,792            |        | 47,891,978 |   |
| Loans:      Mortgage  loans                  |       | 52,661,611            |        | 51,031,339 |   |
| Installment loans                                                     |       | 9,652,026             |        | 10,457,792 |   |
| Commercial and other loans                                            |       | 35,983,518            |        | 40,125,576 |   |
| Total loans                                                           |       | 98,297,155            |        | 101,614,707 |   |
| Less allowance for loan losses                                        |       | (1,263,231            | )           | (1,581,414 | ) |
| Net loans                                                             |       | 97,033,924            |        | 100,033,293 |   |
| Premises and equipment, net                                           |       | 3,191,025             |        | 3,103,002 |   |
| Accrued interest receivable                                           |       | 675,279               |        | 843,052 |   |
| Bank owned life insurance                                             |       | 2,076,279             |        | 2,011,532 |   |
| Other assets                                                          |       | 787,231               |        | 992,800 |   |
| Total assets                                                          |       | $                     | 181,668,080 |   | $ | 173,603,010 |   |
| **LIABILITIES**                                                       | ** ** | ** **            | ** **  | ** ** | ** ** |
| Noninterest bearing deposits:                                         |       |                  |        |   |   |
| Demand                                                                |       | $                     | 33,991,573  |   | $ | 29,721,377 |   |
| Interest bearing deposits:                                            |       |                  |        |   |   |
| Demand                                                                |       | 23,675,393            |        | 21,735,171 |   |
| Savings                                                               |       | 46,548,944            |        | 43,203,543 |   |
| Time                                                                  |       | 56,995,289            |        | 57,594,652 |   |
| Total deposits                                                        |       | 161,211,199           |        | 152,254,743 |   |
| Repurchase agreements                                                 |       | 2,000,000             |        | 3,000,000 |   |
| Other liabilities                                                     |       | 529,550               |        | 558,685 |   |
| Total liabilities                                                     |       | 163,740,749           |        | 155,813,428 |   |
| **STOCKHOLDERS’  EQUITY**                                        | ** ** | ** **            | ** **  | ** ** | ** ** |
| Common stock - $1.67 par value: 780,000  shares authorized and issued |       | 1,300,000             |        | 1,300,000 |   |
| Treasury Stock - 76,000 shares at cost                                |       | (1,406,198            | )           | (1,406,198 | ) |
| Surplus                                                               |       | 2,408,426             |        | 2,408,426 |   |
| Retained earnings                                                     |       | 15,850,552            |        | 15,425,806 |   |
| Accumulated other comprehensive income  (loss)                        |       | (225,449              | )           | 61,548 |   |
| Total stockholders’ equity                                       |       | 17,927,331            |        | 17,789,582 |   |
| Total liabilities and stockholders’ equity                       |       | $                     | 181,668,080 |   | $ | 173,603,010 |   |

 

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

 

34

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

**CONSOLIDATED STATEMENTS OF INCOME**

 
| ** **                                           | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| **INTEREST AND DIVIDEND INCOME**                     | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest and fees on loans:                          |       |                             |       |   |   |   |   |
| Taxable                                              |       | $                                | 6,916,675  |   | $ | 7,578,902 |   | $ | 8,518,297 |   |
| Investment securities:                               |       |                             |       |   |   |   |   |
| Available-for-sale                                   |       | 1,097,591                        |       | 989,819 |   | 1,349,480 |   |
| Dividends                                            |       | 35,131                           |       | 15,267 |   | 14,245 |   |
| Interest on federal funds sold                       |       | 235,435                          |       | 182,160 |   | 205,786 |   |
| Total interest and dividend income                   |       | 8,284,832                        |       | 8,766,148 |   | 10,087,808 |   |
| **INTEREST EXPENSE**                                 |       |                             |       |   |   |   |   |
| Deposits                                             |       | 1,666,371                        |       | 1,986,728 |   | 2,607,604 |   |
| Other borrowings                                     |       | 86,528                           |       | 100,173 |   | 156,508 |   |
| Total interest expense                               |       | 1,752,899                        |       | 2,086,901 |   | 2,764,112 |   |
|                                                 |       |                             |       |   |   |   |   |
| Net interest income                                  |       | 6,531,933                        |       | 6,679,247 |   | 7,323,696 |   |
| **PROVISION (BENEFIT) FOR LOAN LOSSES**              |       | (308,000                         | )          | 2,850 |   | 533,819 |   |
| Net interest income after provision for  loan losses |       | 6,839,933                        |       | 6,676,397 |   | 6,789,877 |   |
| **NONINTEREST INCOME**                               |       |                             |       |   |   |   |   |
| Service charges and other fees                       |       | 830,023                          |       | 857,099 |   | 656,160 |   |
| Securities gains, net                                |       | 17,233                           |       | 148 |   | — |   |
| Other operating income                               |       | 177,173                          |       | 129,021 |   | 148,407 |   |
| Total noninterest income                             |       | 1,024,429                        |       | 986,268 |   | 804,567 |   |
| **NONINTEREST EXPENSE**                              |       |                             |       |   |   |   |   |
| Salary and employee benefits                         |       | 2,364,587                        |       | 2,377,040 |   | 2,321,908 |   |
| Taxes - other                                        |       | 107,551                          |       | 109,713 |   | 129,951 |   |
| Depreciation                                         |       | 288,257                          |       | 259,804 |   | 273,928 |   |
| Repairs and maintenance                              |       | 238,231                          |       | 277,374 |   | 230,105 |   |
| Fees paid to Directors                               |       | 95,100                           |       | 77,400 |   | 80,125 |   |
| FDIC and Fidelity insurance                          |       | 127,629                          |       | 106,944 |   | 109,544 |   |
| Data processing                                      |       | 730,447                          |       | 558,676 |   | 532,884 |   |
| Bank stationery and printing                         |       | 176,273                          |       | 145,724 |   | 142,992 |   |
| Professional fees                                    |       | 206,011                          |       | 66,262 |   | 113,925 |   |
| Expenses of loans and other real estate  owned       |       | 324,226                          |       | 48,467 |   | — |   |
| Other operating expenses                             |       | 672,037                          |       | 700,879 |   | 753,473 |   |
| Total noninterest expense                            |       | 5,330,349                        |       | 4,728,283 |   | 4,688,835 |   |
| Income before income taxes                           |       | 2,534,013                        |       | 2,934,382 |   | 2,905,609 |   |
| **INCOME TAXES**                                     |       | 975,840                          |       | 1,033,359 |   | 1,063,777 |   |
| Net income                                           |       | $                                | 1,558,173  |   | $ | 1,901,023 |   | $ | 1,841,832 |   |
| **WEIGHTED AVERAGE SHARES OUTSTANDING**              |       | 703,991                          |       | 703,991 |   | 716,991 |   |

 

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

 

35

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

**CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’EQUITY**

 
| ** **                                                                            | ** ** | **Common  Stock** | ** ** | **Surplus** | ** ** | **Retained  Earnings** | ** ** | **Treasury  Stock** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Comprehensive  Income** | ** ** | **Total**  | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------|------------|-------------|------------|------------------------|------------|---------------------|------------|------------------------------------------------------|------------|---------------------------|------------|------------|------------|
| **Balance.  December 31, 2001**                                                  |       | $                 | 1,300,000  |        | $          | 2,408,426              |       | $                   | 13,916,867 |                                                 | $          | (860,198                  | )          | $          | 35,034     |   |   |   | $ | 16,800,129 |   |
| Correction of  error                                                                  |       |              |       |        |       | (31,655                | )          |                |       |                                                 |       |                      |       | (31,655    | )          |
| Comprehensive  Income:                                                                |       |              |       |        |       |                   |       |                |       |                                                 |       |                      |       |       |       |
| Net income - 2002                                                                     |       | —            |       | —      |       | 1,841,833              |       |                |       | —                                               |       | $                         | 1,841,833  |       | 1,841,833  |   |
| Other  comprehensive income, net of tax                                               |       |              |       |        |       |                   |       |                |       |                                                 |       |                      |       |       |       |
| Unrealized gains  on securities net of reclassification adjustment available for sale |       | —            |       | —      |       | —                 |       |                |       | 225,290                                              |       | 225,290                   |       | 225,290    |       |
| Comprehensive  Income                                                                 |       |              |       |        |       |                   |       |                |       |                                                 |       | $                         | 2,067,123  |       |       |   |
| Purchase of  13,000 shares of common stock @ $42 per share                            |       |              |       |        |       |                   |       | (546,000            | )          |                                                 |       |                      |       | (546,000   | )          |
| Cash dividend  ($1.53 per share)                                                      |       |              |       |        |       | (1,096,996             | )          |                |       |                                                 |       |                      |       | (1,096,996 | )          |
| **Balance,  December 31, 2002**                                                  |       | 1,300,000         |       | 2,408,426   |       | 14,630,049             |       | (1,406,198          | )          | 260,324                                              |       |                      |       | 17,192,601 |       |
| Comprehensive  Income:                                                                |       |              |       |        |       |                   |       |                |       |                                                 |       |                      |       |       |       |
| Net income - 2003                                                                     |       | —            |       | —      |       | 1,901,023              |       | —              |       | —                                               |       | $                         | 1,901,023  |       | 1,901,023  |   |
| Other  comprehensive income, net of tax                                               |       |              |       |        |       |                   |       |                |       |                                                 |       |                      |       |       |       |
| Unrealized gains  (losses) on securities available for sale                           |       | —            |       | —      |       | —                 |       | —              |       | (198,776                                             | )          | (198,776                  | )          | (198,776   | )          |
| Comprehensive  Income                                                                 |       |              |       |        |       |                   |       |                |       |                                                 |       | $                         | 1,702,247  |       |       |   |
| Cash dividend  ($1.57 per share)                                                      |       | —            |       | —      |       | (1,105,266             | )          | —              |       | —                                               |       |                      |       | (1,105,266 | )          |
| **Balance,  December 31, 2003**                                                  |       | 1,300,000         |       | 2,408,426   |       | 15,425,806             |       | (1,406,198          | )          | 61,548                                               |       |                      |       | 17,789,582 |       |
| Comprehensive  Income:                                                                |       |              |       |        |       |                   |       |                |       |                                                 |       |                      |       |       |       |
| Net Income - 2004                                                                     |       | —            |       | —      |       | 1,558,173              |       | —              |       | —                                               |       | $                         | 1,558,173  |       | 1,558,173  |   |
| Other  comprehensive income, net of tax                                               |       |              |       |        |       |                   |       |                |       |                                                 |       |                      |       |       |       |
| Unrealized gains  (losses) on securities available for sale                           |       | —            |       | —      |       | —                 |       | —              |       | (286,997                                             | )          | (286,997                  | )          | (286,997   | )          |
| Comprehensive Income                                                                  |       |              |       |        |       |                   |       |                |       |                                                 |       | $                         | 1,271,176  |       |       |   |
| Cash dividend  ($1.61 per share)                                                      |       | —            |       | —      |       | (1,133,427             | )          | —              |       | —                                               |       |                      |       | (1,133,427 | )          |
| **Balance,  December 31, 2004**                                                  |       | $                 | 1,300,000  |        | $          | 2,408,426              |       | $                   | 15,850,552 |                                                 | $          | (1,406,198                | )          | $          | (225,449   | ) |   |   | $ | 17,917,331 |   |

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

36

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                        | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                          |       |                             |       |   |   |   |   |
| Net income                                                                        |       | $                                | 1,558,173  |   | $ | 1,901,023 |   | $ | 1,841,833 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities |       |                             |       |   |   |   |   |
| Allowance for loan losses                                                         |       | (308,000                         | )          | 2,850 |   | 533,819 |   |
| Depreciation and amortization                                                     |       | 288,257                          |       | 259,804 |   | 273,928 |   |
| Provision for deferred taxes                                                      |       | 216,508                          |       | (48,707 | ) | (130,620 | ) |
| Gain on sale of securities, net                                                   |       | (17,233                          | )          | (147 | ) | — |   |
| Earnings on bank owned life insurance                                             |       | (64,747                          | )          | (11,532 | ) | — |   |
| Premium amortization and accretion on  investment securities                      |       | 251,358                          |       | (329,208 | ) | 66,565 |   |
| Net change in accrued income and other  assets                                    |       | 373,342                          |       | (229,923 | ) | 196,970 |   |
| Net change in other liabilities                                                   |       | (29,135                          | )          | (504,450 | ) | 381,009 |   |
| Other, net                                                                        |       | —                           |       | (61,178 | ) | — |   |
| Net cash provided by operating activities                                         |       | 2,268,523                        |       | 978,532 |   | 3,163,504 |   |
|                                                                              |       |                             |       |   |   |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                          |       |                             |       |   |   |   |   |
| Proceeds from sales/calls of securities  available-for-sale                       |       | 37,332,396                       |       | 35,831,883 |   | 19,925,000 |   |
| Proceeds from maturities of securities  available-for-sale                        |       | 14,500,000                       |       | 20,000,000 |   | — |   |
| Purchases of securities available-for-sale                                        |       | (70,597,840                      | )          | (62,262,121 | ) | (24,612,311 | ) |
| Purchase of bank owned life insurance                                             |       | —                           |       | (2,000,000 | ) | — |   |
| Net change in loans                                                               |       | 3,307,369                        |       | 6,280,678 |   | 8,974,822 |   |
| Purchase of bank premises and equipment                                           |       | (376,280                         | )          | (145,482 | ) | (107,713 | ) |
| Net cash provided by (used in) investing  activities                              |       | (15,834,355                      | )          | (2,295,042 | ) | 4,179,798 |   |
|                                                                              |       |                             |       |   |   |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                          |       |                             |       |   |   |   |   |
| Net change in deposits                                                            |       | 8,956,456                        |       | 2,181,450 |   | (1,954,836 | ) |
| Net change in repurchase agreements                                               |       | (1,000,000                       | )          | 2,000,000 |   | (1,000,000 | ) |
| Purchase of Treasury Stock, at cost                                               |       | —                           |       | — |   | (546,000 | ) |
| Dividends paid                                                                    |       | (1,133,427                       | )          | (1,105,266 | ) | (1,096,996 | ) |
| Net cash provided by (used in) financing  activities                              |       | 6,823,029                        |       | 3,076,184 |   | (4,597,832 | ) |
|                                                                              |       |                             |       |   |   |   |   |
| **INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS**                             |       | (6,742,803                       | )          | 1,759,674 |   | 2,745,470 |   |
|                                                                              |       |                             |       |   |   |   |   |
| **CASH AND CASH EQUIVALENTS,BEGINNING OF YEAR**                                   |       | 18,727,353                       |       | 16,967,679 |   | 14,222,209 |   |
| **CASH AND CASH EQUIVALENTS, END OF YEAR**                                        |       | $                                | 11,984,550 |   | $ | 18,727,353 |   | $ | 16,967,679 |   |
| **Supplemental Disclosures:**                                                     |       |                             |       |   |   |   |   |
| Cash paid for interest                                                            |       | $                                | 1,764,782  |   | $ | 2,097,994 |   | $ | 2,836,084 |   |
| Cash paid for income taxes                                                        |       | $                                | 880,158    |   | $ | 1,107,160 |   | $ | 1,186,510 |   |

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

37

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**NOTE 1****– SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

Nature of Operations – Logan County BancShares, Inc. (the “Company”) is a WestVirginia corporation.  The Companyprovides a variety of banking services to individuals and businesses throughthe branch network of its subsidiary, Logan Bank and Trust (the “Bank”).  The Bank operates four full-service locationsin Logan County, West Virginia and one in Lincoln County, West Virginia.  Primary deposit products consist of checkingaccounts, savings accounts, and certificates of deposit.  Primary lending products consist ofcommercial and residential real estate loans, consumer loans, and businessloans.

 

Principles of Consolidation – The consolidated financial statements of the Company include thefinancial statements of the parent and its wholly-owned subsidiary. Allsignificant intercompany transactions and balances have been eliminated inconsolidation.

 

Use of Estimates- The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, disclosures of contingent assets and liabilities atthe date of the financial statements, and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates.  Material estimates that are particularlysusceptible to material change in the near term relate to the determination ofthe allowance for loan losses and the valuation of deferred tax assets.

 

Cash and Cash Equivalents – Cash and cash equivalents consist of cash on hand, amounts due frombanks, and federal funds sold.

 

Investment Securities – The Bank’s investment securities are classified in two categoriesand accounted for as follows:

 

*Securities Available-for-Sale*: Securities available-for-sale consists of bonds, notes, debentures, andcertain equity securities not classified as securities held-to-maturity.  These securities are carried at their fairvalue.  Unrealized gains and losses, netof tax, are reported as a net amount in a separate component of stockholders’equity until realized.

 

*Securities Held-to-Maturity:* Bonds, notes, and debentures for which the Bank has the positive intentand ability to hold to maturity are reported at cost, adjusted for amortizationof premiums and accretion of discounts, which are recognized in interest incomeusing the Constant Yield Method over the period to maturity.

 

Gainsand losses on the sale of securities are determined using theSpecific-Identification Method.

 

Commonstock of the Federal Reserve Bank represents ownership interest in aninstitution that is wholly owned by other financial institutions.  This equity security is accounted for at costand is classified with other assets.

 

38

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Loans – Loansare reported at the amount of unpaid principal, net of deferred loan fees andcosts and an allowance for loan losses. Interest income on loans is recognized on the accrual basis except forthose loans in a nonaccrual status.  Theaccrual of interest on impaired loans is discontinued when management believes,after consideration of economic and business conditions and collection effortsthat the borrowers’ financial condition is such that collection of interest isdoubtful.  When interest accrual isdiscontinued, interest income is subsequently recognized only to the extentcash payments are received.

 

Certainloan origination fees and direct origination costs are capitalized andrecognized as an adjustment of the yield on the related loan.

 

Allowance for Loan Losses – The allowance for loan losses represents the amount which managementestimates is adequate to provide for probable losses inherent in its loanportfolio. The allowance method is used in providing for loan losses.  Accordingly, all loan losses are charged tothe allowance, and all recoveries are credited to it. The allowance for loanlosses is established through a provision for loan losses which is charged tooperations. The provision is based upon management’s periodic evaluation of individualloans, the overall risk characteristics of the various portfolio segments, pastexperience with losses, the impact of economic conditions on borrowers, andother relevant factors. The estimates used in determining the adequacy of theallowance for loan losses including the amounts and timing of future cash flowsexpected on impaired loans, are particularly susceptible to significant changein the near term.   This is due to thevariability of key variables.

 

Impairedloans are commercial and commercial real estate loans for which it is probablethat the Company will not be able to collect all amounts due according to thecontractual terms of the loan agreement. The Company individually evaluatessuch loans for impairment and does not aggregate loans by major riskclassifications. The definition of “impaired loans” is not the same as thedefinition of “nonaccrual loans,” although the two categories overlap. TheCompany may choose to place a loan on nonaccrual status due to paymentdelinquency or uncertain collectibility, while not classifying the loan asimpaired, provided the loan is not a commercial or commercial real estateclassification. Factors considered by management in determining impairmentinclude payment status and collateral value. The amount of impairment for thesetypes of loans is determined by the difference between the present value of theexpected cash flows related to the loan, using the original interest rate, andits recorded value, or as a practical expedient in the case of collateralizedloans, the difference between the fair value of the collateral and the recordedamount of the loans. When foreclosure is probable, impairment is measured basedon the fair value of the collateral.

 

Mortgageloans secured by one-to-four family properties and all consumer loans are largegroups of smaller balance homogeneous loans and are measured for impairmentcollectively. Loans that experience insignificant payment delays, which aredefined as 90 days or less, generally are not classified as impaired.Management determines the significance of payment delays on a case-by-casebasis, taking into consideration all of the circumstances concerning the loan,the credit worthiness and payment history of the borrower, the length of thepayment delay, and the amount of shortfall in relation to the principal andinterest owed.

 

39

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Bank Premises and Equipment – Bank premises and equipment are stated at cost, less accumulateddepreciation.  Repairs and maintenanceexpenditures are charged to operating expenses as incurred.  Major improvements and additions to premisesand equipment are capitalized. Depreciation is provided on the straight-line method over the estimateduseful lives of the assets as indicated in Note 7.

 

### Marketingand Advertising Costs– Marketing and advertising costs are expensed as incurred.

###  

Real Estate Acquired Through Foreclosure – Real estate acquired through foreclosureis carried at the lower of the recorded investment in the property or its fairvalue.  The value of the underlying loanis written down to the fair value of the real estate to be acquired by a chargeto the allowance for loan losses, if necessary. Any subsequent write-downs are charged to operating expenses.

 

Income Taxes –The Company accounts for income taxes under the asset and liabilitymethod.  Income tax expense is reportedas the total of current income taxes payable and the net change in deferredincome taxes provided for temporary differences.  Deferred income taxes reflect the net taxeffects of temporary differences between the carrying values of assets andliabilities for financial reporting purposes and the values used for income taxpurposes.  Deferred income taxes are recordedat the statutory Federal and state tax rates in effect at the time that thetemporary differences are expected to reverse.

 

TheCompany files a consolidated Federal income tax return which includes itssubsidiary.  Income tax expense isallocated between the parent company and its subsidiary as if each had filed aseparate return.

 

Earnings Per Common Share – Earnings per common share are calculated by dividing net income bythe weighted-average number of common stock shares outstanding during theyear.  The Company had no securities whichwould be considered potential common stock.

 

Equity – In December 2002,the Company purchased 13,000 shares of Treasury Stock, bringing the totalshares held in Treasury to 76,000.  Afterthe purchase, 703,991 shares of the Company’s stock remained outstanding.

 

Comprehensive Income – Comprehensive income consists of net income and other comprehensiveincome.  Other comprehensive incomeincludes unrealized gains and losses on securities available-for-sale, whichare also recognized as a separate component of equity.

 

Cash and Cash Equivalents - Cash and cash equivalents consist of cash on hand, amounts due frombanks and federal funds sold.

 

Reclassifications – Certain prior year balances have been reclassified to conform to the2004 presentation.

 

40

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Recent Accounting Pronouncements - In December 2004, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards (“FAS”) No. 123 (Revised 2004), *Share-BasedPayment*. The statement requires that compensation cost relating toshare-based payment transactions be recognized in financial statements and thatthis cost be measured based on the fair value of the equity or liabilityinstruments issued.  FAS No. 123(Revised 2004) covers a wide range of share-based compensation arrangementsincluding share options, restricted share plans, performance-based awards,share appreciation rights, and employee share purchase plans. The Company willadopt FAS No. 123 (Revised 2004) on July 1, 2005, although theadoption of the standard is not expected to have a material impact on theCompany’s results of operations.

 

InOctober 2003, the American Institute of Certified Public Accountantsissued SOP 03-3, *Accounting for Loansor Certain Debt Securities Acquired in a Transfer.* SOP 03-3 applies to a loan that isacquired where it is probable, at acquisition, that a transferee will be unableto collect all contractually required payments receivable.  SOP 03-3 requires the recognition, asaccretable yield, of the excess of all cash flows expected at acquisition overthe investor’s initial investment in the loan as interest income on alevel-yield basis over the life of the loan. The amount by which the loan’s contractually required payments exceedthe amount of its expected cash flows at acquisition may not be recognized asan adjustment to yield, a loss accrual, or a valuation allowance for creditrisk.  SOP 03-3 is effective forloans acquired in fiscal years beginning after December 31, 2004.  Early adoption is permitted.  The adoption of SOP 03-3 is notexpected to have a material impact on the consolidated financial statements.

 

**NOTE 2 – INVESTMENT SECURITIES**

 

Thecarrying amounts of investment in securities as shown in the consolidatedbalance sheets of the Bank and their approximate fair values at December 31,are as follows:

 
| ** **                     | ** ** | **December 31, 2004** | ** ** |
|--------------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **Amortized  Cost**        | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|                           |       |                       |       | ** ** |   |   |   |   |   |
| Securities available-for-sale: |       |                       |       |   |   |   |   |   |   |
| Federal agency securities      |       | $                          | 65,686,156 |   | $ | 3,448 |   | $ | 585,629 |   | $ | 65,103,975 |   |
| Equity securities              |       | 629,161                    |       | 186,656 |   | — |   | 815,817 |   |
|                           |       |                       |       |   |   |   |   |   |   |
| Total                          |       | $                          | 66,315,317 |   | $ | 190,104 |   | $ | 585,629 |   | $ | 65,919,792 |   |

 

41

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| ** **                     | ** ** | **December 31, 2003** | ** ** |
|--------------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **Amortized  Cost**        | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
| Securities available-for-sale: |       |                       |       |   |   |   |   |   |   |
| Federal agency securities      |       | $                          | 38,509,935 |   | $ | 58,732 |   | $ | 57,507 |   | $ | 38,511,160 |   |
| U.S. Treasury securities       |       | 9,010,912                  |       | 18,619 |   | — |   | 9,029,531 |   |
| Equity securities              |       | 263,152                    |       | 88,135 |   | — |   | 351,287 |   |
|                           |       |                       |       |   |   |   |   |   |   |
| Total                          |       | $                          | 47,783,999 |   | $ | 165,486 |   | $ | 57,507 |   | $ | 47,891,978 |   |

 

Thefollowing table shows the Company’s gross unrealized losses and fair valueaggregated by investment category and length of time that the individualsecurities have been in a continuous unrealized loss position, at December 31,2004.

 
| **2004**                           | ** ** |
|------------------------------------|------------|
| **Less than Twelve Months  Gross** | ** ** | **Twelve Months or Greater  Gross** | ** ** | **Total  Gross** | ** ** |
| **Unrealized  Loss**               | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** | **Fair  Value** | ** ** |
|                               |       |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale:                |       |   |   |   |   |   |   |   |   |   |   |
| Federal agency securities          |       |   |   |   |   |   |   |   |   |   |   |
|                               |       |   |   |   |   |   |   |   |   |   |   |
| $                                  | 56,696,267 |   | $ | 553,732 |   | $ | 6,154,259 |   | $ | 31,897 |   | $ | 62,850,526 |   | $ | 585,629 |   |
|                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

TheCompany’s investment securities portfolio contains unrealized losses on U.S.Government agency securities, which are generally viewed as having the impliedguarantee of the U.S. government.  On amonthly basis, the Company evaluates the severity and duration of impairmentfor its investment securities portfolio unless the Company has the ability tohold the security to maturity without incurring a loss.  Generally, impairment is considered otherthan temporary when an investment security has sustained a decline in marketvalue of 10 percent or more for a period of 6 months.

 

TheCompany has concluded that any impairment of its investment securitiesportfolio is not other than temporary, but is the result of interest ratechanges, sector rating changes, or company-specific rating changes that are notexpected to result in the noncollection of principal and interest, during theperiod.

 

Theamortized cost and estimated market value of investment in debt securities at December 31,2004, 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  Available-for-Sale** | ** ** |
|------------------------------|------------|------------------------------------|------------|
| ** **                   | ** ** | **Amortized  Cost**                | ** ** | **Estimated  Fair  Value** | ** ** |
|                         |       |                               |       |   |   |
| Due in 1 year or less        |       | $                                  | 19,500,159 |   | $ | 19,360,511 |   |
| Due from 1 year to 5 years   |       | 46,185,997                         |       | 45,743,464 |   |
| Due from 5 years to 10 years |       | —                             |       | — |   |
| Due after 10 years           |       | —                             |       | — |   |
| Equity securities            |       | 629,161                            |       | 815,817 |   |
| Total                        |       | $                                  | 66,315,317 |   | $ | 65,919,792 |   |

 

42

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Proceedsfrom sales of securities available-for-sale during the years ended December 31,2004 and 2003 were $499,063 and $4,976,883, respectively.  There were no sales of investment securitiesclassified as available-for-sale in 2002. Gross gains of $33,607 and gross losses of $16,374 in 2004 and grossgains of $147 and no losses in 2003, were realized on those sales.

 

Thepar value of securities pledged to secure public deposits and for otherpurposes amounted to $23,600,000 in 2004 and $27,012,750 in 2003.

 

**NOTE 3 – RESTRICTION ON CASH, DUE FROM BANKS, AND CONTINGENTLIABILITIES**

 

TheBank is required to maintain average balances with the Federal Reserve Bank.  The average required reserve balances were$1,671,000 and $1,378,000 for 2004 and 2003, respectively.  The Bank had various claims and actionspending at December 31, 2004, arising in the ordinary course ofbusiness.  It is the opinion ofmanagement and legal counsel that such litigation will not materially affectthe Bank’s financial position or earnings.

 

**NOTE 4 – LOANS**

 

Majorclassifications of loans at December 31, 2004 and 2003, are as follows:

 
| ** **                     | ** ** | **2004**   | ** ** | **2003**    | ** ** |
|--------------------------------|------------|------------|------------|-------------|------------|
|                           |       |       |       |        |       |
| Mortgage loans                 |       | $          | 52,661,611 |        | $          | 51,031,339 |   |
| Installment loans              |       | 9,652,026  |       | 10,457,792  |       |
| Commercial and other loans     |       | 35,983,518 |       | 40,125,576  |       |
| Total                          |       | 98,297,155 |       | 101,614,707 |       |
| Less allowance for loan losses |       | 1,263,231  |       | 1,581,414   |       |
|                           |       |       |       |        |       |
| Net loans                      |       | $          | 97,033,924 |        | $          | 100,033,293 |   |

 

Thefollowing is a summary of information pertaining to impaired and non-accrualloans:

 
| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                                           |       |                  |       |   |   |
| Impaired loans without a valuation  allowance  |       | $                     | 479,575    |   | $ | 751,993 |   |
| Impaired loans with a valuation allowance      |       | 926,174               |       | 944,421 |   |
|                                           |       |                  |       |   |   |
| Total impaired loans                           |       | $                     | 1,405,749  |   | $ | 1,696,414 |   |
|                                           |       |                  |       |   |   |
| Valuation allowance related to impaired  loans |       | $                     | 375,956    |   | $ | 426,940 |   |
|                                           |       |                  |       |   |   |
| Total non-accrual loans                        |       | $                     | 734,166    |   | $ | 992,428 |   |

 
| ** **                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                                          |       |                  |       |   |   |
| Average investment in impaired loans          |       | $                     | 1,551,082  |   | $ | 1,377,446 |   |
|                                          |       |                  |       |   |   |
| Interest income recognized on impaired  loans |       | $                     | 58,594     |   | $ | 44,693 |   |

 

43

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Noadditional funds are committed to be advanced in connection with impairedloans.

 

Hadthe above loans not been placed on a non-accrual status, income for the Companywould have increased approximately $86,907, $49,621, and $89,407 for 2004,2003, and 2002, respectively.

 

**NOTE 5 – ALLOWANCE FOR LOAN LOSSES**

 

Activityin the allowance for loan losses is summarized as follows:

 
| ** **                             | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                   |       |                  |       |   |   |   |   |
| Balance at beginning of year           |       | $                     | 1,581,414  |   | $ | 1,618,632 |   | $ | 1,152,777 |   |
| Additions charged to operating expense |       | (308,000              | )          | 2,852 |   | 533,818 |   |
| Recoveries                             |       | 25,566                |       | 43,607 |   | 29,565 |   |
| Total                                  |       | 1,298,980             |       | 1,665,091 |   | 1,716,160 |   |
| Less loans charged-off                 |       | 35,749                |       | 83,677 |   | 97,528 |   |
|                                   |       |                  |       |   |   |   |   |
| Balance at end of year                 |       | $                     | 1,263,231  |   | $ | 1,581,414 |   | $ | 1,618,632 |   |

 

**NOTE 6 – RELATED PARTY TRANSACTIONS**

 

Directorsand officers of the Company and its subsidiaries, and their associates, werecustomers of, and had other transactions with the Bank in the normal course ofbusiness. All loans and commitments included in such transactions were made onsubstantially the same terms, including interest and collateral, as thoseprevailing at the time for comparable transactions with other persons and donot involve more than the normal risk of collectibility.  Such loans totaled $2,687,413 at December 31,2004, and $3,385,958 at December 31, 2003.

 

Thefollowing is an analysis of loan activity to directors, executive officers, andassociates of the Company and its subsidiary for 2004:

 
| Balance, January 1      |   | $        | 3,385,958 |   |
|------------------------------|--------|----------|-----------|--------|
| New loans during the period  |   | 194,970  |      |
| Repayments during the period |   | (893,575 | )         |
|                         |   |     |      |
| Ending balance               |   | $        | 2,687,413 |   |

 

**NOTE 7 – BANK PREMISES AND EQUIPMENT**

 

Premisesand equipment are stated at cost, less accumulated depreciation, as follows:

 
| ** **                         | ** ** | **December 31,** | ** ** | **Original  Useful Life** | ** ** |
|------------------------------------|------------|-----------------------|------------|---------------------------|------------|
| ** **                         | ** ** | **2004**              | ** ** | **2003**                  | ** ** | **Years** | ** ** |
|                               |       |                  |       |                      |       |   |   |
| Land                               |       | $                     | 949,972    |                      | $          | 949,972 |   |   |   |
| Banking house                      |       | 3,303,308             |       | 3,303,308                 |       | 10 – 40 |   |
| Furniture, fixtures, and equipment |       | 2,465,104             |       | 2,564,916                 |       | 3 – 20 |   |
| Total                              |       | 6,718,384             |       | 6,818,196                 |       |   |   |
| Less accumulated depreciation      |       | 3,527,359             |       | 3,715,194                 |       |   |   |
| Net bank premises and equipment    |       | $                     | 3,191,025  |                      | $          | 3,103,002 |   |   |   |

 

44

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Chargesto operations for depreciation amounted to $288,257, $259,804, and $273,928 for2004, 2003 and 2002, respectively.

 

**NOTE 8 – DEPOSITS**

 

Thefollowing is a summary of interest-bearing deposits, by type, as of December 31:

 
| ** **                                              | ** ** | **2004**   | ** **  | **2003**   | ** ** |
|---------------------------------------------------------|------------|------------|-------------|------------|------------|
|                                                    |       |       |        |       |       |
| NOW and Super NOW accounts                              |       | $          | 19,459,844  |       | $          | 17,661,908 |   |
| Money market accounts                                   |       | 4,215,549  |        | 4,073,263  |       |
| Savings accounts                                        |       | 46,548,944 |        | 43,203,543 |       |
| Regular certificates of deposit                         |       | 51,774,328 |        | 51,969,170 |       |
| Individual retirement accounts and other  time deposits |       | 5,220,961  |        | 5,625,482  |       |
|                                                    |       |       |        |       |       |
| Total                                                   |       | $          | 127,219,626 |       | $          | 122,533,366 |   |

 

Certificatesof deposit, in denominations of $100,000 or more, totaled $18,216,808 and$16,787,499 at December 31, 2004 and 2003, respectively.  Interest paid on all time deposits totaled$1,420,922 and $1,671,827 for the years ended December 31, 2004 and 2003,respectively.

 

45

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Amaturity distribution of time certificates of deposit of $100,000 or more at December 31,2004, follows:

 
| ** **                | ** ** | **Amount** | ** ** | **Percent** | ** ** |
|---------------------------|------------|------------|------------|-------------|------------|
|                      |       |       |       |        |       |
| Three months or less      |       | $          | 3,407,542  |        | 18.7       | % |
| Three through six months  |       | 2,337,258  |       | 12.8        |       |
| Six through twelve months |       | 4,711,257  |       | 25.9        |       |
| Over twelve months        |       | 7,760,751  |       | 42.6        |       |
|                      |       |       |       |        |       |
| Total                     |       | $          | 18,216,808 |        | 100.0      | % |

 

AtDecember 31, 2004, the scheduled maturities of time deposits are asfollows:

 
| 2005          |   | $          | 31,049,682 |   |
|---------------|--------|------------|------------|--------|
| 2006          |   | 12,577,697 |       |
| 2007          |   | 8,317,135  |       |
| 2008          |   | 2,688,856  |       |
| 2009 and over |   | 2,361,919  |       |
|          |   |       |       |
| Total         |   | $          | 56,995,289 |   |

 

**NOTE 9 – REPURCHASE AGREEMENTS**

 

Repurchaseagreements represent financing arrangements whereby the Company sellssecurities and agrees to repurchase the identical securities at the maturitydate of the agreement for a specified price. The securities underlying the agreements remain under the Company’scontrol.  Information related torepurchase agreements is summarized below:

 
| ** **                                | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|-------------------------------------------|------------|-----------|------------|-----------|------------|
|                                      |       |      |       |      |       |
| Balance at end of year                    |       | $         | 2,000,000  |      | $          | 3,000,000 |   |
| Average balance during the year           |       | 2,435,616 |       | 2,852,461 |       |
| Maximum month-end balance                 |       | 3,000,000 |       | 3,000,000 |       |
| Weighted-average rate during the year     |       | 3.54      | %          | 3.51      | %          |
| Weighted-average rate at December 31 |       | 3.50      | %          | 3.58      | %          |
|                                           |            |           |            |           |            |  |  |

 

46

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**NOTE 10 – INCOME TAX**

 

Theprovisions for income taxes at December 31 consist of:

 
| ** **         | ** ** | **2004** | ** ** | **2003** | ** ** | **2002**  | ** ** |
|--------------------|------------|----------|------------|----------|------------|-----------|------------|
|               |       |     |       |     |       |      |       |
| Current            |       | $        | 776,751    |     | $          | 1,082,066 |       | $ | 1,194,397 |   |
| Deferred           |       | 199,089  |       | (48,707  | )          | (130,620  | )          |
|               |       |     |       |     |       |      |       |
| Income tax expense |       | $        | 975,840    |     | $          | 1,033,359 |       | $ | 1,063,777 |   |

 

Deferredtax assets and deferred tax liabilities are comprised of the following:

 
| ** **                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
|                                                |       |     |       |     |       |
| Items giving rise to deferred tax assets:           |       |     |       |     |       |
| Allowance for loan losses in excess of tax  reserve |       | $        | 368,793    |     | $          | 483,275 |   |
| Deferred compensation                               |       | 52,784   |       | 26,808   |       |
| Other                                               |       | 2,922    |       | 62,629   |       |
| Unrealized loss on securities  available-for-sale   |       | 170,075  |       |     |       |
| Total deferred tax assets                           |       | 594,574  |       | 572,712  |       |
| Items giving rise to deferred tax liabilities:      |       |     |       |     |       |
| Property and equipment                              |       | (158,860 | )          | (94,893  | )          |
| Unrealized gain on securities  available-for-sale   |       | (46,431  | )          |     |       |
| Investment accretion                                |       | —   |       | (16,013  | )          |
| Total deferred tax liabilities                      |       | (158,860 | )          | (157,337 | )          |
|                                                |       |     |       |     |       |
| Net deferred tax asset                              |       | $        | 435,714    |     | $          | 415,375 |   |

 

Areconciliation between the amount of reported income tax expense and the amountcomputed by applying the statutory federal income tax rate to income beforeincome taxes for the year ended December 31 is as follows:

 
| ** **                                           | ** ** | **2004**   | ** ** | **2003**    | ** ** | **2002**   | ** ** |
|------------------------------------------------------|------------|------------|------------|-------------|------------|------------|------------|
| ** **                                           | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
|                                                 |       |       |       |        |       |       |       |   |   |   |   |   |   |
| Computed tax at statutory federal rate               |       | $          | 861,54     |        | 34.0       | %          | $          | 997,690 |   | 34.0 | % | $ | 987,907 |   | 34.0 | % |
| Plus state income taxes net of federal tax  benefits |       | 40,444     |       | 1.6         |       | 67,595     |       | 2.3 |   | 74,346 |   | 2.6 |   |
|                                                 |       | 902,008    |       | 35.6        |       | 1,065,285  |       | 36.3 |   | 1,062,253 |   | 36.6 |   |
| Effect of:                                           |       |       |       |        |       |       |       |   |   |   |   |   |   |
| Dividends received deduction                         |       | (7,204     | )          | (0.2        | )          | (3,634     | )          | (0.1 | ) | (2,193 | ) | (0.1 | ) |
| Life insurance earnings                              |       | (22,014    | )          | (0.8        | )          | (3,921     | )          | (0.1 | ) | — |   | 0.0 |   |
| Travel and dues                                      |       | 1,639      |       | 0.0         |       | 1,593      |       | 0.1 |   | 1,593 |   | 0.0 |   |
| Others - net                                         |       | 101,411    |       | 3.9         |       | (25,964    | )          | (1.0 | ) | 2,124 |   | 0.1 |   |
|                                                 |       |       |       |        |       |       |       |   |   |   |   |   |   |
| Actual tax expense                                   |       | $          | 975,840    |        | 38.5       | %          | $          | 1,033,359 |   | 35.2 | % | $ | 1,063,777 |   | 36.6 | % |

 

47

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**NOTE 11– EMPLOYEE BENEFIT PLANS**

 

TheCompany’s subsidiary has a qualified profit sharing and a 401(k) employeebenefit plan covering substantially all employees.  The contributions to the plans are at thediscretion of the plan’s advisory board and amounted to $114,302, $124,470, and$121,121 in 2004, 2003 and 2002, respectively.

 

**NOTE 12- DEFERRED COMPENSATION AND LIFE INSURANCE**

 

OnOctober 28, 2003, the Company entered into an agreement with an executiveofficer for the payment of deferred compensation upon retirement.  As a result, the Company has made a provisionfor the future compensation.  At December31, 2004, $78,512 has been accrued under this contract and this liability hasbeen recognized in the financial statements. Deferred compensation is to be paid to the individual or his beneficiaryupon reaching age 65.  Payments will bemade over his lifetime, with a minimum payment of fourteen years.

 

Inorder to offset the cost of the deferred compensation arrangement describedabove, the Company purchased a life insurance policy on the executive.  The Company is the owner and beneficiary ofthe policy with a death benefit of $4,380,000 on the life of the employee.  The policy had a cash surrender value of$2,076,279 at December 31, 2004.

 

**NOTE 13– COMMITMENTS AND CONTINGENCIES**

 

TheBank is a party to financial instruments with off-balance-sheet risk in thenormal course of business to meet the financing needs of its customers.  These financial instruments include loancommitments and standby letters of credit. The instruments involve, to varying degrees, elements of credit andinterest rate risk in excess of the amount recognized in the financialstatements.

 

TheCompany’s exposure to credit loss in the event of nonperformance by the otherparty to the financial instrument for loan commitments and standby letters ofcredit is represented by the contractual amount of those instruments.  The Bank uses the same credit policies inmaking commitments and conditional obligations as it does for on-balance-sheetinstruments.

 

Thetotal amounts of off-balance-sheet financial instruments with credit risk areas follows:

 
| ** **                | ** ** | **December 31,** | ** ** |
|---------------------------|------------|------------------|------------|
| ** **                | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                      |       |             |       |   |   |
| Loan commitments          |       | $                | 13,966,000 |   | $ | 11,669,000 |   |
| Standby letters of credit |       | 856,000          |       | 1,027,000 |   |
|                           |            |                  |            |  |  |  |  |

 

48

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Commitmentsto extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract.  Commitments generally have fixed expirationdates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected toexpire without being drawn upon, the total commitment amounts do notnecessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-casebasis.  The amount of collateralobtained, if deemed necessary by the Bank upon extension of credit, is based onmanagement’s credit evaluation of the counterparty.  Collateral held varies, but may includeaccounts receivable, inventory, property, plant, and equipment, and income-producingcommercial properties.

 

Standbyletters of credit are conditional commitments issued by the Company toguarantee the performance of a customer to a third party.  These guarantees are primarily issued tosupport public and private borrowing arrangements. The credit risk involved inissuing letters of credit is essentially the same as that involved in extendingloan facilities to customers.

 

**NOTE 14- CONCENTRATION OF CREDIT RISK**

 

Mostof the Bank’s loans and commitments have been granted to customers in the Bank’sprimary market area of Logan and Lincoln Counties in West Virginia.  In the normal course of business, however,the Bank has originated loans outside of its primary market area.  The aggregate loan balances outstanding inany one geographic area, other than the Bank’s primary lending areas, do notexceed 10 percent of total loans.  Nospecific industry concentrations exceeded 10 percent of total exposure.  The concentrations of credit by type of loanare set forth in Note 4.

 

**NOTE 15 - REGULATORY MATTERS**

 

TheBank is subject to various regulatory capital requirements administered by thefederal banking agencies.  Failure tomeet minimum capital requirements can initiate certain mandatory and possiblyadditional discretionary, actions by regulators that, if undertaken, could havea direct material effect on the Bank’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of the Bank’s assets,liabilities, and certain off-balance-sheet items as calculated under regulatoryaccounting practices.  The Bank’s capitalamounts and classifications are also subject to qualitative judgments by theregulators about components, risk, weighting, and other factors.

 

Quantitativemeasures established by regulation to ensure capital adequacy require the banksto maintain minimum amounts and ratios (set forth in the table below) of totaland Tier I capital (as defined in the regulations) to risk-weighted assets (asdefined), and of Tier I capital (as defined) to average assets (asdefined).  Management believes, as of December31, 2004, that the Bank meets all capital adequacy requirements to which it issubject.

 

Asof December 31, 2004, the most recent notification from the Federal ReserveBank categorized the Bank as well capitalized under the regulatory frameworkfor prompt corrective action.  To becategorized as well capitalized, the Bank must maintain minimum totalrisk-based, Tier I risk-based, and Tier I leverage ratios as set forth in thetable.  There are no conditions or eventssince those notifications that management believes have changed the institution’scategory.

 

49

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| ** **                                | ** ** | **Actual** | ** ** | **For Capital   Adequacy Purposes** | ** ** | **To Be Well   Capitalized Under   Prompt Corrective   Action Provisions** | ** ** |
|-------------------------------------------|------------|------------|------------|-------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **(Amounts Expressed in Thousands)**      | ** ** | **Amount** | ** ** | **Ratio**                           | ** ** | **Amount**                                                                 | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
|                                      |       |       |       |                                |       |                                                                       |       |   |   |   |   |   |   |
| As of December 31, 2004:                  |       |       |       |                                |       |                                                                       |       |   |   |   |   |   |   |
| Total Capital  (to Risk Weighted Assets)  |       | $          | 17,927     |                                | 18.90%     |                                                                       | $          | 7,593 |   | 8.0% |   | $ | 9,491 |   | 10.0% |   |
| Tier I Capital  (to Risk Weighted Assets) |       | $          | 18,235     |                                | 19.21%     |                                                                       | $          | 3,796 |   | 4.0% |   | $ | 5,695 |   | 6.0% |   |
| Tier I Capital  (to Average Assets)       |       | $          | 19,422     |                                | 10.55%     |                                                                       | $          | 7,366 |   | 4.0% |   | $ | 9,208 |   | 5.0% |   |

 

 

| ** **                                | ** ** | **Actual** | ** ** | **For Capital   Adequacy Purposes** | ** ** | **To Be Well  Capitalized Under   Prompt Corrective   Action Provisions** | ** ** |
|-------------------------------------------|------------|------------|------------|-------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **(Amount Expressed in Thousands)**       | ** ** | **Amount** | ** ** | **Ratio**                           | ** ** | **Amount**                                                                | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                                | ** ** | ** ** | ** ** | ** **                          | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| As of December 31, 2003:                  |       |       |       |                                |       |                                                                      |       |   |   |   |   |   |   |
| Total Capital  (to Risk Weighted Assets)  |       | $          | 17,790     |                                | 18.8%      |                                                                      | $          | 7,564 |   | 8.0% |   | $ | 9,455 |   | 10.0% |   |
| Tier I Capital  (to Risk Weighted Assets) |       | $          | 17,755     |                                | 18.8%      |                                                                      | $          | 3,782 |   | 4.0% |   | $ | 5,673 |   | 6.0% |   |
| Tier I Capital  (to Average Assets)       |       | $          | 18,972     |                                | 10.8%      |                                                                      | $          | 7,050 |   | 4.0% |   | $ | 8,812 |   | 5.0% |   |

 

**NOTE 16 - LIMITATIONS ON DIVIDENDS**

 

WestVirginia State Law precludes the Bank from paying dividends without the priorapproval of the Commissioner of Banking, if such dividends exceed the total ofthe Bank’s net profits as defined for the year, combined with its net profitsof the previous 2 years.  Under thisformula, the Bank is limited to paying dividends in 2005 to the amount of its2005 net profit without the approval of the Commissioner of Banking.  The subsidiary Bank is the primary source offunds to pay dividends to the stockholders of Logan County BancShares, Inc.

 

**NOTE 17 – REORGANIZATION**

 

On December 14, 2004, the Company announced itsintention to engage in a corporate reorganization commonly known as a “goingprivate” transaction.  The transactionwill be structured as a merger transaction with a “shell” corporation merginginto the Company.  The purpose of thistransaction is to allow the Company to go private under Federal securitieslaws.  Under the proposed going privatetransaction, stockholders who own less than 200 shares will receive cash fortheir shares.  Stockholders who own 200or more shares will continue to be stockholders of the Company.  The exact terms of the going privatetransaction have not been finalized.  OnDecember 14, 2004, the Company mailed a letter to its shareholders announcingits intention to engage in the merger transaction.

 

50

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**NOTE 18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIALINSTRUMENTS**

 

Thereported fair values of financial instruments are based on a variety offactors.  Where possible, fair valuesrepresent quoted market prices for identical or comparable instruments.  In other cases, fair values have beenestimated based on assumptions concerning the amount and timing of estimatedfuture cash flows and assumed discount rates reflecting varying degrees ofrisk.  Intangible values assigned tocustomer relationships are not reflected in the reported fair values.  Accordingly, the fair values may notrepresent actual values of the financial instruments that could have beenrealized as of year end or that will be realized in the future.

 

Thefollowing methods and assumptions were used by the Company in estimating thefair value disclosures for financial instruments:

 

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

 

Investment Securities:  Fair values for investmentsecurities 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.

 

Repurchase Agreements:  For these short-terminstruments, the carrying amount is a reasonable estimate of fair value.

 

Off-Balance-Sheet Instruments:  Commitments to extend creditand standby letters of credit represent agreements to lend to a customer at themarket rate when the loan is extended, thus the commitments and letters ofcredit are not considered to have a fair value.

 

51

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Theestimates of fair values of financial instruments are summarized as follows atDecember 31:

 
| ** **                  | ** ** | **2004**             | ** ** | **2003**        | ** ** |
|-----------------------------|------------|----------------------|------------|-----------------|------------|
| ** **                  | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| ** **                  | ** ** | ** **           | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Financial  assets:          | ** ** | ** **           | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and due from banks     |       | $                    | 5,944,550  |            | $          | 5,994,550 |   | $ | 5,342,353 |   | $ | 5,342,353 |   |
| Federal funds sold          |       | 5,990,000            |       | 5,990,000       |       | 13,385,000 |   | 13,385,000 |   |
| Investment securities       |       | 65,919,792           |       | 65,919,792      |       | 47,891,978 |   | 47,891,978 |   |
| Loans                       |       | 97,033,924           |       | 99,825,320      |       | 100,033,293 |   | 103,913,636 |   |
| Accrued interest receivable |       | 675,279              |       | 675,279         |       | 843,052 |   | 843,052 |   |
| Bank-owned life insurance   |       | 2,076,279            |       | 2,076,279       |       | 2,011,532 |   | 2,011,532 |   |
|                        |       |                 |       |            |       |   |   |   |   |
| Financial liabilities:      |       |                 |       |            |       |   |   |   |   |
| Deposits                    |       | 161,211,199          |       | 161,794,567     |       | 152,254,743 |   | 152,853,045 |   |
| Repurchase agreements       |       | 2,000,000            |       | 2,000,000       |       | 3,000,000 |   | 3,000,000 |   |
| Accrued interest payable    |       | 70,166               |       | 70,166          |       | 82,050 |   | 82,050 |   |
|                             |            |                      |            |                 |            |  |  |  |  |  |  |  |  |

 

**NOTE 19 - CONDENSED PARENT COMPANYONLY FINANCIAL STATEMENTS**

 

Presentedbelow are the condensed balance sheets, statements of income, and statements ofcash flows for Logan County BancShares, Inc.:

 

**BALANCE SHEETS**

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|------------------|------------|
| ** **                                      | ** ** | **2004**         | ** ** | **2003** | ** ** |
| **ASSETS**                                      |       |             |       |   |   |
| Cash                                            |       | $                | 1,433,106  |   | $ | 1,897,530 |   |
| Securities available for sale, at fair  value   |       | 815,818          |       | 351,287 |   |
| Other assets                                    |       | 48,238           |       | 30,799 |   |
| Investment in subsidiary                        |       | 16,091,318       |       | 15,894,269 |   |
|                                            |       |             |       |   |   |
| Total assets                                    |       | $                | 18,388,480 |   | $ | 18,173,578 |   |
|                                            |       |             |       |   |   |
| **LIABILITIES**                                 |       |             |       |   |   |
| Other                                           |       | $                | 461,149    |   | $ | 384,303 |   |
|                                            |       |             |       |   |   |
| **STOCKHOLDERS’ EQUITY**                   |       | 17,927,331       |       | 17,789,582 |   |
| ** **                                      |       |             |       |   |   |
| Total liabilities and stockholders’ equity |       | $                | 18,388,480 |   | $ | 18,173,885 |   |

 

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**STATEMENTS OF INCOME**

 
| ** **                                                                       | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                       | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| **OPERATING INCOME**                                                             |       |                        |       |   |   |   |   |
| Other income                                                                     |       | $                           | 71,931     |   | $ | 10,440 |   | $ | 67,284 |   |
| Dividends from subsidiary                                                        |       | 1,133,426                   |       | 2,726,471 |   | 1,706,148 |   |
| Total operating income                                                           |       | 1,205,357                   |       | 2,736,911 |   | 1,773,432 |   |
|                                                                             |       |                        |       |   |   |   |   |
| **OPERATING EXPENSES**                                                           |       | 264,225                     |       | 109,469 |   | 121,459 |   |
| ** **                                                                       |       |                        |       |   |   |   |   |
| Income before income tax and equity in  undistributed earnings of subsidiary     |       | 941,132                     |       | 2,627,442 |   | 1,651,973 |   |
|                                                                             |       |                        |       |   |   |   |   |
| **INCOME TAX BENEFIT**                                                           |       | 76,842                      |       | 38,630 |   | 43,127 |   |
|                                                                             |       |                        |       |   |   |   |   |
| Income before equity in undistributed  earnings of subsidiary                    |       | 1,017,974                   |       | 2,666,072 |   | 1,695,100 |   |
|                                                                             |       |                        |       |   |   |   |   |
| **EQUITY IN UNDISTRIBUTED (DISTRIBUTIONS IN  EXCESS OF) EARNINGS OF SUBSIDIARY** |       | 540,199                     |       | (765,009 | ) | 146,732 |   |
| ** **                                                                       |       |                        |       |   |   |   |   |
| Net income                                                                       |       | $                           | 1,558,173  |   | $ | 1,901,063 |   | $ | 1,841,832 |   |

 

**STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                                  |       |                        |       |   |   |   |   |
| Net income                                                                                |       | $                           | 1,558,170  |   | $ | 1,901,063 |   | $ | 1,841,833 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:   |       |                        |       |   |   |   |   |
| (Gain) or loss on sale of securities                                                      |       | (17,233                     | )          | — |   | — |   |
| Equity in undistributed (distribution in  excess of) earnings of subsidiary               |       | (540,199                    | )          | 765,009 |   | (146,732 | ) |
| Change in deferred tax                                                                    |       | (42,361                     | )          | — |   | — |   |
| Change in other assets                                                                    |       | (1,192                      | )          | 16,069 |   | (110,591 | ) |
| Change in other liabilities                                                               |       | 60,593                      |       | (49,629 | ) | 7,343 |   |
| Net cash provided by operating activities                                                 |       | 1,017,778                   |       | 2,632,512 |   | 1,591,853 |   |
|                                                                                      |       |                        |       |   |   |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                                  |       |                        |       |   |   |   |   |
| Proceeds from sale of securities                                                          |       | 499,063                     |       | — |   | — |   |
| Purchases of securities                                                                   |       | (847,839                    | )          | — |   | — |   |
| Net cash used in investing activities                                                     |       | (348,776                    | )          | — |   | — |   |
|                                                                                           |            |                             |            |  |  |  |  |  |  |  |

 

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| **CASH FLOWS FROM**  **FINANCING ACTIVITIES** |   |       |      |       |   |       |   |
|----------------------------------------------------|--------|------------|-----------|------------|--------|------------|--------|
| Purchase of Treasury stock                         |   | —     |      | —     |   | (546,000   | )      |
| Dividends paid                                     |   | (1,133,426 | )         | (1,104,726 | )      | (1,096,996 | )      |
| Net cash used in financing activities              |   | (1,133,426 | )         | (1,104,726 | )      | (1,642,996 | )      |
|                                               |   |       |      |       |   |       |   |
| Change in cash and cash equivalents                |   | (464,424   | )         | 1,527,786  |   | (51,143    | )      |
|                                               |   |       |      |       |   |       |   |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF  YEAR**  |   | 1,897,530  |      | 369,744    |   | 420,887    |   |
|                                               |   |       |      |       |   |       |   |
| **CASH AND CASH EQUIVALENTS, END OF YEAR**         |   | $          | 1,433,106 |       | $      | 1,897,530  |   | $ | 369,744 |   |
|                                                    |        |            |           |            |        |            |        |  |  |  |

 

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ITEM 9 – CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A –CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the periodcovered by this report, the Company’s Chief Executive Officer and ChiefFinancial Officer evaluated the effectiveness of the Company’s disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)).  Based on their evaluation,the Chief Executive Officer and Chief Financial Officer concluded that theCompany’s disclosure controls and procedures were effective.

 

Changes inInternal Control Over Financial Reporting

 

There were nochanges in the Company’s internal control over financial reporting during thefourth quarter for the year ended December 31, 2004, that materially affected,or are reasonably likely to materially affect, the Company’s internal controlover financial reporting.

 

ITEM 9B – OTHERINFORMATION

 

Item 1.01                                                 Entryinto a Material Definitive Agreement

 

On December 7,2004, the Board of Directors of the Company granted an increase in the annualsalary and awarded a bonus to Eddie Canterbury, the Company’s Chief ExecutiveOfficer.  Mr. Canterbury is the onlyindividual that will be disclosed as a named executive officer in the Company’s2005 Proxy Statement.  A summary of thecompensation awarded to the Chief Executive Officer is attached hereto asExhibit 10.c. to this Annual Report on Form 10-K and is incorporated herein byreference.

 

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**PART III**

 

ITEM 10 –DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

Setforth below is information concerning the Company’s Directors, Nominees forDirector and Executive Officers.

 
| **Name**           | ** ** | **Age as of  December 31, 2004** | ** ** | **Positions with the Company  and Logan Bank & Trust  Company (“LB&T”)**                                                                                                        | ** ** | **Business Experience  During Last Five Years  and Directorships**                                                                                                                                         |
|--------------------|------------|----------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Harvey Oakley      |       | 84                               |       | Director of the Company since 1985 and Director of  LB&T since 1964; President and Chairman of the Board of Directors of  Company since 1985 and Chairman of the Board of LB&T since 1964 |       | Attorney at Law; President of the Company                                                                                                                                                                  |
|               |       |                             |       |                                                                                                                                                                                              |       |                                                                                                                                                                                                       |
| Clell  Peyton      |       | 68                               |       | Director  of the Company since 1985 and Director of LB&T since 1996                                                                                                                           |       | Retired,  Nationwide Insurance Company.                                                                                                                                                                    |
|               |       |                             |       |                                                                                                                                                                                              |       |                                                                                                                                                                                                       |
| Earle  B. Queen    |       | 77                               |       | Director  of the Company since 1985 and Director of LB&T since 1964                                                                                                                           |       | President,  James Funeral Home; Director of West Logan Water Co., Queen Brothers, Inc.  and Funeral Services, Inc.                                                                                         |
|               |       |                             |       |                                                                                                                                                                                              |       |                                                                                                                                                                                                       |
| LaVeta  Jean Ray   |       | 73                               |       | Director  of the Company since 1985                                                                                                                                                               |       | Retired;  Counselor, Chapmanville High School.                                                                                                                                                             |
|               |       |                             |       |                                                                                                                                                                                              |       |                                                                                                                                                                                                       |
| William  W. Wagner |       | 72                               |       | Director  of the Company since 1985 and Director of LB&T since 1976                                                                                                                           |       | Retired;  Former Director and Executive Comm. Of United Bankshares, Inc.; Former  Chairman of Eagle Bancorp. Inc.                                                                                          |
|               |       |                             |       |                                                                                                                                                                                              |       |                                                                                                                                                                                                       |
| Eddie  Canterbury  |       | 56                               |       | Director  and Executive Vice-President and CEO of the Company since 1985; Director of  LB&T since 1980; CEO of LB&T since 1982 and President of LB&T  since 2000                      |       | Executive  Vice President and CEO of the Company and President and CEO of LB&T;  Director of KY/WV Cable, Inc., Greentree Cable of KY, Inc., Louisa Cable  & TV, Inc. and Logan County Cable, Inc. |

 

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| **Name**         | ** ** | **Age as of  December 31, 2004** | ** ** | **Positions with the Company  and Logan Bank & Trust  Company (“LB&T”)** | ** ** | **Business Experience  During Last Five Years  and Directorships**                                          |
|------------------|------------|----------------------------------|------------|--------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|
| Walter  D. Vance |       | 54                               |       | Director  and Vice President of the Company since 1985                                     |       | Vice  President of the Company; Pharmacist; and Vice President and Director of  Aracoma Drug Company.       |
|             |       |                             |       |                                                                                       |       |                                                                                                        |
| Glenn  T. Yost   |       | 47                               |       | Director  of the Company and LB&T since 1994                                           |       | President,  W.W. McDonald Land Co.; President, Triadelphia Land Co.; President, Bruce  McDonald Holding Co. |
|             |       |                             |       |                                                                                       |       |                                                                                                        |
| David  McCormick |       | 57                               |       | Director  of the Company and LB&T since 1994                                           |       | President,  McCormick’s, Inc.; President, Bodaco, Co.                                                  |
|             |       |                             |       |                                                                                       |       |                                                                                                        |
| Michael  Winter  |       | 28                               |       | Director  of the Company and LB&T since May, 2004                                      |       | Insurance  agent; Director and Vice-President of Bray & Oakley Insurance Agency,  Inc.                  |

 

FAMILY RELATIONSHIPS

 

Harvey Oakley is William W. Wagner’s uncle and Michael Winter’sgreat uncle.

 

AUDIT COMMITTEE

 

The Company has a standing Audit Committee established inaccordance with Section 3(a)(58)(A) of the Exchange Act.  The members of the standing Audit Committeeare: Glenn T. Yost, Chairman, Earle B. Queen, and Clell Peyton.

 

Pursuant to the provisions of the Sarbanes-Oxley Act, whichwas enacted in 2002, the SEC adopted rules requiring companies to disclosewhether at least one member of the audit committee is an “audit committeefinancial expert” as defined in such rules.

 

No current member of the Company’s Audit Committee meets thecriteria set forth in the rules which would qualify them as a financialexpert.  The current Audit Committeemembers have been selected by the Board of Directors based on the Board’sdetermination that they are fully qualified to monitor the performance ofmanagement and the Company’s financial condition, and to oversee its internalaccounting operations and its independent auditors.  In addition, the Audit Committee has beenauthorized to retain independent accounting, legal or other consultants toassist it in performing these functions as it deems appropriate.  The Board is conducting further analysis ofthe backgrounds of its current members to determine if any member not currentlyon the Audit Committee may qualify as a financial expert.

 

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CODE OF ETHICS

 

In January, 2003, the SEC adopted final rules under theSarbanes-Oxley Act of 2002 (the “Act”), regarding disclosure of whethercompanies have a Code of Ethics for their chief executive officers and chieffinancial officers.  As of December 31,2003, the Company had not adopted a Code of Ethics applicable to its ExecutiveVice-President and Chief Executive Officer and its Vice-President and ChiefFinancial Officer because the Company was not aware that it was subject to therequirements of the Act until the second quarter of 2004.  Promptly upon becoming aware that it wassubject to the requirements of the Act, the Company adopted a Code of Ethicsapplicable to its Executive Vice President and Chief Executive Officer and itsVice-President and Chief Financial Officer. A copy of the Code of Ethics is attached as Exhibit 14 to this annualreport.

 

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ITEM11 –EXECUTIVE COMPENSATION

 

**EXECUTIVECOMPENSATION**

 

**Cash Compensation**

 

The table below sets forth the cash compensation of theCompany’s CEO.  No other executiveofficer of the Company earned $100,000 or more in salary and bonus for theyears ended December 31, 2004, 2003, and 2002.

 

**Summary Compensation Table**

 
| ** **                                                                                                                                                                                    | ** ** | ** **              | ** ** | **Long Term Compensation** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|------------|------------|
| ** **                                                                                                                                                                                    | ** ** | **Annual Compensation** | ** ** | **Securities**             | ** ** | ** ** | ** ** |
| **Name and  Principal Position**                                                                                                                                                              | ** ** | **Year**                | ** ** | **Salary**                 | ** ** | **Bonus**  | ** ** | **Other Compensation(1)** | ** ** | **Underlying  Options** | ** ** | **All  Other(2)** | ** ** |
| Eddie Canterbury  Executive Vice President and  Chief Executive Officer of the  Company and President and  Chief Executive Officer of  Logan Bank & Trust Company  (“LB&T”) |       | 2004                    |       | $                          | 123,000    |       | $          | 20,000 |   | — |   | 0 |   | $ | 11,440 |   |
|                                                                                                                                                                                          | 2003       |                    | $          | 120,000                    |       | $          | 20,000     |   | — |   | 0 |   | $ | 11,200 |   |
|                                                                                                                                                                                          | 2002       |                    | $          | 120,000                    |       | $          | 20,000     |   | — |   | 0 |   | $ | 11,200 |   |
|                                                                                                                                                                                          |       |                    |       |                       |       |       |       |   |   |   |   |
|                                                                                                                                                                                          |       |                    |       |                       |       |       |       |   |   |   |   |

 

----

(1)                                  TheCEO did not receive perquisites or other personal benefits, securities orproperty during 2004 which, in the aggregate cost the Company an amount thatequaled or exceeded the lesser of $50,000 or 10% of the CEO’s salary and bonusearned during the year.

 

(2)                                  Includespayments made to the Company’s 401(K) Profit Sharing Plan.

 

**EMPLOYMENT AGREEMENT AND SUPPLEMENTALEXECUTIVE RETIREMENT PLAN**

 

Employment Agreement

 

Effective October 1, 1998, Logan CountyBancShares, Inc. and Logan Bank & Trust Company (collectively referred toas the “Employers”) entered into an employment agreement with Eddie Canterbury(the “Agreement”).  Pursuant to theAgreement, the Employers agreed to employ Mr. Canterbury as the ExecutiveVice President and Chief Executive Officer and Mr. Canterbury agreed to performsuch executive services for the Employers as consistent with his title and asmay be assigned to him by the Employers’ Boards of Directors.  The Agreement provides for a three (3) yearterm commencing on October 1, 1998.  TheAgreement is automatically renewed for additional one (1) year periods unlessthe Employers’ Boards of Directors or the Employee provides contrary writtennotice to the other not less than forty-five (45) days in advance of eachOctober 1.  The Agreement will not extendbeyond the calendar month in which Mr.Canterbury turns 65 years of age.

 

59

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The Agreement provides that Mr. Canterbury willreceive a base salary, which may be increased from time to time, in suchamounts as may be determined by the Employers’ Boards of Directors.  Mr. Canterbury’s 2004 salary is shown inthe salary column of the Summary Compensation Table.  The Agreement alsoprovides Mr. Canterbury with the same fringe benefits that Mr. Canterburyreceived prior to entering into the Agreement.

 

The Agreement restricts Mr. Canterbury fromdirectly or indirectly engaging in or making any financial investment in, anyfirm, corporation, business entity or business enterprise which is competitivewith or to any business of the Employers. This restriction does not prohibit Mr. Canterbury from owning passiveinvestments, including investments in the securities of other financialinstitutions of not more than two percent (2.0%) of each financial institution’soutstanding capital stock, as long as such ownership does not requireMr. Canterbury to devote substantial time to management or control of thebusiness or activities in which he has invested.

 

Pursuant to the Agreement, the Employers mayterminate Mr. Canterbury upon prior written notice, including termination for “justcause” and termination because Mr. Canterbury becomes subject to total andpermanent disability.  “Just cause”includes: personal dishonesty, incompetence, willful misconduct, breach offiduciary duty, willful failure to perform lawful duties assigned andprescribed by the Employers’ Boards of Directors, willful violation of any law,rule or regulation (other than traffic violations or similar offenses) or finalcease-and-desist order, or material breach of any provision of the Agreement.

 

Mr. Canterbury has the right to terminate theAgreement upon prior written notice to the Employers.  If the Agreement is terminated by Mr.Canterbury for any reason other than “good reason”, then Mr. Canterbury is notentitled to compensation or other benefits after the date of termination.  “Good reason” is defined as:

 

A.                                   A failure by Employers to complywith any material provision of the Agreement, which failure is not cured within25 days after notice of such noncompliance;

 

B.                                     Any of the following subsequent to a“change in control” and without Mr. Canterbury’s express written consent:

 

(i)                                     the assignment of duties inconsistentwith Mr. Canterbury’s positions, duties, responsibilities and status with theEmployers immediately prior to a “change in control” or a change in Mr.Canterbury’s reporting responsibilities, titles, or officer as in effectimmediately prior to a change in control;

 

(ii)                                  any removal of Mr. Canterbury from,or any failure to re-elect Mr. Canterbury to, any of the positions held by Mr.Canterbury, except in connection with a termination of employment for “justcause”, disability, death, retirement or upon termination for any other reasonupon prior written notice;

 

(iii)                               a reduction in Mr. Canterbury’s basesalary as in effect immediately prior to a “change in control” or as may beincreased from time to time;

 

(iv)                              a requirement that Mr. Canterbury berelocated to an office which is more than 100 miles from the current principalexecutive offices of Logan Bank & Trust Company;

 

(v)                                 the taking of any action by theEmployers which would adversely affect Mr. Canterbury’s benefits which Mr.Canterbury has at the time of a “change in control”; or

 

60

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(vi)                              any purported termination of Mr.Canterbury’s employment which is not effected pursuant to proper writtennotice.

 

C.                                     Any purported termination of Mr.Canterbury’s employment which is not effected pursuant to proper writtennotice.

 

For purposes of the Agreement a “change incontrol” means a change in control of a nature that would be required to bereported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgatedby the Securities Exchange Act of 1934 (the “Exchange Act”); provided that,without limitation, such a change in control shall be deemed to have occurredif: (i) any person other than the Employers is or becomes the beneficial owner,directly or indirectly, of securities of the Employers representing 25% or moreof the combined voting power of the Company’s or Logan Bank & Trust Company’sthen outstanding securities; or (ii) during any period of two (2) consecutiveyears during the term of this Agreement, individuals who at the beginning ofsuch period constitute the Boards of Directors of the Employers cease for anyreason to constitute at least a majority thereof, unless the election of eachDirector who was not a Director at the beginning of such period has beenapproved in advance by Directorsrepresenting at least 2/3 of the Directors then in office who were Directors atthe beginning of the period.  A change incontrol is not deemed to occur if such change of stock ownership results from thedeath of a shareholder or his distributes or legatees succeed to such ownershipby way of such shareholder’s Last Will and Testament or by intestatesuccession.

 

If Mr. Canterbury is terminated by Employersfor “just cause” or total and permanent disability, then Mr. Canterbury has noright to compensation or other benefits for any period after the date oftermination.  If Mr. Canterbury isterminated by Employers for any reason other than “just cause” or total andpermanent disability or if Mr. Canterbury terminates this Agreement for “goodreason” as defined in subparagraphs (A) and (C) above, then in lieu of anyfurther salary payments to Mr. Canterbury for periods subsequent to the date oftermination, the Employers must pay Mr. Canterbury severance equal to theproduct of:

 

(i)                                     Mr. Canterbury’s base salary ineffect as of the date of termination and

 

(ii)                                  the number of years (includingpartial years) remaining in the term of employment of the Agreement or 2.99,whichever is greater.

 

At the discretion of the Employers,the severance amount must be paid in a lump sum within 15 days of the date oftermination or in monthly installments during the 24 months followingtermination.

 

If Mr. Canterbury terminates the Agreementfor “good reason” as defined in subparagraph (B) above, then in lieu of anyfurther salary payments to Mr. Canterbury for periods subsequent to the date oftermination, the Employers must pay Mr. Canterbury severance equal to three (3)times the average annual salary paid to Mr. Canterbury, as reflected inInternal Revenue Service Form W-2, for the three (3) years immediatelypreceding Mr. Canterbury’s termination. At the discretion of the Employers, the severance amount must be paid ina lump sum within 15 days of the date of termination or in monthly installmentsduring the 24 months following termination.

 

Supplemental Executive Retirement Plan

 

In an effort to reward Eddie Canterbury forpast services and to encourage Mr. Canterbury to continue in his dedicatedservice to the Company, the Company entered into an Supplemental ExecutiveRetirement Plan Agreement (the Plan”) with Mr. Canterbury effective as ofOctober 28, 2003.

 

61

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Under the Plan, Mr. Canterbury is entitled to certain supplementalretirement benefits upon Mr. Canterbury’s 65th birthday.  If Mr. Canterbury becomes disabled prior tohis 65th birthday and is terminated on account of his disability,then he is entitled to a percentage of his supplemental retirement benefits as supplementaldisability benefits.  Upon Mr. Canterbury’sdeath, Mr. Canterbury’s beneficiaries are entitled to the supplementalretirement benefits

 

The supplemental retirement benefits equal 58% of Mr.Canterbury’s base salary for the calendar year in which Mr. Canterburyterminates his employment with the Company. The benefits will be paid each year during Mr. Canterbury’s life on amonthly basis beginning with the month following Mr. Canterbury’s 65thbirthday.  If Mr. Canterbury dies priorto receiving the supplemental retirement benefits for 14 full years, then Mr.Canterbury’s beneficiary is entitled to receive the benefits until 14 years ofpayments have been made.

 

The supplemental disability benefits equal the annualsupplemental retirement benefit multiplied by the percentage represented by1.00 minus the product of 0.05 times a whole number equal to the positivedifference between 65 and Mr. Canterbury’s age when he is terminated because ofa disability.  The supplementaldisability benefit will be paid to Mr. Canterbury each year duringMr. Canterbury’s life on a monthly basis as soon as practicable aftertermination of Mr. Canterbury because of a disability.  If Mr. Canterbury dies prior toreceiving the supplemental disability benefits for 14 full years, thenMr. Canterbury’s beneficiary is entitled to receive the benefits until 14years of payments have been made.

 

If Mr. Canterbury dies prior to turning age 65, then theCompany will pay Mr. Canterbury’s beneficiary a death benefit equal to thesupplemental retirement benefit.  Thisbenefit will commence as soon as practicable after the date on which Mr.Canterbury would have turned age 65 and will be paid monthly each year until 14years of payments have been made.  If Mr.Canterbury dies after age 65, then the Company will pay Mr. Canterbury’sbeneficiary the remaining supplemental retirement benefits until Mr. Canterburyand his beneficiary have received a combined 14 years of annual payments.

 

If Mr. Canterbury’s beneficiary dies before all payments havebeen made, then the present-value of the remaining benefits will be paid in alump-sum cash payment to a contingent beneficiary designated by Mr.Canterbury.  Mr. Canterbury’s beneficiarymay elect to receive the death benefit in the form of a lump-sum cash paymentdetermined in accordance with actuarial assumptions and interest based on Moody’sAa Corporate Bond Yield.

 

The Company’s obligations for the retirement benefits underthe Plan are fully funded by an insurance policy on the life of Mr. Canterburyin the amount of $2,000,000.00.  The cashvalue of such insurance policy as of December 31, 2004 was $2,076,279 and thevalue of the death benefit as of December 31, 2004 was $4,531,026.  If Mr. Canterbury dies prior to age 65, thenthe proceeds of the insurance policy will be payable to the Company and theCompany will use such proceeds to fund the remaining retirement planobligations.  All retirement benefitspayable under the Plan will be paid entirely from the insurance policy on thelife of Mr. Canterbury, which policy is owned by the Company.

 

Fees for Directors.  Directors of Logan County BancShares, Inc.received $900 per quarter in 2004.  Inaddition, members of the Audit Committee received $75 for each meetingattended.  Directors of Logan Bank &Trust Company received $300 per month in 2004 and members of the Loan andDiscount Committee of Logan Bank & Trust Company received $150 per meetingattended.

 

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ITEM12 –SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS

 

**PRINCIPALSHAREHOLDERS**

 

Thefollowing table lists each shareholder of Logan County BancShares, Inc. who isthe beneficial owner of more than 5% of Logan County BancShares Inc.’s commonstock as of March 15, 2005.

 
| **Title of Class** | ** ** | **Name and Address of  Beneficial Owner**                                                 | ** ** | **Amount and  Nature of Beneficial  Ownership** | ** ** | **% of Class** | ** ** |
|--------------------|------------|-------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|----------------|------------|
| Common  Stock      |       | David  McCormick  Post Office Box 627  Logan, West Virginia 25601                         |       | 38,143                                          | (1)        | 5.42           | %          |
| Common  Stock      |       | Harvey  Oakley  509 Main Street  Logan, West Virginia 25601                               |       | 56,645                                          | (2)        | 8.05           | %          |
| Common  Stock      |       | Sarah  Matteson Irrevocable Trust  11125 Harbour Estates Circle  Ft. Myers, Florida 33908 |       | 93,182                                          |       | 13.24          | %          |
| Common  Stock      |       | Paul  Clinton Winter  Post Office Box 386  Logan, West Virginia 25601                     |       | 116,619                                         | (3)        | 16.57          | %          |

 

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(1)           Includes 37,908 shares ownedby Bodaco Company.

 

(2)           Includes 7,537 sharesjointly owned with spouse.

 

(3)           Includes: 18,000 shares heldby Bray & Oakley Insurance Agency; 1,063 held by Mary O. Winter Trust forMichael P. Winter of which Paul Clinter Winter is the Trustee; and 1,063 heldby Mary O. Winter Trust for Angela L. Winter of which Paul Clinton Winter isthe Trustee.

 

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**SECURITYOWNERSHIP OF MANAGEMENT**

 

Asof March 15, 2005, the nominees, Directors of the Company and Logan Bank &Trust Company (“LB&T”) and executive officers of the Company ownedbeneficially, directly or indirectly, the number of shares of common stockindicated on the following table.  Thenumber of shares shown as beneficially owned by each nominee, director andexecutive officer is determined under the rules of the Securities and ExchangeCommission and the information is not necessarily indicative of beneficialownership for any other purposes.  AllDirectors and executive officers of the Company as a group owned 193,404 sharesor 27.47% of the Company’s common stock as of March 15, 2005.

 
| **Title of  Class** | ** ** | **Position**                                                                                                                             | ** ** | **Name of  Beneficial Owner** | ** ** | **Amount and  Nature of Beneficial  Ownership** | ** ** | **% of  Class** | ** ** |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------------------------|------------|-----------------|------------|
| Common Stock        |       | Director of  Company and LB&T and President and Chairman of the Board of Directors of  Company and Chairman of the Board of LB&T |       | Harvey Oakley                 |       | 56,645                                          | (1)        | 8.05            | %          |
| Common Stock        |       | Director of  LB&T                                                                                                                    |       | Clell Peyton                  |       | 10,733                                          |       | 1.52            | %          |
| Common Stock        |       | Director of  LB&T                                                                                                                    |       | Earle B. Queen                |       | 19,842                                          | (2)        | 2.82            | %          |
| Common Stock        |       | Director of  Company                                                                                                                     |       | LaVeta Jean Ray               |       | 7,110                                           |       | 1.01            | %          |
| Common Stock        |       | Director of  LB&T                                                                                                                    |       | William W. Wagner             |       | 18,000                                          | (3)        | 2.56            | %          |
| Common Stock        |       | Director and  Executive Vice-President and CEO of the Company; Director and President and  CEO of LB&T                               |       | Eddie Canterbury              |       | 8,200                                           | (4)        | 1.16            | %          |
| Common Stock        |       | Director of  Company; Vice President of the Company                                                                                      |       | Walter D. Vance               |       | 4,569                                           | (5)        | 0.65            | %          |
| Common Stock        |       | Director of  LB&T                                                                                                                    |       | Glenn T. Yost                 |       | 29,762                                          | (6)        | 4.23            | %          |
| Common Stock        |       | Director of  LB&T                                                                                                                    |       | David McCormick               |       | 38,143                                          | (7)        | 5.42            | %          |
| Common Stock        |       | Elected as  Director of Company and LB&T at Annual Meeting held on May 25, 2004                                                      |       | Michael Winter                |       | 400                                             |       | .06             | %          |

 

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(1)                                  Includes7,537 shares jointly owned with spouse.

 

(2)                                  Includes:18,000 shares owned by Earle B. Queen, Trust; 355 shares owned by FuneralServices, Inc.; and 400 shares owned by Queen Brothers, Inc.

 

(3)                                  Includes654 shares jointly owned with spouse.

 

(4)                                  Includes:800 shares owned in IRA; and 200 shares as custodian for Alexis Jo Canterbury.

 

(5)                                  Includes849 shares owned by Aracoma Drug Company.

 

(6)                                  Includes: 28,762shares for which voting and investment powers are held by Glenn T. Yost; 22,224shares owned by W.W. McDonald Land Company; 5,863 shares owned by BruceMcDonald Holding Company; and 675 shares owned by Tridelphia Land Company.

 

(7)                                  Includes37,908 shares owned by Bodaco, Co.

 

**EQUITY COMPENSATION PLANS**

 

The Company does not have any equity compensation plans.

 

ITEM 13 – CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS.

 

Directors and executive officers of the Company and itssubsidiaries, members of their immediate families, and business organizationsand individuals associated with them have been customers of, and have hadnormal banking transactions with Logan Bank & Trust Company, a subsidiaryof the Company.  All such transactionswere made in the ordinary course of business, were made on substantially thesame terms, including interest rate and collateral, as those prevailing at thetime for comparable transactions with other persons and did not involve morethan the normal risk of collectibility or present other unfavorable features.

 

ITEM 14 –PRINCIPAL ACCOUNTING FEES AND SERVICES.

 

Audit and Audit-Related Fees.

 

The following table presents fees for professional servicesrendered by McNeal, Williamson & Co. to perform an audit of the Corporation’sannual financial statements for the year ended December 31, 2003, and feesfor other services rendered by McNeal, Williamson & Co. during that period:

 
| ** **            | ** ** | **2003** | ** ** |
|-----------------------|------------|----------|------------|
| Audit Fees(1)         |       | $        | 32,000     |   |
| Audit-Related Fees(2) |       | —   |       |
| Tax Fees(3)           |       | 8,450    |       |
| All Other Fees(4)     |       | 2,945    |       |
| Total Fees            |       | $        | 43,395     |   |

 

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(1)                                  Audit Fees – These are fees for professionalservices performed by McNeal, Williamson & Co. for the audit of theCorporation’s annual financial statements and review of the quarterly financialstatements.

 

(2)                                  Audit-Related Fees – These are for assuranceand related services performed by McNeal, Williamson & Co. that arereasonably related to the performance of the audit or review of the Corporation’sfinancial statements.

 

(3)                                  Tax Fees – These are fees for professionalservices performed by McNeal, Williamson & Co. with respect to taxcompliance, tax advice and tax planning. This includes: the preparation and the filing of federal and stateincome taxes and property taxes.

 

(4)                                  All Other Fees – These are fees for otherpermissible work performed by McNeal, Williamson & Co. that does not meetthe above category descriptions.  Thefees for services incurred in 2003 include the filing of the Corporation’s Form10-Q for the quarters ending September 30, 2003.  All services rendered by McNeal, Williamson& Co. are permissible under applicable laws and regulations, andpre-approved by the Audit Committee.

 

Asdisclosed on Form 8-K filed with the Securities and Exchange Commission onAugust 4, 2004, the Company was informed by McNeal, Williamson & Co. (“McNealWilliamson”) that McNeal Williamson was no longer permitted to issue auditreports for the Company and was no longer permitted to perform interim reviewsin accordance with SAS 100 for the Company as a result of McNeal Williamson’sfailure to register with the Public Company Accounting Oversight Board (“PCAOB”).  McNeal Williamson advised the Company that itshould obtain new independent accountants. Accordingly, the Company retained S. R. Snodgrass, A. C. on August 10,2004, to:  (i) review all interim periodsthat were reviewed by McNeal Williamson after the adoption of Sarbanes-Oxley;(ii) re-audit the financial statements for the period ended December 31, 2003;and (iii) review the audit for the period ended December 31, 2002.

 

Duringthe period covering the fiscal years ended December 31, 2003 and December 31,2004, S. R. Snodgrass, A.C. performed the following professional services:

 
| **Description**    | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Audit Fees (1)     |       | $        | 37,500     |     | $          | 36,000 |   |
| Audit-Related Fees |       | $        | 0          |     | $          | 0 |   |
| Tax Fees (2)       |       | $        | 3,500      |     | $          | 0 |   |
| All Other  Fees    |       | $        | 0          |     | $          | 0 |   |

 

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(1)                   Audit fees consist of fees for professional service rendered to for theaudit of the consolidated financial statements and review of financialstatements included in the Company’s quarterly reports.

 

(2)                   Tax fees consists of compliance fees for the preparation of income andfranchise tax returns.

 

Pre-Approval Policies and Procedures

 

Prior to July 23, 2004, the Audit Committee did not haveformal pre-approval policies and procedures for audit and non-auditservices.  Prior to July 23, 2004, theAudit Committee met and considered each audit and non-audit service to berendered by McNeal, Williamson & Co. During 2003, all of fees paid to McNeal, Williamson & Co. wereapproved by the Audit Committee.

 

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On July 23, 2004, the Audit Committee adopted a policythat requires pre-approval of all audit, audit-related, tax services and otherservices performed by the independent auditor. The policy provides for pre-approval by the Audit Committee ofspecifically defined audit and non-audit services.  Unless the specific service has beenpreviously pre-approved with respect to that year, the Audit Committee mustapprove the permitted service before the independent auditor is engaged toperform it.  The Audit Committee maydelegate pre-approval authority to one or more of its members who shall reportany pre-approval decisions to the Audit Committee at its next scheduled meeting.

 

ITEM15 – EXHIBITS,FINANCIAL STATEMENT SCHEDULES

 

(a)                                  1.                                       Financial Statements.

 
|   | Report of Independent Registered  Public Accounting Firm         |   |
|--------|------------------------------------------------------------------|--------|
|   | Consolidated Balance Sheets                                      |   |
|   | Consolidated Statements  of Income                               |   |
|   | Consolidated  Statements of Changes in Stockholders’ Equity |   |
|   | Consolidated  Statements of Cash Flow                            |   |
|   | Notes to  the Consolidated Financial Statements                  |   |

 

2.                                       Financial Statement Schedules.

 

Allschedules are omitted, as the required information is inapplicable or theinformation is presented in the Consolidated Financial Statements or relatednotes.

 

3.                                       Exhibits

 

3.                                       Articles of Incorporation and Bylaws

 

a.                                       Articles of Incorporation of Logan CountyBancshares, Inc. dated October 26, 1984 (1)

 

b.                                      Restated Articles of Incorporation of LoganCounty Bancshares, Inc. dated December 27, 1984 (2)

 

c.                                       Amended Articles of Incorporation of LoganCounty Bancshares, Inc.datedMay 26, 1993 (3)

 

d.                                      Amended Articles of Incorporation of LoganCounty Bancshares, Inc.datedApril 27, 1999 (4)

 

e.                                       Bylaws of Logan County Bancshares, Inc. datedDecember 3, 1984 (5)

 

10.                                 Material Contracts

 

a.                                       Employment Agreement between the Company,Logan Bank & Trust  Company and Eddie Canterbury (6)

 

b.                                      The Supplemental Executive Retirement Planbetween the Company and Eddie Canterbury (7)

 

c.                                       Summary of Compensation To Be Paid to ChiefExecutive Officer

 

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11.                                 Statement regarding computation of per shareearnings.

 

(Thesestatements are included in the notes to the Consolidated Financial Statementsand the Management’s Discussion and Analysis of Financial Condition and Resultsof Operation, which are incorporated herein by reference.)

 

14.                                 Senior Financial Officer’s Code of Ethics

 

21.                                 Subsidiaries of the Company

 

23.1                           Consent of S.R. Snodgrass, A.C.

 

23.2                           Consent of McNeal,Williamson & Co.

 

31.1                           Certification Pursuant to Rule13a-14(a)/15d-14(a)

 

31.2                           Certification Pursuant to Rule13a-14(a)/15d-14(a)

 

32.1                           Certification Pursuant to 18 U.S.C. Section1350

 

32.2                           Certification Pursuant to 18 U.S.C. Section1350

 

SUPPLEMENTAL INFORMATION TO BEFURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BYREGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THEACT

 

The Annual Report and proxymaterials of Logan County Bancshares Inc. will be furnished toshareholders subsequent to the filing of this Annual Report on Form 10-K.

 

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(1)                                  Incorporated by reference to Exhibit 3.a. toLogan County BancShares Inc.’s Amendment No. 1 on Form 10-K/A covering theperiod ended December 31, 2003.

 

(2)                                  Incorporated by reference to Exhibit 3.b. toLogan County BancShares Inc.’s Amendment No. 1 on Form 10-K/A covering theperiod ended December 31, 2003.

 

(3)                                  Incorporated by reference to Exhibit 3.c. toLogan County BancShares Inc.’s Amendment No. 1 on Form 10-K/A covering theperiod ended December 31, 2003.

 

(4)                                  Incorporated by reference to Exhibit 3.d. toLogan County BancShares Inc.’s Amendment No. 1 on Form 10-K/A covering theperiod ended December 31, 2003.

 

(5)                                  Incorporated by reference to Exhibit 3.e. toLogan County BancShares Inc.’s Amendment No. 1 on Form 10-K/A covering theperiod ended December 31, 2003.

 

(6)                                  Incorporated by reference to Exhibit 10.a. toLogan County BancShares Inc.’s Amendment No. 1 on Form 10-K/A covering theperiod ended December 31, 2003.

 

(7)                                  Incorporated by reference to Exhibit 10.b. toLogan County BancShares Inc.’s Amendment No. 1 on Form 10-K/A covering theperiod ended December 31, 2003.

 

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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) |   |
|   |                           |
|   | By:                            |   | /s/  Eddie Canterbury |   |
|   |                           | Eddie  Canterbury |
|   | Its:                           | Chief  Executive Officer |
|   |                           |   |
|   | March  29, 2005                |
|        |                                |  |  |  |  |  |

 

Pursuant to the requirements of the Securities Exchange Actof 1934, this report has been signed below by the following persons on behalfof the registrant and in the capacities and on the dates indicated.

 

 
| By:    |                                                                               |   | Date:                 |   |   |
|--------|------------------------------------------------------------------------------------|--------|-----------------------|--------|--------|
|   | Harvey  Oakley, Director and Chairman of the Board of Directors                    |   |                  |
|   |                                                                               |   |                  |
|   |                                                                               |   |                  |
| By     | /s/  Clell Peyton                                                                  |   | Date:  March 29, 2005 |
|   | Clell  Peyton, Director                                                            |   |                  |
|   |                                                                               |   |                  |
|   |                                                                               |   |                  |
| By     |                                                                               |   | Date:                 |   |   |
|   | Earle  B. Queen, Director                                                          |   |                  |   |   |
|   |                                                                               |   |                  |   |   |
|   |                                                                               |   |                  |   |   |
| By     |                                                                               |   | Date:                 |   |   |
|   | LaVeta  Jean Ray, Director                                                         |   |                  |   |   |
|   |                                                                               |   |                  |   |   |
|   |                                                                               |   |                  |   |   |
| By:    |                                                                               |   | Date:                 |   |   |
|   | William  W. Wagner, Director                                                       |   |                  |
|   |                                                                               |   |                  |
|   |                                                                               |   |                  |
| By     | /s/  Eddie Canterbury                                                              |   | Date:  March 29, 2005 |
|   | Eddie Canterbury, Director, Executive  Vice-President and  Chief Executive Officer |   |                  |
|   |                                                                               |   |                  |
|   |                                                                               |   |                  |
| By     |                                                                               |   | Date:                 |   |   |
|   | Walter  D. Vance Director                                                          |   |                  |
|   |                                                                               |   |                  |
|   |                                                                               |   |                  |
| By     | /s/  Glenn T. Yost                                                                 |   | Date:  March 29, 2005 |
|   | Glenn  T. Yost, Director                                                           |   |                  |
|   |                                                                               |   |                  |
|   |                                                                               |   |                  |
| By     | /s/  David McCormick                                                               |   | Date:  March 29, 2005 |
|   | David  McCormick, Director                                                         |   |                  |
|   |                                                                               |   |                  |
|   |                                                                               |   |                  |
| By     | /s/  Michael Winter                                                                |   | Date:  March 29, 2005 |
|   | Michael  Winter, Director                                                          |   |                  |

 

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