**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

** **

**AnnualReport Pursuant to Section 13 or 15 (d) of**

**TheSecurities Exchange Act of 1934**

 

**For the calendar year ended December 31, 2003Commission file No. 2-95114**

 

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**LOGAN COUNTY BANCSHARES, INC.**

(Exact name of registrant as specified in itscharter)

 

| **West Virginia**                                               |   | **55-0660015**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  Incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **P.O. Box 597  Logan, WV**                                |   | **25601**                             |
| (Address of principal executive offices)                        |   | (Zip code)                            |

 

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

 

Securities Registered Pursuant to Section12(g) of The Act:

 

**NONE**

(Title of Class)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15 (d) of the securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days. (X) Yes ( ) No.

 

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

 

Class Outstanding at April 14, 2004

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

 

State the aggregate market value of the voting stock held bynon-affiliates of the Registrant.

 
| Aggregate market value of voting stock | Based on last trade price |
|----------------------------------------|---------------------------|
|                                   |                      |
| $29,567,622                            | $42.00                    |

 

Documents Incorporated by Reference

 

(None)

 

 

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LOGAN COUNTY BANCSHARES, INC.

 

FORM 10-K

 

# INDEX

 
| ITEM     1  | -      | Business                                                                                        | 2      |
|---------------------------------|--------|-------------------------------------------------------------------------------------------------|--------|
|                            |   |                                                                                            |
| ITEM     2  | -      | Properties                                                                                      | 6      |
|                            |   |                                                                                            |
| ITEM      3 | -      | Legal Proceedings                                                                               | 6      |
|                            |   |                                                                                            |
| ITEM     4  | -      | Submission  of Matters to a Vote of Security Holders                                            | 6      |
|                            |   |                                                                                            |
| ITEM     5  | -      | Market  for the Registrant’s Common Stock and Related And Related Security Holder  Matters | 7      |
|                            |   |                                                                                            |
| ITEM     6  | -      | Selected  Financial Data                                                                        | 8      |
|                            |   |                                                                                            |
| ITEM     7  | -      | Management’s  Discussion and Analysis                                                      | 11     |
|                            |   |                                                                                            |
| ITEM     8  | -      | Financial Statements and Supplemental Data                                                      |   |
|                            |   |                                                                                            |
| ITEM     9  | -      | Disagreements  on Accounting and Financial Disclosures                                          | 61     |
|                            |   |                                                                                            |
| ITEM   10             | -      | Directors  and Executive Officers of the Registrant                                             | 61     |
|                            |   |                                                                                            |
| ITEM   11             | -      | Executive  Compensation                                                                         | 62     |
|                            |   |                                                                                            |
| ITEM   12             | -      | Security  Ownership of Certain Beneficial Owners and Management                                 | 62     |
|                            |   |                                                                                            |
| ITEM   13             | -      | Certain  Relationships and Related Transactions                                                 | 62     |
|                            |   |                                                                                            |
| ITEM   14             | -      | Exhibits,  Financial Statement Schedules and Reports on Form 8K                                 | 62     |
|                            |   |                                                                                            |
| PROXY MATERIALS                 | 64     |
|                            |   |                                                                                            |
| SIGNATURES                      | 68     |
|                                 |        |                                                                                                 |        |  |  |

 

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ITEM 1- BUSINESS

 

LOGAN COUNTY BANCSHARES, INC.

 

Logan County Bancshares, Inc. is a bank holding company, whichwas organized under the laws of the State of West Virginia in 1985.  On May 17, 1985, the Corporation acquiredall 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 are bankingcorporations organized under the laws of the State of West Virginia.  On May 28, 1996, the subsidiary banks, LoganBank & Trust Company and Bank of Chapmanville entered into a merger agreementwhereby they would be merged into Logan 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 stilloperates at its original location at the corner of Washington and Main Streetsin Logan, West Virginia.  The Companyalso has a separate drive-up facility and mini-bank also located on Main Streetin Logan, and in early February 1996, opened a new full-service branch in theMan area.  In November 1996, the bankacquired a branch facility from another financial institution located at Harts,West Virginia.  The facility at Route 10North, Harts, is operated as a full service branch of the bank.  Logan Bank & Trust Company is a memberof the Federal Reserve System and deposits are insured pursuant to the FederalDeposit Insurance Act.

 

Logan Bank & Trust Company provides a complete range of retailbanking services to individuals and small and medium size businesses.  Their services include checking, savings,NOW, certificates of deposit and money market deposit accounts, business loans,individual loans, mortgage loans, home equity loans, consumer loans for variousother purposes, other consumer-oriented financial services including safetydeposit box accounts, IRA accounts and night depository.  The company also operates several automaticteller machines at three strategic locations in Logan County, which provide24-hour working services to customers of Logan Bank & trust Company.  The Company is a member of the Cirrus ATMnetwork which has over 100 locations in West Virginia and more than 10,000locations in 47 states.

 

Logan Bank & Trust Company provides depository lending and relatedfinancial services to commercial, retail, industrial, financial andgovernmental customers.  The lendingfunction includes short and medium-term loans, letters of credit, inventory andaccounts receivable financing and real estate construction lending.  The Company also offers a discountinvestment brokerage service through a sub-contract arrangement with a largerfinancial institution.

 

The Chapmanville Bank of LB&T Bank has one location situated onRailroad Avenue in Chapmanville, West Virginia.  This facility also provides a complete range of retail bankingservices to individuals and small and medium sized businesses.  These services include checking, savings,NOW, certificates of deposit and money market account deposits, business loans,individual loans, mortgage loans, home equity loans, consumer loans for variousother purposes are provided as well.  Inaddition, the Bank offers consumer oriented financial services such as IRAaccounts, night depository, safety deposit boxes and other banking relatedservices.

 

2

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The branch also provides depository, lending and relatedfinancial services to commercial, retail, industrial, financial andgovernmental customers.  The lendingfunction includes short and medium-term loans, letters of credit, inventory andaccounts receivable financing, and real estate construction lending, as do allthe branches of Logan Bank & Trust Company.

 

INVESTMENT CONSIDERATIONS

 

An investment in the shares offered hereby involves certainrisks.  A subscription for shares shouldbe made only after careful considerations set forth below and elsewhere in thisOffering Circular, and should be undertaken only by persons who can afford aninvestment involving such risks.

 

MARKET FOR THECOMMON STOCK AND RELATED SECURITY HOLDER MATTERS

 

The shares of Logan county BancShares, Inc. are infrequentlytraded in the over-the-counter market and are not listed on the NationalAssociation of Security Dealers Automated Quotation System (NASDAQ) or on anyexchange.  Management is not aware ofany security dealer, which makes a market in the stock; therefore, no activetrading market should be deemed to exist.

 

The sales price for Logan County BancShares, Inc. stock is determinedby negotiations between individual buyers and sellers.  Although company keeps no records of saleprices paid for Company stock and has no direct knowledge of such prices, forpurposes of presentation, Corporation’s management estimates the approximatemarket value ranges for 2003 and 2002 to be as follows:

 
|                          |   | **First  Quarter** |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   |
|-------------------------------|--------|--------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|
| Sale Price:                   |   |               |   |                |   |               |   |                |   |
| 2003 Common Stock             |   | $42-$42            |   | $42-$42             |   | $42-$42            |   | $42-$42             |   |
| 2002 Common Stock             |   | $42-$42            |   | $42-$42             |   | $42-$42            |   | $42-$42             |   |
|                          |   |               |   |                |   |               |   |                |   |
| Per Share Dividends Declared: |   |               |   |                |   |               |   |                |   |
| 2003 Common Stock             |   | $0.35              |   | $0.35               |   | $0.35              |   | $0.51               |   |
| 2002 Common Stock             |   | $0.34              |   | $0.34               |   | $0.35              |   | $0.50               |   |

 

COMPETITION

 

Vigorous competition exists in the market area of Logan CountyBancshares, Inc.  In addition to thethree other banks located within the market area, the location is in arelatively close proximity to two population 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 additionto the finance companies, provide loans. Since the Bank Holding Company Act, passed by the West VirginiaLegislature in 1982, local banks have been joining bank holding companiesaround the State.  Of the five bankslocated in Logan County, only one is a unit bank.  The other four are members of various multi-bank holdingcompanies.  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 stimulate growth, Logan CountyBancShares, Inc. is the only bank holding company owned and controlled from withinthe county.

 

3

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SUPERVISION AND REGULATION

 

The Corporation is a bank holding company within the meaning of theBank Holding Company Act of 1956 (the Act) and is registered as such with theBoard of Governors of the Federal Reserve System (the Reserve Board).  As a bank holding company, the corporationis required to file with the Federal Reserve Board an annual report and suchother information as may be required. The Federal Reserve Board may also make examinations of thecorporation.  In addition, the FederalReserve Board has the authority (which it has not exercised) to regulateprovisions of certain bank holding company debt.

 

The Act requires every bank holding company to obtain the priorapproval of the Federal Reserve Board before acquiring substantially all theassets of or direct or indirect ownership or control of more than 5% of thevoting shares of any bank, which is not already majority-owned.  The Act also prohibits a bank holdingcompany, with certain exceptions, from itself engaging in or acquiring director indirect control of more than 5% of the voting shares of any company engagedin 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 Actprohibits the acquisition by a bank holding company of more that 5% of theoutstanding voting shares of a bank located outside the State in which theoperations of its banking subsidiaries are principally conducted, unless suchan acquisition is specifically authorized by statute of the State in which the bankacquired 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 theBanking Law of the State of West Virginia and is a member of the FederalReserve System.  Accordingly, theiroperations are subject to Federal and State laws applicable to commercial bankswith trust powers and to regulation by the Commissioner of Banking and the WestVirginia State Banking Commissioner, the Federal Reserve Board and the FederalDeposit Insurance Corporation.  Amongother restrictions, the West Virginia Banking laws state that banks organizedhereunder may pay dividends only out of undivided profits.  Under the Federal Reserve Act, the approvalof the Federal Reserve Board is required for dividends declared by a statemember bank which in any year exceeds the net profits of such bank for thatyear, as defined, combined with retained net profits for the two precedingyears.

 

4

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GOVERNMENT MONETARY POLICIES AND ECONOMICCONTROLS

 

The earnings and growth of the banking industry and of LoganBank & Trust Company is affected by the credit policies of monetaryauthorities including the Federal Reserve System.  An important function of the Federal Reserve System is toregulate the national supply of bank credit in order to control recessionaryand inflationary pressures.  Among theinstruments of monetary policy used by the Federal Reserve to implement theseobjectives are open market operations in the U. S. Government securities, changesin the discount rate on member bank borrowings, and changes in reserverequirements against member bank deposits. These means are used in varying combinations to influence overall growthof bank loans, investments and deposits and may also affect interest ratescharged on loans or paid for deposits. The monetary policies of the Federal Reserve authorities have had asignificant effect on the operating results of commercial banks in the past andare expected to continue to have such an effect in the future.

 

In view of changing conditions in the national economy and in the moneymarkets, as well as the effect of actions by monetary and fiscal authorities,including the Federal Reserve system, no prediction can be made as to possiblefuture changes in interest rates, deposit levels, loan demand of their effecton the business and earnings of the Corporation, and Logan Bank & TrustCompany.

 

FOREIGN OPERATIONS

 

The corporation and subsidiary have no foreign operations.

 

EXECUTIVE OFFICERS

 

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

 

5

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ITEM 2- PROPERTIES

 

The principal offices of the corporation are shared with thoseof Logan Bank & Trust Company and are situated in Logan, WestVirginia.  This building, a two-storybank and office building, is owned by Logan Bank & Trust Company, as is amini-bank and drive-up facility which is located near-by.  In addition, a one-story office and bankbuilding is located on Railroad Avenue in Chapmanville, West Virginia.  During 1996 the Bank opened two other branchfacilities in West Virginia.  Both areone-story office and bank buildings located at Rt. 10, South Man, West Virginiaand Rt. 10 North at Harts, West Virginia.

 

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 A VOTE OF SECURITY HOLDERS

 

None.

 

6

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ITEM 5- MARKET FOR THE REGISTRANT’S COMMON STOCKAND RELATED SECURITY HOLDER MATTERS

 

The shares of Logan County BancShares, Inc are infrequentlytraded in the over-the-counter market and are not listed on the NationalAssociation of Security Dealers Automated Quotation System (NASDAQ) or on anyexchange.  Management is not aware ofany security dealer, which makes a market in the stock; therefore, no activetrading market should be deemed to exist.

 

The sales price for Logan County BancShares, Inc. stock is determinedby negotiations between individual buyers and sellers.  Although company keeps no records of salesprices paid for Company stock and has no direct knowledge of such prices, forpurposes of presentations, Corporation’s management estimates the approximate marketvalue ranges for 2003 and 2002 to be as follows:

 

 
|                          |   | **First  Quarter** |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   |
|-------------------------------|--------|--------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|
| Sales Price:                  |   |               |   |                |   |               |   |                |   |
| 2003 Common Stock             |   | $42-$42            |   | $42-$42             |   | $42-$42            |   | $42-$42             |   |
| 2002 Common Stock             |   | $42-$42            |   | $42-$42             |   | $42-$42            |   | $42-$42             |   |
|                          |   |               |   |                |   |               |   |                |   |
| Per Share Dividends Declared: |   |               |   |                |   |               |   |                |   |
| 2003 Common Stock             |   | $0.35              |   | $0.35               |   | $0.35              |   | $0.51               |   |
| 2002 Common Stock             |   | $0.34              |   | $0.34               |   | $0.35              |   | $0.50               |   |

 

7

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ITEM 6- SELECTED FINANCIAL DATA

 

LOGAN BANCSHARES, INC. AND SUBSIDIARY

 

(In Thousands of Dollars)

 
| **YEAR ENDED DECEMBER 31:**                                                |   | **2003** |    | **2002** |   | **2001** |   | **2000** |    | **1999** |   |
|----------------------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|----------|---------|----------|--------|
| Total Interest Revenue                                                     |   | $        | 8,766   |     | $      | 10,088   |   | $        | 12,090  |     | $      | 11,508 |   | $ | 10,753 |   |
| Total Interest Expense                                                     |   | 2,087    |    | 2,764    |   | 4,801    |   | 4,828    |    | 4,378    |   |
|                                                                       |   |     |    |     |   |     |   |     |    |     |   |
| Net Interest Revenue                                                       |   | 6,679    |    | 7,324    |   | 7,289    |   | 6,680    |    | 6,375    |   |
| Provision for Possible                                                     |   |     |    |     |   |     |   |     |    |     |   |
| Loan Losses                                                                |   | 3        |    | 534      |   | 700      |   | 100      |    | 22       |   |
|                                                                       |   |     |    |     |   |     |   |     |    |     |   |
| Net Interest Revenue After Provision for  Possible Loan Losses             |   | 6,676    |    | 6,790    |   | 6,589    |   | 6,580    |    | 6,353    |   |
| Other Operating Revenue                                                    |   | 986      |    | 805      |   | 707      |   | 769      |    | 699      |   |
| Other Operating Expense                                                    |   | (4,728   | )       | (4,689   | )      | (4,631   | )      | (4,185   | )       | (3,897   | )      |
|                                                                       |   |     |    |     |   |     |   |     |    |     |   |
| Income Before Income Taxes                                                 |   | 2,934    |    | 2,906    |   | 2,665    |   | 3,164    |    | 3,155    |   |
| Income Taxes                                                               |   | 1,033    |    | 1,064    |   | 909      |   | 1,131    |    | 1,131    |   |
|                                                                       |   |     |    |     |   |     |   |     |    |     |   |
| Net Income                                                                 |   | $        | 1,901   |     | $      | 1,842    |   | $        | 1,756   |     | $      | 2,033 |   | $ | 2,024 |   |
| Per Common Share:                                                          |   |     |    |     |   |     |   |     |    |     |   |
| Net Income                                                                 |   | $        | 2.70    |     | $      | 2.57     |   | $        | 2.45    |     | $      | 2.84 |   | $ | 2.83 |   |
| Cash Dividends Declared                                                    |   | $        | 1.57    |     | $      | 1.53     |   | $        | 1.50    |     | $      | 1.44 |   | $ | 1.34 |   |
|                                                                       |   |     |    |     |   |     |   |     |    |     |   |
| At December 31:                                                            |   |     |    |     |   |     |   |     |    |     |   |
| Total Loans                                                                |   | $        | 101,615 |     | $      | 107,933  |   | $        | 116,907 |     | $      | 113,641 |   | $ | 109,571 |   |
| Total Assets                                                               |   | 175,659  |    | 170,041  |   | 171,599  |   | 157,480  |    | 152,746  |   |
| Total Deposits                                                             |   | 154,152  |    | 156,443  |   | 152,028  |   | 138,723  |    | 127,619  |   |
| Short-Term Debt                                                            |   | 3,000    |    | 1,000    |   | 2,000    |   | 2,000    |    | 9,840    |   |
| Tota Shareholders' Equity                                                  |   | 17,790   |    | 17,193   |   | 16,800   |   | 16,014   |    | 14,444   |   |
| Selected Ratios:                                                           |   |     |    |     |   |     |   |     |    |     |   |
| Rate of Return on Average:                                                 |   |     |    |     |   |     |   |     |    |     |   |
| Total Assets                                                               |   | 1.06     | %       | 1.06     | %      | 1.03     | %      | 1.36     | %       | 1.39     | %      |
| Shareholders' Equity                                                       |   | 10.24    | %       | 10.37    | %      | 10.36    | %      | 13.35    | %       | 13.84    | %      |
| Tier 1 Capital to Total Assets at Year End                                 |   | 10.11    | %       | 9.58     | %      | 10.31    | %      | 10.25    | %       | 9.92     | %      |
| Average Total Shareholders' Equity to  Average Total Assets                |   | 10.25    | %       | 10.25    | %      | 9.95     | %      | 10.15    | %       | 10.05    | %      |
| Common Dividend Payout Ratio                                               |   | 58.15    | %       | 59.56    | %      | 61.12    | %      | 50.79    | %       | 47.35    | %      |
| Nonaccrual and Restructured Business Loans  as a Percentage of Total Loans |   | 1.04     | %       | 1.58     | %      | 0.74     | %      | 0.37     | %       | 0.51     | %      |

 

8

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Logan County BancShares, Inc. and Subsidiary

Management’s Discussion and Analysis ofFinancial

Condition and Results of Operations

 

INTRODUCTION

 

The Management’s Discussion and Analysis reviews and discusses thefinancial condition of Logan County BancShares, Inc. and Subsidiary.  Included are (a) the results of operationsfor 2003 and 2002 and (b) discussion of liquidity including an asset andliability sensitivity analysis, and (c) an analysis of earnings, dividends, andcapital.  The discussion and analysis disclosesany material changes and any infrequent events and known trends as they relateto liquidity, capital resources and results of operations.  The information presented reflects theactivities of the holding company and the subsidiary bank, Logan Bank &Trust Company.

 

To assist in understanding and evaluating major changes in Logan CountyBancShares, Inc.’s financial position and results of operations, thisdiscussion emphasizes a comparison of the years 2003 to 2002, 2002 to 2001 and2001 to 2000, and also presents five year information in instances whereappropriate.  This discussion should beread concurrently with the audited financial statements including notes tothose statements.

 

The following definitions apply to terms used in this report:

 

AVERAGE BALANCE:  All balanceshave been computed on the basis of monthly averages.

 

NET INTEREST INCOME:  Interestand related fee income on earning assets, reduced by total interest paid oninterest bearing deposits and borrowed funds. This net amount, when divided by average earning asset balances becomesnet interest margin.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity is provided through short-term investments, payments onoutstanding loans, and the ability to attract new deposits or borrowfunds.  At December 31, 2003 and 2002,the funds available within one year from investments and loans were$51,426,000. and 47,465,000.

 

Logan County BancShares, Inc.’s subsidiary bank deposit mix increasedby $3,709,000. in 2003 after a small decrease in 2002.  In the other years presented, depositsincreased by $13,305,000 in 2001 and $11,104,000 in 2000.  These increases in the deposit mix point outa marketing strategy that has attracted new customers to the Bank.  Time deposits represented the major growthin the deposit mix.  They decreased overthe last two years after reasonable increases in the first three years. Demanddeposits contributed to the growth in the deposit mix by increasing $2,015,000.in 2002, $6,164,000. in 2001 and $4,011,000. in 2000.  Savings deposits showed increases of $5,060,000. in 2002,  $7,517,000 in 2001, $1,263,000. in 2000 andremaining stable.

 

9

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These changes are predominantly due to the fluctuating interest ratesby the Federal Reserve and movement of savings to time deposits by the consumerin order to obtain a better interest rate. At December 31, 2003 and 2002, 34.61% and 31.19%, of the total depositswere in demand deposits while 28.03% and 29.82% were in savings and 37.36% and38.98% were in time deposits, respectively. The stable growth in deposits gives the Bank a firm deposit base to meetthe lending demand and market fluctuations.

 

AtDecember 31, 2001 and 2000, 32.19% and 30.84% of the total deposits were indemand deposits, while 26.18% and 23.27% were in savings and 41.16% and 45.88%were in time deposits respectively.  Thestable growth in deposits gives the Bank a firm deposit base to meet thelending demand and market fluctuations.

 

10

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ITEM 7- Management’s Discussion and Analysis

 

The Management’s Discussion and Analysis reviews and discusses thefinancial condition of Logan County BancShares, Inc. and Subsidiary.  Included are (a) the results of operationsfor 2003 and 2002 and (b) discussion of liquidity including an asset andliability sensitivity analysis, and (c) an analysis of earnings, dividends, andcapital.  The discussion and analysisdiscloses any material changes and any infrequent events and known trends as theyrelate to liquidity, capital resources and results of operations.  The information presented reflects theactivities of the holding company and the subsidiary bank, Logan Bank &Trust Company.

 

To assist in understanding and evaluating major changes in Logan CountyBancShares, Inc.’s financial position and results of operations, thisdiscussion emphasizes a comparison of the years 2003 to 2002, 2002 to 2001 and2001 to 2000, and also presents five year information in instances whereappropriate.  This discussion should beread concurrently with the audited financial statements including notes tothose statements.

 

The following definitions apply to terms used in this report:

 

AVERAGE BALANCE:  All balanceshave been computed on the basis of monthly averages.

 

NET INTEREST INCOME:  Interestand related fee income on earning assets, reduced by total interest paid oninterest bearing deposits and borrowed funds. This net amount, when divided by average earning asset balances becomesnet interest margin.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity is provided through short-term investments, payments onoutstanding loans, and the ability to attract new deposits or borrowfunds.  At December 31, 2003 and 2002,the funds available within one year from investments and loans were$51,426,000. and 47,465,000.

 

Logan County BancShares, Inc.’s subsidiary bank deposit mix increasedby $3,709,000. in 2003 after a small decrease in 2002.  In the other years presented, depositsincreased by $13,305,000 in 2001 and $11,104,000 in 2000.  These increases in the deposit mix point outa marketing strategy that has attracted new customers to the Bank.  Time deposits represented the major growthin the deposit mix.  They decreased overthe last two years after reasonable increases in the first three years. Demanddeposits contributed to the growth in the deposit mix by increasing $2,015,000.in 2002, $6,164,000. in 2001 and $4,011,000. in 2000.  Savings deposits showed increases of $5,060,000. in 2002,  $7,517,000 in 2001, $1,263,000. in 2000 andremaining stable.

 

11

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These changes are predominantly due to the fluctuating interest ratesby the Federal Reserve and movement of savings to time deposits by the consumerin order to obtain a better interest rate. At December 31, 2003 and 2002, 34.61% and 31.19%, of the total depositswere in demand deposits while 28.03% and 29.82% were in savings and 37.36% and38.98% were in time deposits, respectively. The stable growth in deposits gives the Bank a firm deposit base to meetthe lending demand and market fluctuations.

 

AtDecember 31, 2001 and 2000, 32.19% and 30.84% of the total deposits were indemand deposits, while 26.18% and 23.27% were in savings and 41.16% and 45.88%were in time deposits respectively.  Thestable growth in deposits gives the Bank a firm deposit base to meet thelending demand and market fluctuations.

 

12

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During 2003, 2002 and 2001, banks have been faced with a highlycompetitive atmosphere in the sense of maintaining a continuity of growth.  Logan County BancShares, Inc. has maintaineda community bank approach that enhanced its performance over those years.  The merger of Bank of Chapmanville intoLogan Bank & Trust Company enabled the Company to operate more efficientlyand thereby capture a sizeable portion of the market for deposits in thefastest growing area of Logan County, West Virginia. See Table I. for afive-year summary of financial data.

 

Capital planning is essentially the management process that allocatescapital resources in a manner which generates the highest income, whilemaintaining sufficient liquidity, at the lowest degree of risk attainable.  Moreover, it is the philosophy of LoganCounty BancShares, Inc. to nurture that growth by planning for steady,long-range profits rather that the high-risk, high-exposure techniques.  As noted in Table I. the ratio of net incometo average assets was 1.08%, 1.06% and 1.03% for the years ended December 31,2003, 2002 and 2001, respectively. Through the periods presented, management has allocated new funds intothe higher-yielding loans when the loan demand has been sufficient.  Although the improvement in the localeconomy had been at a slow pace through the periods presented, overall loandemand has been stable.  Deposit growthshow a marked increase due to marketing the community bank service approach.

 

Table I. represents a summary of financial data for the previous fiveyears.

 

13

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TABLE I. -  SUMMARY OF FINANCIAL DATA FORFIVE YEARS

(In thousands of dollars)

 
|                                                 |   | **2003** |    | **2002** |   | **2001** |   | **2000** |    | **1999** |   |
|------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|----------|---------|----------|--------|
| Year End Balances:                                   |   |     |    |     |   |     |   |     |    |     |   |
| Total Assets                                         |   | $        | 175,659 |     | $      | 170,041  |   | $        | 171,599 |     | $      | 157,480 |   | $ | 152,746 |   |
| Total Earning Assets                                 |   | 165,973  |    | 160,608  |   | 160,413  |   | 147,539  |    | 139,600  |   |
| TotalDeposits                                        |   | 154,152  |    | 150,443  |   | 152,028  |   | 138,728  |    | 127,619  |   |
| Stockholders' Equity                                 |   | 17,790   |    | 17,193   |   | 16,800   |   | 16,014   |    | 14,444   |   |
|                                                 |   |     |    |     |   |     |   |     |    |     |   |
| Income for theYear:                                  |   |     |    |     |   |     |   |     |    |     |   |
| Total Interest Income                                |   | 8,766    |    | 10,088   |   | 12,090   |   | 11,508   |    | 10,753   |   |
| Total Interest Expnese                               |   | 2,087    |    | 2,764    |   | 4,801    |   | 4,828    |    | 4,378    |   |
| Net Interest Income                                  |   | 6,679    |    | 7,324    |   | 7,289    |   | 6,680    |    | 6,375    |   |
| Provision for Loan                                   |   |     |    |     |   |     |   |     |    |     |   |
| Losses                                               |   | 3        |    | 534      |   | 700      |   | 100      |    | 22       |   |
| Non-interest Income                                  |   | 986      |    | 805      |   | 707      |   | 769      |    | 699      |   |
| Non-interest expense                                 |   | 5,762    |    | 5,753    |   | 5,540    |   | 5,316    |    | 5,028    |   |
| Net Income                                           |   | 1,901    |    | 1,842    |   | 1,756    |   | 2,033    |    | 2,024    |   |
|                                                 |   |     |    |     |   |     |   |     |    |     |   |
| Per Share Data                                       |   |     |    |     |   |     |   |     |    |     |   |
| Net Income                                           |   | 2.70     |    | 2.57     |   | 2.45     |   | 2.84     |    | 2.83     |   |
| Stockholders’ Equity                            |   | 25.27    |    | 23.73    |   | 23.43    |   | 22.34    |    | 20.14    |   |
| Cash Dividends                                       |   | 1.57     |    | 1.53     |   | 1.50     |   | 1.44     |    | 1.34     |   |
|                                                 |   |     |    |     |   |     |   |     |    |     |   |
| Key Ratios                                           |   |     |    |     |   |     |   |     |    |     |   |
| Net Income To:                                       |   |     |    |     |   |     |   |     |    |     |   |
| Average Assets                                       |   | 1.06     | %       | 1.06     | %      | 1.03     | %      | 1.36     | %       | 1.39     | %      |
| Average Stockholders’ Equity                    |   | 10.24    | %       | 10.37    | %      | 10.36    | %      | 13.36    | %       | 13.84    | %      |
| Average Stockholders’ Equity to Average  Assets |   | 10.25    | %       | 10.25    | %      | 9.95     | %      | 10.15    | %       | 10.05    | %      |
|                                                      |        |          |         |          |        |          |        |          |         |          |        |  |  |  |  |  |

 

14

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TABLE II - RATE ANALYSIS OF INTEREST EARNINGASSETS AND INTEREST BEARING LIABILITIES

(In Thousands of Dollars)

 
|                                                               |   | **2003**             |    | **2002**              |   | **2001**           |   |
|--------------------------------------------------------------------|--------|----------------------|---------|-----------------------|--------|--------------------|--------|
|                                                               |   | **Average  Balance** |    | **Income  (Expense)** |   | **Average  Yield** |   | **Average  Balance** |   | **Income  (Expense)** |   | **Average  Yield** |   | **Average  Balance** |   | **Income  (Expense)** |   | **Average  Yield** |   |
| EARNING ASSETS:                                                    |   |                 |    |                  |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                                              |   |                 |    |                  |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (Net of Reserves & Discounts:)                                 |   |                 |    |                  |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                                                         |   | $                    | 41,444  |                  | $      | 2,665              |   | 6.43 | % | $ | 44,680 |   | $ | 3,103 |   | 6.94 | % | $ | 46,696 |   | $ | 4,209 |   | 9.01 | % |
| Real Estate                                                        |   | 51,765               |    | 4,004                 |   | 7.73               | %      | 53,180 |   | 4,262 |   | 8.01 | % | 52,514 |   | 4,376 |   | 8.33 | % |
| Consumer                                                           |   | 10,665               |    | 910                   |   | 8.53               | %      | 12,564 |   | 1,154 |   | 9.18 | % | 14,079 |   | 1,397 |   | 9.92 | % |
|                                                               |   |                 |    |                  |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Net Loans                                                    |   | 103,874              |    | 7,579                 |   | 7.30               | %      | 110,424 |   | 8,519 |   | 7.71 | % | 113,289 |   | 9,982 |   | 8.81 | % |
|                                                               |   |                 |    |                  |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment Securities:                                             |   |                 |    |                  |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                                                            |   | 0                    |    | 0                     |   | 0.00               | %      | 0 |   | 0 |   | 0.00 | % | 0 |   | 0 |   | 0.00 | % |
| Available for Sale                                                 |   | 45,014               |    | 1,005                 |   | 2.23               | %      | 40,988 |   | 1,364 |   | 3.33 | % | 25,967 |   | 1,354 |   | 5.21 | % |
|                                                               |   |                 |    |                  |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Investment Securities                                        |   | 45,014               |    | 1,005                 |   | 2.23               | %      | 40,988 |   | 1,364 |   | 3.33 | % | 25,967 |   | 1,354 |   | 5.21 | % |
|                                                               |   |                 |    |                  |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal Funds sold and Securities Purchased Under Option to resale |   | 17,472               |    | 182                   |   | 1.04               | %      | 13,106 |   | 206 |   | 1.57 | % | 20,540 |   | 754 |   | 3.67 | % |
|                                                               |   |                 |    |                  |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Earnings Assets                                              |   | $                    | 166,360 |                  | $      | 8,766              |   | 5.27 | % | $ | 164,518 |   | $ | 10,089 |   | 6.13 | % | $ | 159,796 |   | $ | 12,090 |   | 7.57 | % |
|                                                               |   |                 |    |                  |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Liabliities:                                      |   |                 |    |                  |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings and Interest Bearing Demand                                |   | $                    | 67,047  |                  | $      | 315                |   | 0.47 | % | $ | 65,384 |   | $ | 584 |   | 0.89 | % | $ | 57,807 |   | $ | 1,139 |   | 1.97 | % |
| Time Deposits                                                      |   | 58,224               |    | 1,672                 |   | 2.87               | %      | 60,861 |   | 2,024 |   | 3.33 | % | 64,549 |   | 3,522 |   | 5.46 | % |
| Federal Funds Purchased                                            |   | 2,852                |    | 100                   |   | 3.51               | %      | 2,910 |   | 157 |   | 5.39 | % | 2,000 |   | 140 |   | 7.00 | % |
|                                                               |   |                 |    |                  |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Interest Bearing Liabilities                                 |   | $                    | 128,123 |                  | $      | 2,087              |   | 1.63 | % | $ | 129,155 |   | $ | 2,765 |   | 2.14 | % | $ | 124,356 |   | $ | 4,801 |   | 3.86 | % |
|                                                                    |        |                      |         |                       |        |                    |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

15

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TABLE III - VOLUME ANALYSIS OF CHANGE IN INTEREST INCOME AND INTERESTEXPENSE

(In Thousands of Dollars)

 
|                                               |   |               |   |             |   |              |   | **2003 VS  2002**    |   |                            | **2002 VS  2001** |              |   |                 |
|----------------------------------------------------|--------|--------------------|--------|------------------|--------|-------------------|--------|----------------------|--------|---------------------------------|-------------------|-------------------|--------|----------------------|
|                                               |   | **Interest  2003** |   | **Income  2002** |   | **Expense  2001** |   | **Increase  Volume** |   | **(Decrease)  Change In  Rate** |              | **Due To  Total** |   | **Increase  Volume** |   | **(Decrease)  Change In  Rate** |   | **Due To  Total** |   |
| INTEREST INCOME ON                                 |   |               |   |             |   |              |   |                 |   |                            |              |              |   |                 |   |   |   |   |   |
| EARNING ASSETS:                                    |   |               |   |             |   |              |   |                 |   |                            |              |              |   |                 |   |   |   |   |   |
| LOANS:                                             |   |               |   |             |   |              |   |                 |   |                            |              |              |   |                 |   |   |   |   |   |
| Commercial                                         |   | $                  | 2,665  |             | $      | 3,103             |   | $                    | 4,209  |                            | (312              | )                 | (126   | )                    | $ | (438 | ) | $ | (140 | ) | $ | (966 | ) | $ | (1,106 | ) |
| Real Estate                                        |   | 4,004              |   | 4,262            |   | 4,376             |   | (113                 | )      | (145                            | )                 | (258              | )      | 54                   |   | (168 | ) | (114 | ) |
| Consumer                                           |   | 910                |   | 1,154            |   | 1,397             |   | (174                 | )      | (70                             | )                 | (244              | )      | (139                 | ) | —104 |   | (243 | ) |
|                                               |   |               |   |             |   |              |   |                 |   |                            |              |              |   |                 |   |   |   |   |   |
| Total Loans                                        |   | 7,579              |   | 8,519            |   | 9,982             |   | (599                 | )      | (341                            | )                 | (940              | )      | (225                 | ) | (1,238 | ) | (1,463 | ) |
|                                               |   |               |   |             |   |              |   |                 |   |                            |              |              |   |                 |   |   |   |   |   |
| SECURITIES                                         |   |               |   |             |   |              |   |                 |   |                            |              |              |   |                 |   |   |   |   |   |
| Held to Maturity                                   |   |               |   |             |   |              |   |                 |   |                            |              |              |   |                 |   |   |   |   |   |
| Taxable                                            |   | 0                  |   | 0                |   | 0                 |   | 0                    |   | 0                               |              | 0                 |   | 0                    |   | 0 |   | 0 |   |
| Available for sale                                 |   | 1,005              |   | 1,364            |   | 1,354             |   | 134                  |   | (493                            | )                 | (359              | )      | 500                  |   | (490 | ) | 10 |   |
| TOTAL SECURITIES                                   |   | 1,005              |   | 1,364            |   | 1,354             |   | 134                  |   | (493                            | )                 | (359              | )      | 500                  |   | (490 | ) | 10 |   |
|                                               |   |               |   |             |   |              |   |                 |   |                            |              |              |   |                 |   |   |   |   |   |
| FEDERAL FUNDS SOLD AND SECURITIES  PURCHASED:      |   |               |   |             |   |              |   |                 |   |                            |              |              |   |                 |   |   |   |   |   |
| Under Agreement to Resale                          |   | 182                |   | 206              |   | 754               |   | 69                   |   | (93                             | )                 | (24               | )      | (117                 | ) | (431 | ) | (548 | ) |
|                                               |   |               |   |             |   |              |   |                 |   |                            |              |              |   |                 |   |   |   |   |   |
| TOTAL INTEREST INCOME ON EARNING ASSETS            |   | 8,766              |   | 10,089           |   | 12,090            |   | (396                 | )      | (927                            | )                 | (1,323            | )      | 158                  |   | (2,159 | ) | (2,001 | ) |
|                                               |   |               |   |             |   |              |   |                 |   |                            |              |              |   |                 |   |   |   |   |   |
| INTEREST EXPENSE ON INTEREST BEARING  LIABILITIES: |   |               |   |             |   |              |   |                 |   |                            |              |              |   |                 |   |   |   |   |   |
| Savings & Interest                             |   |               |   |             |   |              |   |                 |   |                            |              |              |   |                 |   |   |   |   |   |
| Bearing Demand Deposits                            |   | 315                |   | 584              |   | 1,139             |   | 148                  |   | (417                            | )                 | (269              | )      | 68                   |   | (623 | ) | (555 | ) |
| Time Deposits                                      |   | 1,672              |   | 2,024            |   | 3,522             |   | (88                  | )      | (264                            | )                 | (352              | )      | (123                 | ) | (1,375 | ) | (1,498 | ) |
| Repurchased - Purchased                            |   | 100                |   | 157              |   | 140               |   | (3                   | )      | (54                             | )                 | (57               | )      | 49                   |   | (32 | ) | 17 |   |
|                                               |   |               |   |             |   |              |   |                 |   |                            |              |              |   |                 |   |   |   |   |   |
| TOTAL INTEREST EXPENSE ON                          |   |               |   |             |   |              |   |                 |   |                            |              |              |   |                 |   |   |   |   |   |
| INTEREST BEARING LIABILITIES                       |   | 2,087              |   | 2,765            |   | 4,801             |   | 57                   |   | (735                            | )                 | (678              | )      | (6                   | ) | (2,030 | ) | (2,036 | ) |
|                                               |   |               |   |             |   |              |   |                 |   |                            |              |              |   |                 |   |   |   |   |   |
| NET INTEREST INCOME                                |   | $                  | 6,679  |             | $      | 7,324             |   | $                    | 7,289  |                            | $                 | (453              | )      | $                    | (192 | ) | $ | (645 | ) | $ | 164 |   | $ | (129 | ) | $ | 35 |   |
|                                                    |        |                    |        |                  |        |                   |        |                      |        |                                 |                   |                   |        |                      |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

16

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# LOAN PORTFOLIO

 

The loan portfolio of Logan county BancShares, Inc. andSubsidiary continues to represent the largest component of earning assets.  Loan activity has remained stable due to theBank’s emphasis on lending; as shown on Table IV, the Bank has contributedsubstantially to liquidity by structuring the loan portfolio in such a manner asto have approximately 39.48% of the total loans due within one year.

 

TABLE IV -REMAINING MATURITIES OF LOANS AT DECEMBER 31, 2003

(In Thousands of dollars)

 
|                                |   | **Commercial,  Financial and  Agricultural** |   | **Real  Estate  Mortgages** |   | **Installments** |   | **Total** |   |
|-------------------------------------|--------|----------------------------------------------|--------|-----------------------------|--------|------------------|--------|-----------|--------|
| MATURITIES                          |   |                                         |   |                        |   |             |   |      |   |
| Due Within OneYear                  |   | $                                            | 18,004 |                        | $      | 4,907            |   | $         | 1,731  |   | 24,642 |   |
| Due One to Five Years               |   | 11,567                                       |   | 14,150                      |   | 5,496            |   | 31,213    |   |
| Due After Five Years                |   | 10,555                                       |   | 31,974                      |   | 3,231            |   | 45,760    |   |
|                                |   |                                         |   |                        |   |             |   |      |   |
| Total Loans                         |   | $                                            | 40,126 |                        | $      | 51,031           |   | $         | 10,458 |   | $ | 101,615 |   |
|                                |   |                                         |   |                        |   |             |   |      |   |
| Due After One Year at Fixed Rate    |   | $                                            | 22,122 |                        | $      | 46,124           |   | $         | 9,132  |   | 77,378 |   |
| Due After One Year at Floating Rate |   | 0                                            |   | 0                           |   | 0                |   | 0         |   |
|                                |   |                                         |   |                        |   |             |   |      |   |
| Total Loans Due After One Year      |   | $                                            | 22,122 |                        | $      | 46,124           |   | $         | 9,132  |   | $ | 77,378 |   |

 

17

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LOAN LOSSES AND CREDIT RISKS

 

The allowance for loan losses isestablished by charging expenses at an amount that will maintain the allowancefor loan losses at a level sufficient to provide for potential loanlosses.  Loan losses are charged directlyto the allowance when they occur and recoveries are credited to theallowance.  The amount of the provisionis based on pase loan loss experience, management’s evaluation of the loanportfolio under current economic conditions, and such other factors as inmanagement’s best judgment deserve current recognition in estimating loanlosses.  Tables V and VI represent asummary of loan loss experience for the years 2003, 2002, 2001, 2000, and 1999.

TABLEV - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

 
|                                                                  |   | **Year Ended  December 31** |    |
|-----------------------------------------------------------------------|--------|-----------------------------|---------|
|                                                                  |   | **2003**                    |    | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| Amount of Loans Outstanding  at End of Period                    |   | $                           | 101,615 |   | $ | 107,933 |   | $ | 115,755 |   | $ | 112,939 |   | $ | 108,871 |   |
|                                                                  |   |                        |    |   |   |   |   |   |   |   |   |
| Monthly Average                                                       |   |                        |    |   |   |   |   |   |   |   |   |
| Amount of Loans                                                       |   | $                           | 103,873 |   | $ | 110,174 |   | $ | 113,289 |   | $ | 109,447 |   | $ | 101,197 |   |
|                                                                  |   |                        |    |   |   |   |   |   |   |   |   |
| Balance of Allowance for Possible Loan  Losses at Beginning of Period |   | $                           | 1,619   |   | $ | 1,153 |   | $ | 702 |   | $ | 700 |   | $ | 701 |   |
|                                                                  |   |                        |    |   |   |   |   |   |   |   |   |
| Loans Charged Off:                                                    |   |                        |    |   |   |   |   |   |   |   |   |
| Commercial                                                            |   | $                           | 0       |   | $ | 9 |   | $ | 32 |   | $ | 0 |   | $ | 0 |   |
| Real Estate                                                           |   | 35                          |    | 16 |   | 20 |   | 7 |   | 0 |   |
| Consumer                                                              |   | 49                          |    | 73 |   | 205 |   | 99 |   | 29 |   |
|                                                                  |   |                        |    |   |   |   |   |   |   |   |   |
| Total Loans Charged Off                                               |   | 84                          |    | 98 |   | 257 |   | 106 |   | 29 |   |
|                                                                  |   |                        |    |   |   |   |   |   |   |   |   |
| Recoveries of Loans Previously Charged Off:                           |   |                        |    |   |   |   |   |   |   |   |   |
| Commercial                                                            |   | 0                           |    | 1 |   | 1 |   | 0 |   | 1 |   |
| Real Estate                                                           |   | 5                           |    | 1 |   | 1 |   | 3 |   | 0 |   |
| Consumer                                                              |   | 38                          |    | 28 |   | 6 |   | 5 |   | 4 |   |
|                                                                  |   |                        |    |   |   |   |   |   |   |   |   |
| Total Recoveries                                                      |   | 43                          |    | 30 |   | 8 |   | 8 |   | 5 |   |
|                                                                  |   |                        |    |   |   |   |   |   |   |   |   |
| Net Loans Charged Off:                                                |   | 41                          |    | 68 |   | 249 |   | 98 |   | 24 |   |
|                                                                  |   |                        |    |   |   |   |   |   |   |   |   |
| Additions to Allowance:                                               |   |                        |    |   |   |   |   |   |   |   |   |
| Charged to Expense                                                    |   | 3                           |    | 534 |   | 700 |   | 100 |   | 23 |   |
|                                                                  |   |                        |    |   |   |   |   |   |   |   |   |
| Balance at End of Period                                              |   | $                           | 1,581   |   | $ | 1,619 |   | $ | 1,153 |   | $ | 702 |   | $ | 700 |   |
|                                                                  |   |                        |    |   |   |   |   |   |   |   |   |
| Ratio of Net Charge-Offs                                              |   |                        |    |   |   |   |   |   |   |   |   |
| During Period to                                                      |   |                        |    |   |   |   |   |   |   |   |   |
| Average Loans                                                         |   | 0.039                       | %       | 0.062 | % | 0.220 | % | 0.089 | % | 0.024 | % |

 

18

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TABLE VI - ALLOCATION OF ALLOWANCE FOR LOANLOSSES

 
|        |   | **December  31, 2003** |   | **December  31, 2002**               |   | **December  31, 2001** |   | **December  31, 2000**               |   | **December  31, 1999** |   |
|-------------|--------|------------------------|--------|--------------------------------------|--------|------------------------|--------|--------------------------------------|--------|------------------------|--------|
|        |   | **Allowance**          |   | **% of  Outstanding  Loan  Balance** |   | **Allowance**          |   | **% of  Outstanding  Loan  Balance** |   | **Allowance**          |   | **% of  Outstanding  Loan  Balance** |   | **Allowance** |   | **% of  Outstanding  Loan** |   | **Allowance** |   | **% of  Outstanding  Loan  Balance** |   |
| Commercial  |   | $                      | 854    |                                 | 2.13   | %                      | $      | 854                                  |   | 1.94                   | %      | $ | 749 |   | 1.52 | % | $ | 464 |   | 0.98 | % | $ | 464 |   | 1.03 | % |
|        |   |                   |   |                                 |   |                   |   |                                 |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Real Estate |   | 596                    |   | 1.17                                 | %      | 623                    |   | 1.19                                 | %      | 288                    |   | 0.54 | % | 163 |   | 0.31 | % | 163 |   | 0.32 | % |
|        |   |                   |   |                                 |   |                   |   |                                 |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Consumer    |   | 132                    |   | 1.25                                 | %      | 142                    |   | 1.24                                 | %      | 116                    |   | 0.83 | % | 75 |   | 5.50 | % | 73 |   | 5.50 | % |
|        |   |                   |   |                                 |   |                   |   |                                 |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Total       |   | $                      | 1,582  |                                 | 1.55   | %                      | $      | 1,619                                |   | 1.50                   | %      | $ | 1,153 |   | 0.97 | % | $ | 702 |   | 0.62 | % | $ | 700 |   | 0.64 | % |

 

19

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CONSOLIDATED SUMMARY OF LOANS ANDNON-PERFORMING ASSETS

 

Non-performing assets consist of (a) loans not accruing interestany longer due to doubts about future collectibility, (b) loans more thanninety days past due for the last principal or interest payment, and (c) otherreal estate owned by the Bank taken originally as loan collateral.  Table VII. provides a five-year summary ofthe components involved in non-performing assets as of year end.

 

Loans are determined to be non-accruing when it has beendetermined that the ability of the bank to collect the unpaid balance of suchloans is highly unlikely due to the financial position of the borrower andgeneral economic conditions.  Thedetermination of such classification is made by bank management on acase-by-case basis for problem loans. Generally, a review of each loan ninety days or more past due is mademonthly and such loans deemed uncollectible become classified as non-accrual.

 

Loans are determined to be ninety days delinquent when such aperiod of time has elapsed since the last payment of principal or interest wasmade.  At such a time, consideration asto whether to classify the loan as non-accruing is made.  However, until such classification is made,interest will continue to be accrued.

 

Other real estate consists of real property that the Bankoriginally took as collateral for loans but has since acquired title to whenthe borrowers defaulted and the Bank bid on the property in question at publicauction.

 

TABLE VII. - CONSOLIDATED SUMMARY OF LOANS AND NON-PERFORMINGASSETS

(In thousands of Dollars)

 
|                                     |   | **Year Ended  December 31,** |   |
|------------------------------------------|--------|------------------------------|--------|
|                                     |   | **2003**                     |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                     |   |                         |   |   |   |   |   |   |   |   |   |
| Commercial Loans                         |   | $40,126                      |   | $43,980 |   | $49,211 |   | $47,526 |   | $45,069 |   |
| Real Estate Loans                        |   | 51,031                       |   | 52,503 |   | 53,719 |   | 52,597 |   | 51,163 |   |
| Consumer Loans                           |   | 10,458                       |   | 11,450 |   | 13,978 |   | 13,518 |   | 13,339 |   |
|                                     |   |                         |   |   |   |   |   |   |   |   |   |
| Subtotal                                 |   | 101,615                      |   | 107,933 |   | 116,908 |   | 113,641 |   | 109,571 |   |
| Less: Unearned Income                    |   | 0.                           |   | 0. |   | 0. |   | 0. |   | 0. |   |
|                                     |   | 101,615                      |   | 107,933 |   | 116,908 |   | 113,641 |   | 109,571 |   |
| Subtotal                                 |   |                         |   |   |   |   |   |   |   |   |   |
| Less: Reserve for Loan Losses            |   | 1,582                        |   | 1,619 |   | 1,153 |   | 702 |   | 700 |   |
|                                     |   |                         |   |   |   |   |   |   |   |   |   |
| Net Loans                                |   | $100,033                     |   | $106,314 |   | $115,755 |   | $112,939 |   | $108,871 |   |
|                                     |   |                         |   |   |   |   |   |   |   |   |   |
| Non-Performing Assets Non-Accruing Loans |   | $1,059                       |   | $1,706 |   | $864 |   | $426 |   | $555 |   |
| Loans Past Due 90 Days                   |   | 149                          |   | 617 |   | 1,801 |   | 3,338 |   | 3,272 |   |
| Other Real Estate Owned                  |   | 202                          |   | 196 |   | 227 |   | 200 |   | 358 |   |
|                                     |   |                         |   |   |   |   |   |   |   |   |   |
| Total Non-Performing Assets              |   | $1,410                       |   | $2,519 |   | $2,892 |   | $3,964 |   | $4,185 |   |

 

20

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SECURITIES

 

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

 

Securitiesinclude those classified as held to maturity and available for sale, in 2002and 2001 these amounted to approximately 30% of the earning assets and representedallocation of funds due to lower loan demand.

 

All debtsecurities, that Logan County BancShares Subsidiary does not have the abilityor management does not have the positive intent to hold to maturity, areclassified as “securities available for sale” and are carried at market value.

 

TABLE VIII. – MATURITY DISTRIBUTION OF SECURITES AT DECEMBER 31, 2003

(In Thousands of Dollars)

 
| **December 31. 2003**            |   | **One  Year  or  Less** |   | **OneYear  Through  Five  Years** |   | **Years  Through  Ten  Years** |   | **Over  Ten  Years** |   | **Total** |   | **Market  Value** |   |
|----------------------------------|--------|-------------------------|--------|-----------------------------------|--------|--------------------------------|--------|----------------------|--------|-----------|--------|-------------------|--------|
| **Dollars in thousands**         |   |                    |   |                              |   |                           |   |                 |   |      |   |              |   |
|                             |   |                    |   |                              |   |                           |   |                 |   |      |   |              |   |
| U.S. Government:                 |   |                    |   |                              |   |                           |   |                 |   |      |   |              |   |
| Available for Sale               |   | $                       | 9,001  |                              | $      | 0                              |   | $                    | 0      |      | $      | 0                 |   | $ | 9,001 |   | $ | 9,030 |   |
| Held to maturity                 |   | 0                       |   | 0                                 |   | 0                              |   | 0                    |   | 0         |   | 0                 |   |
|                             |   |                    |   |                              |   |                           |   |                 |   |      |   |              |   |
| U.S. Federal Agency/and Equities |   |                    |   |                              |   |                           |   |                 |   |      |   |              |   |
| Available for sale               |   | 17,773                  |   | 20,737                            |   | 0                              |   | 344                  |   | 38,854    |   | 38,943            |   |
| Held to maturity                 |   | 0                       |   | 0                                 |   | 0                              |   | 0                    |   | 0         |   | 0                 |   |
|                             |   |                    |   |                              |   |                           |   |                 |   |      |   |              |   |
| Total Securities:                |   |                    |   |                              |   |                           |   |                 |   |      |   |              |   |
| Available for sale               |   | 26,774                  |   | 20,737                            |   | 0                              |   | 344                  |   | 47,855    |   | 47,973            |   |
| Held to maturity                 |   | 0                       |   | 0                                 |   | 0                              |   | 0                    |   | 0         |   | 0                 |   |
| TOTAL                            |   | $                       | 26,774 |                              | $      | 20,737                         |   | $                    | 0      |      | $      | 344               |   | $ | 47,855 |   | $ | 47,973 |   |
|                             |   |                    |   |                              |   | 0                              |   |                 |   |      |   |              |   |
| Percent of total                 |   | 55.95                   | %      | 43.33                             | %      | 0.00                           | %      | 0.72                 | %      | 100.00    | %      | 100.00            | %      |
|                             |   |                    |   |                              |   |                           |   |                 |   |      |   |              |   |
| Weighted average yield           |   | 2.09                    | %      | 1.92                              | %      | 0.00                           | %      | 3.30                 | %      | 2.02      | %      | 2.02              | %      |

 

----

 

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

 

21

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OTHERINCOME

 

In2003 and 2002, the bank adjusted to a slower growth pace and evaluated servicefees on the various services rendered for customers.  As a result, the service fees increased by $200,000 and otherfees decreased by $20,000 in 2003 compared to 2002 and $29,000 and $75,000,respectively, in 2002 compared to 2001.

 

TableIX – OTHER INCOME(InThousands of Dollars)

 
|               |   |     |   |     |   |     |   | **Increase  (Decrease)** |   |
|--------------------|--------|----------|--------|----------|--------|----------|--------|--------------------------|--------|
|               |   |     |   |     |   |     |   | **2003 Over  2002**      |   | **2002 Over  2001** |   |
|               |   | **2003** |   | **2002** |   | **2001** |   | **Amount**               |   | **Percent** |   | **Amount** |   | **Percent** |   |
| Service Fee        |   | $        | 857    |     | $      | 657      |   | $                        | 628    |   | $ | 200 |   | 30.44 | % | $ | 29 |   | -6.53 | % |
|               |   |     |   |     |   |     |   |                     |   |   |   |   |   |   |   |
| Other Fees         |   | 128      |   | 148      |   | 73       |   | (20                      | )      | -13.51 | % | 75 |   | 102.74 | % |
|               |   |     |   |     |   |     |   |                     |   |   |   |   |   |   |   |
| Securities:        |   |     |   |     |   |     |   |                     |   |   |   |   |   |   |   |
| Gain (Loss)        |   | 1        |   | 0        |   | 6        |   | 1                        |   | 100.00 | % | (6 | ) | -100.00 | % |
|               |   |     |   |     |   |     |   |                     |   |   |   |   |   |   |   |
| Total Other Income |   | $        | 986    |     | $      | 805      |   | $                        | 707    |   | $ | 181 |   | 22.48 | % | $ | 98 |   | -8.91 | % |

 

22

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TABLE X – OTHER EXPENSES

(In Thousands of Dollars)

 
|                          |   |     |   |     |   |     |   | **2003 Over  2002** |   | **2002 Over  2001** |   |
|-------------------------------|--------|----------|--------|----------|--------|----------|--------|---------------------|--------|---------------------|--------|
|                          |   | **2003** |   | **2002** |   | **2001** |   | **Amount**          |   | **Percent**         |   | **Amount** |   | **Percent** |   |
|                          |   |     |   |     |   |     |   |                |   |                |   |   |   |   |   |
| Salaries and Benefits         |   | $        | 2,377  |     | $      | 2,322    |   | $                   | 2,217  |                | $      | 55 |   | 2.37 | % | $ | 105 |   | 4.74 | % |
| Taxes                         |   | 110      |   | 130      |   | 85       |   | (20                 | )      | -15.38              | %      | 45 |   | 52.94 | % |
| Depreciation                  |   | 259      |   | 273      |   | 270      |   | (14                 | )      | -5.13               | %      | 3 |   | 1.12 | % |
| Repairs and Maintenance       |   | 277      |   | 230      |   | 223      |   | 47                  |   | 20.43               | %      | 7 |   | 3.14 | % |
| Fees Paid to Directors        |   | 77       |   | 80       |   | 80       |   | (3                  | )      | -3.75               | %      | 0 |   | 0.00 | % |
| Equipment Rental              |   | 39       |   | 43       |   | 41       |   | (4                  | )      | -9.30               | %      | 2 |   | 4.88 | % |
| FDIC & Fidelity Insurance |   | 107      |   | 110      |   | 113      |   | (3                  | )      | -2.73               | %      | (3 | ) | -2.64 | % |
| Data Processing               |   | 559      |   | 533      |   | 514      |   | 26                  |   | 4.88                | %      | 19 |   | 3.67 | % |
| Bank Stationery               |   | 146      |   | 143      |   | 163      |   | 3                   |   | 2.10                | %      | (20 | ) | -12.27 | % |
| Bank Operating Expenses       |   | 777      |   | 825      |   | 925      |   | (48                 | )      | -5.82               | %      | (100 | ) | -10.81 | % |
|                          |   |     |   |     |   |     |   |                |   |                |   |   |   |   |   |
| TOTAL                         |   | $        | 4,728  |     | $      | 4,689    |   | $                   | 4,631  |                | $      | 39 |   | 0.83 | % | $ | 58 |   | 1.25 | % |

 

23

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OTHER EXPENSES

 

During 2003the other expenses increased by $39,000 and only .82% of the increase was insalaries and benefits and reflected normal increases in compensation.  Most other areas were relatively stable asmanagement continued to control operational cost.

 

In 2002 theother expenses grew by $58,000 or only 1.25% over 2001.  This small increase was primarily insalaries, benefits and taxes all relating to normal increases in theseareas.  These were affected by decreasesin operating expenses and bank supplies.

 

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

 

24

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EARNINGS AND DIVIDENDS

 

Asdemonstrated in Table XI., Logan County BancShares, Inc. strives to achieve afavorable dividend payout rate to the shareholders.  In 2003 the trend of recent years continued.  Net income per share grew by 5.08% anddividends to shareholders by 2.61%.  Thecompany maintained a strong capital position by increasing stockholders’ equityby 3.47% and assets grew by 3.51%. During 2002 the company increased stockholder’s equity by 2.340%, alongwith increases of 4.90% in net income and 2.00% increase in the dividend payoutratio.  These positive indicatorsreflect the overall growth in size, service area and customer base.

 

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

 

 
|   |   | **Dividend  Payout** |   | **Net  Income** |   | **Dividends** |   | **Net  Income** |   | **Dividends** |   | **Total  Assets** |   | **Equity** |   |
|--------|--------|----------------------|--------|-----------------|--------|---------------|--------|-----------------|--------|---------------|--------|-------------------|--------|------------|--------|
|   |   |                 |   |            |   |          |   |            |   |          |   |              |   |       |   |
| 2001   |   | 61.12                | %      | $               | 2.45   |          | $      | 1.50            |   | -13.73        | %      | 4.17              | %      | 8.96       | %      | 4.91 | % |
| 2002   |   | 59.56                | %      | $               | 2.57   |          | $      | 1.53            |   | 4.90          | %      | 2.00              | %      | 0.91       | %      | 2.34 | % |
| 2003   |   | 58.15                | %      | $               | 2.45   |          | $      | 1.57            |   | 5.08          | %      | 2.61              | %      | 3.51       | %      | 3.47 | % |

 

25

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EARNING ASSETS

 

Table XIIrepresents analysis of average earning assets and interest-bearing liabilitiesfor the years ended December 31, 2003, 2002, and 2001.

 

In the periodpresented, average-earning assets grew by $1,841,000 in 2003, $4,722,000 in2002 and $20,386,000 in 2001.  Thisgrowth represented increases of 1.12% in 2003, 2.95% in 2002 and 14.62% in2001.  The loan portfolio is the majorcomponent of earning assets which declined by $6,551,000 in 2003, $2,865,000 in2002 after growing by $4,494,000 or 4.13% in 2001.  The company also allocated to the investment portfolio a portionof the growth to maintain liquidity and fund future loan requirements.

 

INTEREST BEARING LIABILITIES

 

Interestbearing liabilities include interest bearing demand deposits, savings accounts,time deposits and borrowed funds.  Theseare the prime sources of funds for Logan County BancShares, Inc. subsidiary tosupport earning assets.  Total averageinterest bearing liabilities decreased by $1,032,000 in 203 or 0.01% afterincreasing $4,799,000 or 3.86% in 2002 and $8,630,000 or 7.46$ in 2001.  In all years the Company has maintained astable net interest margin while experiencing growth in the underlyingdeposits.  The Company has been able tomatch earning yields with costs of funds over the past three years to maintain astable net interest margin.

 

26

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TABLE XII – ANALYSIS OF EARNING ASSETS AND INTEREST BEARING LIABILITIES

 

(In Thousands of Dollars)

 
|                      |   | **Year Ended  12/31/03** |    | **Year Ended  12/31/02** |   | **Year Ended  12/31/01** |   |
|---------------------------|--------|--------------------------|---------|--------------------------|--------|--------------------------|--------|
|                      |   | **Average  Balance**     |    | **Interest**             |   | **Yield/  Rate**         |   | **Average  Balance** |   | **Interest** |   | **Yield/  Rate** |   | **Average  Balance** |   | **Interest** |   | **Yield/  Rate** |   |
|                      |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ASSETS                    |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| EARNING ASSETS:           |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| LOANS:                    |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                |   | $                        | 41,444  |                     | $      | 2,665                    |   | 6.43 | % | $ | 44,680 |   | $ | 3,103 |   | 6.94 | % | $ | 46,696 |   | $ | 4,209 |   | 9.01 | % |
| Real Estate               |   | 51,764                   |    | 4,004                    |   | 7.74                     | %      | 53,180 |   | 4,262 |   | 8.01 | % | 52,514 |   | 4,376 |   | 8.33 | % |
| Consumer                  |   | 10,665                   |    | 910                      |   | 8.53                     | %      | 12,564 |   | 1,154 |   | 9.18 | % | 14,079 |   | 1,397 |   | 9.92 | % |
|                      |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Loans               |   | $                        | 103,873 |                     | $      | 7,579                    |   | 7.30 | % | $ | 110,424 |   | $ | 8,519 |   | 7.71 | % | $ | 113,289 |   | $ | 9,982 |   | 8.81 | % |
|                      |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| INVESTMENT                |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| SECURITIES                |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Held to Maturity          |   | 0                        |    | 0                        |   | 0.00                     | %      | 0 |   | 0 |   | 0.00 | % | 0 |   | 0 |   | 0.00 | % |
| Available for Sale        |   | 45,014                   |    | 1,005                    |   | 2.23                     | %      | 40,988 |   | 1,364 |   | 3.32 | % | 25,967 |   | 1,354 |   | 5.21 | % |
|                      |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Securities          |   | 45,014                   |    | 1,005                    |   | 2.23                     | %      | 40,988 |   | 1,364 |   | 3.32 | % | 25,967 |   | 1,354 |   | 5.21 | % |
|                      |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| FEDERAL FUNDS             |   | 17,472                   |    | 182                      |   | 1.04                     | %      | 13,106 |   | 206 |   | 1.57 | % | 20,540 |   | 754 |   | 3.67 | % |
| SOLD TOTAL EARNING ASSETS |   | $                        | 166,359 |                     | $      | 8,766                    |   | 5.27 | % | $ | 164,518 |   | $ | 10,089 |   | 6.13 | % | $ | 159,796 |   | $ | 12,090 |   | 7.57 | % |
|                      |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NON-EARNING               |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ASSETS:                   |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                      |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and Due From Banks   |   | 5,339                    |    |                     |   |                     |   | 5,187 |   |   |   |   |   | 5,027 |   |   |   |   |   |
| Bank Premises             |   | 3,145                    |    |                     |   |                     |   | 3,337 |   |   |   |   |   | 3,561 |   |   |   |   |   |
| Other Assets              |   | 300                      |    |                     |   |                     |   | 408 |   |   |   |   |   | 1,997 |   |   |   |   |   |
|                      |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                      |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                      |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| TOTAL NON-EARNING ASSETS  |   | $                        | 8,784   |                     |   |                     |   |   | $ | 8,932 |   |   |   |   |   | $ | 10,585 |   |   |   |   |   |
|                      |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| TOTAL ASSETS              |   | $                        | 175,143 |                     |   |                     |   |   | $ | 173,450 |   |   |   |   |   | $ | 170,381 |   |   |   |   |   |

 

27

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TABLE XII – ANALYSIS OF EARNING ASSETS AND INTEREST BEARING LIABILITIES

 

(In Thousands of Dollars)

 
|                                                |   | **Year Ended  12/31/03** |    | **Year Ended  12/31/02** |   | **Year Ended  12/31/01** |   |
|-----------------------------------------------------|--------|--------------------------|---------|--------------------------|--------|--------------------------|--------|
|                                                |   | **Average  Balance**     |    | **Interest**             |   | **Yield/  Rate**         |   | **Average  Balance** |   | **Interest** |   | **Yield/  Rate** |   | **Average  Balance** |   | **Interest** |   | **Yield/  Rate** |   |
|                                                |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| INTEREST BEARING LIABILITIES:                       |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| DDA                                                 |   | $                        | 67,047  |                     | $      | 315                      |   | 0.47 | % | $ | 65,384 |   | $ | 584 |   | 0.89 | % | $ | 57,807 |   | $ | 1,139 |   | 1.97 | % |
| Time Deposits                                       |   | 58,224                   |    | 1,672                    |   | 2.87                     | %      | 60,861 |   | 2,024 |   | 3.33 | % | 64,549 |   | 3,522 |   | 5.46 | % |
| Repurchase Agreement                                |   | 2,852                    |    | 100                      |   | 3.51                     | %      | 2,910 |   | 157 |   | 5.39 | % | 2,000 |   | 140 |   | 7.00 | % |
|                                                |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Interest Bearing Liabilities                  |   | $                        | 128,123 |                     | $      | 2,087                    |   | 1.63 | % | $ | 129,155 |   | $ | 2,765 |   | 2.14 | % | $ | 124,356 |   | $ | 4,801 |   | 3.86 | % |
|                                                |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NON-INTEREST BEARING LIABILITIES AND  CAPITAL       |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand Deposits                                     |   | 28,166                   |    |                     |   |                     |   | 25,559 |   |   |   |   |   | 28,052 |   |   |   |   |   |
| Accrued Expenses                                    |   | 899                      |    |                     |   |                     |   | 966 |   |   |   |   |   | 1,023 |   |   |   |   |   |
| Capital                                             |   | 17,955                   |    |                     |   |                     |   | 17,770 |   |   |   |   |   | 16,950 |   |   |   |   |   |
|                                                |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Non-Interest Bearing Liabilities and  Capital |   | 47,020                   |    |                     |   |                     |   | 44,295 |   |   |   |   |   | 46,025 |   |   |   |   |   |
|                                                |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Liabilities and Stockholders’ Equity     |   | $                        | 175,143 |                     |   |                     |   |   | $ | 173,450 |   |   |   |   |   | $ | 170,381 |   |   |   |   |   |
|                                                |   |                     |    |                     |   |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NET INTEREST MARGIN                                 |   | $                        | 166,360 |                     | $      | 6,680                    |   | 4.02 | % | $ | 164,518 |   | $ | 7,324 |   | 4.45 | % | $ | 159,796 |   | $ | 7,289 |   | 4.56 | % |

 

28

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INTEREST RATE SENSITIVITY ANALYSIS

 

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

 

The negativegap position as presented in the following table for maturities of one year orless is offset by the substantial positive gap position for maturities greaterthat one year.  The earnings of LoganCounty BancShares, Inc. are sufficient to withstand the short-term negative gapposition.  Should a large fluctuationoccur, increasing the costs of funds, management would consider increasingservice charges and non-interest fees which management determines the marketwould bear in order to negate increased rate costs.  An additional response, at the option of management, would beliquidation of certain long-term investments, and conversion of those fundsinto short-term securities.

 

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

 

All demand andsavings deposits are considered highly volatile, although experience has shownthese accounts to be stable regardless of economic cycles.  Interest on savings and other transactionalaccounts have generally remained constant over periods of interest ratechanges.  Therefore, deposits andsavings are classified as “over one year” to represent a more realistic ratesensitive gap.

 

29

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TABLE XIII — INTEREST RATE SENSITIVITY ANALYSIS

 

(In Thousands of dollars)

 
|                                                                      |   | **0 - 90** |    | **91 - 180** |   | **181 - 365** |   | **Total  One Year** |    | **Over  One year** |   | **Total** |   |
|---------------------------------------------------------------------------|--------|------------|---------|--------------|--------|---------------|--------|---------------------|---------|--------------------|--------|-----------|--------|
| Earning Assets                                                            |   |       |    |         |   |          |   |                |    |               |   |      |   |
| Loans                                                                     |   | $          | 6,557   |         | $      | 5,576         |   | $                   | 21,299  |               | $      | 33,432    |   | $ | 74,501 |   | $ | 107,933 |   |
| Investments                                                               |   | 13,591     |    | 6,607        |   | 6,607         |   | 26,805              |    | 21,168             |   | 47,973    |   |
| Fed. Funds Sold                                                           |   | 11,370     |    | 0            |   | 0             |   | 11,370              |    | 0                  |   | 11,370    |   |
|                                                                      |   |       |    |         |   |          |   |                |    |               |   |      |   |
|                                                                      |   |       |    |         |   |          |   |                |    |               |   |      |   |
| Total Earning Assets                                                      |   | 31,518     |    | 12,183       |   | 27,906        |   | 71,607              |    | 95,669             |   | 167,276   |   |
|                                                                      |   |       |    |         |   |          |   |                |    |               |   |      |   |
|                                                                      |   |       |    |         |   |          |   |                |    |               |   |      |   |
| Interest Bearing Liabilities:                                             |   |       |    |         |   |          |   |                |    |               |   |      |   |
| Demand Deposits                                                           |   | 23,256     |    | 0            |   | 0             |   | 23,256              |    | 0                  |   | 23,256    |   |
| Savings                                                                   |   | 12,185     |    | 9,689        |   | 21,330        |   | 43,204              |    | 0                  |   | 43,204    |   |
| CD’s of $100,000 and Over                                            |   | 2,804      |    | 1,991        |   | 3,270         |   | 8,065               |    | 14,348             |   | 22,413    |   |
| Other Time                                                                |   | 6,834      |    | 6,707        |   | 6,341         |   | 19,882              |    | 15,300             |   | 35,182    |   |
|                                                                      |   |       |    |         |   |          |   |                |    |               |   |      |   |
| Total Interest Bearing Liability                                          |   | 45,079     |    | 18,387       |   | 30,941        |   | 94,407              |    | 29,648             |   | 124,055   |   |
|                                                                      |   |       |    |         |   |          |   |                |    |               |   |      |   |
| Interest Sensitivity Gap                                                  |   | $          | (13,561 | )            | $      | (6,204        | )      | $                   | (3,035  | )                  | $      | (22,800   | )      | $ | 66,021 |   | $ | 43,221 |   |
|                                                                      |   |       |    |         |   |          |   |                |    |               |   |      |   |
| Cumulative Gap                                                            |   | $          | (13,561 | )            | $      | (19,765       | )      | $                   | (22,800 | )                  | $      | (22,800   | )      | $ | 66,021 |   | $ | 43,221 |   |
|                                                                      |   |       |    |         |   |          |   |                |    |               |   |      |   |
| Rate Sensitive Assets/Rate Sensitive  Liabilities (Cumulative Percentage) |   | 69.92      | %       | 68.86        | %      | 75.85         | %      | 75.85               | %       | 134.84             | %      | 134.84    | %      |

 

30

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TABLE XIV – AVERAGE BALANCE SHEET(In Thousands of Dollars)

 
|                                               |   | **2003** |    | **2002** |   | **2001** |   | **2000** |    | **1999** |   |
|----------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|----------|---------|----------|--------|
| ASSETS:                                            |   |     |    |     |   |     |   |     |    |     |   |
| Cash & Due from Banks                          |   | $        | 5,339   |     | $      | 5,187    |   | $        | 5,027   |     | $      | 4,467 |   | $ | 4,400 |   |
|                                               |   |     |    |     |   |     |   |     |    |     |   |
| Investment Securities:                             |   |     |    |     |   |     |   |     |    |     |   |
| Available for Sale                                 |   | 45,014   |    | 40,988   |   | 25,967   |   | 28,887   |    | 29,045   |   |
| Held to Maturity                                   |   | 0        |    | 0        |   | 0        |   | 0        |    | 1,080    |   |
|                                               |   |     |    |     |   |     |   |     |    |     |   |
| Total Investments                                  |   | 45,014   |    | 40,988   |   | 25,967   |   | 28,887   |    | 30,125   |   |
|                                               |   |     |    |     |   |     |   |     |    |     |   |
| Federal Funds Sold                                 |   | 17,472   |    | 13,106   |   | 20,540   |   | 1,728    |    | 4,792    |   |
| Loans                                              |   |     |    |     |   |     |   |     |    |     |   |
| Real Estates                                       |   | 51,764   |    | 53,180   |   | 52,514   |   | 52,215   |    | 49,235   |   |
| Installment                                        |   | 10,665   |    | 12,564   |   | 14,079   |   | 13,348   |    | 12,212   |   |
| Commercial & Other                             |   | 41,444   |    | 44,680   |   | 46,696   |   | 43,884   |    | 40,468   |   |
|                                               |   | 103,873  |    | 110,424  |   | 113,289  |   | 109,447  |    | 101,915  |   |
| Less:   Unearned Discount                     |   | 0        |    | 0        |   | 0        |   | 0        |    | 0        |   |
|                                               |   | 103,873  |    | 110,424  |   | 113,289  |   | 109,447  |    | 101,915  |   |
| Allowance For Loan Losses                          |   | (1,582   | )       | (1,250   | )      | (788     | )      | (652     | )       | (718     | )      |
|                                               |   |     |    |     |   |     |   |     |    |     |   |
| Net Loans                                          |   | 102,291  |    | 109,174  |   | 112,501  |   | 108,795  |    | 101,197  |   |
|                                               |   |     |    |     |   |     |   |     |    |     |   |
| Banking Premises                                   |   | 3,145    |    | 3,337    |   | 3,561    |   | 3,765    |    | 2,824    |   |
| Accrued Interest and Other Assets                  |   | 1,882    |    | 1,658    |   | 2,785    |   | 2,373    |    | 2,136    |   |
| TOTAL ASSETS                                       |   | $        | 175,143 |     | $      | 173,450  |   | $        | 170,381 |     | $      | 150,015 |   | $ | 145,474 |   |
|                                               |   |     |    |     |   |     |   |     |    |     |   |
| LIABILITIES & STOCKHOLDERS’ EQUITY        |   |     |    |     |   |     |   |     |    |     |   |
| Deposits:                                          |   |     |    |     |   |     |   |     |    |     |   |
| Demand Deposits                                    |   | $        | 51,897  |     | $      | 48,419   |   | $        | 48,524  |     | $      | 40,135 |   | $ | 39,585 |   |
| Savings Deposits                                   |   | 43,316   |    | 42,524   |   | 37,335   |   | 33,621   |    | 31,413   |   |
| Time Deposits                                      |   | 58,224   |    | 60,861   |   | 64,549   |   | 59,505   |    | 58,167   |   |
|                                               |   |     |    |     |   |     |   |     |    |     |   |
| Total Deposits                                     |   | 153,437  |    | 151,804  |   | 150,408  |   | 133,261  |    | 129,165  |   |
|                                               |   |     |    |     |   |     |   |     |    |     |   |
| Repurchase Agreement                               |   | 2,852    |    | 2,910    |   | 2,000    |   | 1,052    |    | 834      |   |
| Other Liabilities                                  |   | 899      |    | 966      |   | 1,023    |   | 470      |    | 851      |   |
|                                               |   |     |    |     |   |     |   |     |    |     |   |
| TOTAL LIABILITIES                                  |   | 157,188  |    | 155,680  |   | 153,431  |   | 134,783  |    | 130,850  |   |
|                                               |   |     |    |     |   |     |   |     |    |     |   |
| STOCKHOLDERS’ EQUITY                          |   | 17,955   |    | 17,770   |   | 16,950   |   | 15,232   |    | 15,624   |   |
|                                               |   |     |    |     |   |     |   |     |    |     |   |
| TOTAL LIABILITIES & STOCKHOLDERS’  EQUITY |   | $        | 175,143 |     | $      | 173,450  |   | $        | 170,381 |     | $      | 150,015 |   | $ | 146,474 |   |

 

31

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To Our Shareholders, Customersand Friends:

 

 

We are proud to present the2003 annual report of Logan County BancShares, Inc. and its Subsidiary, LoganBank and Trust Company.  2003 saw theeconomy begin a slow upturn and we were positioned to show a continued earningsgrowth.  Net income for 2003 was$1,901,023 compared to $1,841,832. for 2002. Earnings per common share totaled $2.62 in 2003 versus $2.57 in2002.  This growth was largely from costcontainment and proper asset liability management.  The return on average assets of 1.08% and return on equity of10.24% are excellent returns of capital in today’s financial markets.

 

This year has been a year ofcelebration.  This marks our 40THcontinuous year of business in Logan; we are very proud of thisachievement.  In today’s market, itcertainly is not unusual to drive down the highway and see names change on banksigns (and new, OUT OF TOWN owners), but ours stays the SAME.  We had a vision 40 years ago, and bymanaging to achieve that goal we are still here for you.  We knew we needed four basic components tobe successful: 1) the best people, 2) the best facility, 3) state of the arttechnology and 4) leadership with commitment. We feel we have achieved these goals and are grateful the community hasrewarded us with their continued support.

 

We started out with onefacility and concentrated on becoming the kind of bank that would not only meetany of your banking or financial needs, but would be a part of yourcommunity.  We focused on gettingandkeeping the best people...your neighbors...not someone from outof town who not only didn’t know you, but also didn’t know the area’sneeds.  As we fulfilled this commitment,we knew it was time to grow.  Webranched out into more communities and today we have five sites, each meetingthe four basic goals with which we started.

 

By continuing to anticipate thefluctuations in today’s economy and moving ahead of the curve, we have managed,even with the continuing slow market, to provide dividends to shareholders,affordable homes to neighbors, innovative lending to business while meeting thegeneral financial needs of all our customers. We specialize in giving all our customers that “hometown” treatment.

 

Our employees have been one ofour biggest assets for the past forty years. They continue to be involved in local schools, churches andorganizations.  In today’s fast-pacedworld, it is comforting and inspiring to have people who are equally concernedwith excelling in the business market and making our community a better placefor us all.

 

We want to sincerely thank ourdirectors for their vision, our shareholders for their support, our employeesfor their continued dedication and to our customers for their confidence.  We pledge to continue to focus on the visionand meet all new challenges as only a locally owned bank can do.  We will continue the tradition!

 

 

Respectively,

 

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

 

32

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[Mc NEAL. WILLIAMSON & CO. LETTER HEAD]

 
| Donald M.  McNecl. CPA      |   | Daniel L. Williamson, CPA         |
|-----------------------------|--------|-----------------------------------|
| Post Office  Box 1839       |   | 525 Tiller St., Cherry Tree Addn. |
| Logan, West  Virginia 2560; |   | Logan, West Virginia 2560;        |
| Phone (304)  752-0461       |   | Fax  (304) 752-4660          |

 

INDEPENDENT AUDITORS’ REPORT

 

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

 

We haveaudited the accompanying consolidated statements of condition of Logan CountyBancShares, Inc., and Subsidiary as of December 31, 2003, and 2002, and therelated consolidated statements of income, changes in stockholders’ equity andcash flows for each of the three years in the period ended December 31, 2003.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conductedour audits in accordance with auditing standards generally accepted in the UnitedStates of America.  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the consolidated financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe  financial  statements.  An  audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe that our audits provides areasonable basis for our opinion.

 

In ouropinion, the financial statements referred to above present

fairly, in allmaterial respects, the consolidated financial position of Logan CountyBancShares, Inc. and Subsidiary as of December 31, 2003, and 2002, and theresults of their operations and  cashflows for each of the three years in the period ended December 31, 2003, inconformity with accounting principles generally accepted in the United Statesof America.

 

 
| /s/ McNeal,  Williamson & Co. |   |
|-----------------------------------|--------|
|                              |
| Logan, West  Virginia             |
| February 26,  2004                |

 

33

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Logan County BancShares, Inc. and Subsidiary

Consolidated Statement of Condition

December 31, 2003 and 2002

 

ASSETS

 
|                        |   | **2003**    |        | **2002**    |   |
|-----------------------------|--------|-------------|-------------|-------------|--------|
|                        |   |        |        |        |   |
| CASH AND DUE FROM BANKS     |   | $           | 7,239,884   |        | $      | 5,967,423 |   |
|                        |   |        |        |        |   |
| INVESTMENT SECURITIES:      |   |        |        |        |   |
| Available for sale          |   | 47,972,978  |        | 41,305,138  |   |
| Held to maturity            |   | 0           |        | 0           |   |
|                        |   |        |        |        |   |
| Total Investment Securities |   | 47,972,978  |        | 41,305,138  |   |
|                        |   |        |        |        |   |
| FEDERAL FUNDS SOLD          |   | 13,385,000  |        | 11,370,000  |   |
|                        |   |        |        |        |   |
| LOANS:                      |   |        |        |        |   |
| Mortgage Loans              |   | 51,031,339  |        | 52,502,944  |   |
| Installment Loans           |   | 10,457,792  |        | 11,449,826  |   |
| Commercial and Other Loans  |   | 40,125,576  |        | 43,979,821  |   |
|                        |   |        |        |        |   |
| Total Loans                 |   | 101,614,706 |        | 107,932,591 |   |
|                        |   |        |        |        |   |
| Less:Unearned Interest      |   | 0           |        | 0           |   |
| Reserve for Loan Losses     |   | 1,581,414   |        | 1,618,632   |   |
|                        |   |        |        |        |   |
| Net Loans                   |   | 100,033,292 |        | 106,313,959 |   |
|                        |   |        |        |        |   |
| BANK PREMISES AND EQUIPMENT |   | 3,103,002   |        | 3,217,324   |   |
|                        |   |        |        |        |   |
| INTEREST RECEIVABLE         |   | 843,052     |        | 811,373     |   |
|                        |   |        |        |        |   |
| OTHER ASSETS                |   | 3,081,834   |        | 713,556     |   |
|                        |   |        |        |        |   |
| TOTAL ASSETS                |   | $           | 175,659,042 |        | $      | 169,698,773 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

34

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Logan County BancShares, Inc. and SubsidiaryConsolidated Statement of ConditionDecember 31, 2003 and 2002

 

# LIABILITIES AND STOCKHOLDERS’ EQUITY

 
|                                                                                                                        |   | **2003**    |        | **2002**    |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|-------------|-------------|-------------|--------|
|                                                                                                                        |   |        |        |        |   |
| DEPOSITS:                                                                                                                   |   |        |        |        |   |
| Non-Interest Bearing                                                                                                        |   | $           | 30,097,669  |        | $      | 25,076,180 |   |
| Interest Bearing                                                                                                            |   | 23,256,409  |        | 21,851,348  |   |
| Savings Deposits                                                                                                            |   | 43,203,543  |        | 44,864,222  |   |
| Time Certificates                                                                                                           |   | 57,594,652  |        | 58,651,287  |   |
|                                                                                                                        |   |        |        |        |   |
| Total Deposits                                                                                                              |   | 154,152,273 |        | 150,443,037 |   |
|                                                                                                                        |   |        |        |        |   |
| REPURCHASED AGREEMENTS                                                                                                      |   | 3,000,000   |        | 1,000,000   |   |
|                                                                                                                        |   |        |        |        |   |
| ACCRUED AND OTHER LIABILITIES                                                                                               |   | 582,440     |        | 1,046,326   |   |
|                                                                                                                        |   |        |        |        |   |
| FEDERAL INCOME TAXES PAYABLE:                                                                                               |   |        |        |        |   |
| Current                                                                                                                     |   | (34,971     | )           | (9,878      | )      |
| Deferred                                                                                                                    |   | 169,718     |        | 26,687      |   |
|                                                                                                                        |   |        |        |        |   |
| TOTAL LIABILITIES                                                                                                           |   | 157,869,460 |        | 152,506,172 |   |
|                                                                                                                        |   |        |        |        |   |
| STOCKHOLDERS’ EQUITY:                                                                                                  |   |        |        |        |   |
| Common Stock – $1.67 par value; Authorized  – 780,000 shares, Outstanding – 703,991 shares in 2003 and 2002. |   | 1,300,000   |        | 1,300,000   |   |
| Surplus                                                                                                                     |   | 2,408,426   |        | 2,408,426   |   |
| Retained Earnings                                                                                                           |   | 15,425,806  |        | 14,630,049  |   |
| Net unrealized amortization on securities  available for sale                                                               |   | 61,548      |        | 260,324     |   |
| Treasury Stock                                                                                                              |   | (1,406,198  | )           | (1,406,198  | )      |
|                                                                                                                        |   |        |        |        |   |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                             |   | 17,789,582  |        | 17,192,601  |   |
|                                                                                                                        |   |        |        |        |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                             |   | $           | 175,659,042 |        | $      | 169,698,773 |   |

 

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

 

35

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Logan County BancShares, Inc. and SubsidiaryConsolidated Statement of IncomeFor the Years Ended December 31, 2003, 2002, and 2001

 
|                                                 |   | **2003**  |      | **2002**   |   | **2001**   |   |
|------------------------------------------------------|--------|-----------|-----------|------------|--------|------------|--------|
|                                                 |   |      |      |       |   |       |   |
| INTEREST INCOME                                      |   |      |      |       |   |       |   |
| Loans, Including fees                                |   | $         | 7,578,902 |       | $      | 8,518,297  |   | $ | 9,981,814 |   |
|                                                 |   |      |      |       |   |       |   |
| Investment Securities:                               |   |      |      |       |   |       |   |
| Available for Sale                                   |   | 1,005,086 |      | 1,363,725  |   | 1,354,163  |   |
| Held to Maturity                                     |   | 0         |      | 0          |   | 0          |   |
|                                                 |   |      |      |       |   |       |   |
| FEDERAL FUNDS SOLD                                   |   | 182,160   |      | 205,786    |   | 753,745    |   |
| Total Interest Income                                |   | 8,766,148 |      | 10,087,808 |   | 12,089,722 |   |
|                                                 |   |      |      |       |   |       |   |
| INTEREST EXPENSE:                                    |   |      |      |       |   |       |   |
|                                                 |   |      |      |       |   |       |   |
| Deposits                                             |   | 1,986,728 |      | 2,607,604  |   | 4,661,023  |   |
| Other Borrowings                                     |   | 100,173   |      | 156,508    |   | 140,000    |   |
|                                                 |   |      |      |       |   |       |   |
| Total Interest Expense                               |   | 2,086,901 |      | 2,764,112  |   | 4,801,023  |   |
|                                                 |   |      |      |       |   |       |   |
| NET INTEREST INCOME                                  |   | 6,679,247 |      | 7,323,696  |   | 7,288,699  |   |
|                                                 |   |      |      |       |   |       |   |
| PROVISION FOR LOAN LOSSES                            |   | 2,850     |      | 533,819    |   | 700,000    |   |
|                                                 |   |      |      |       |   |       |   |
| NET INTEREST INCOME AFTER PROVISION FOR  LOAN LOSSES |   | 6,676,397 |      | 6,789,877  |   | 6,588,699  |   |
|                                                 |   |      |      |       |   |       |   |
| OTHER INCOME:                                        |   |      |      |       |   |       |   |
| Service Fees                                         |   | 857,099   |      | 656,160    |   | 628,220    |   |
| Other                                                |   | 129,021   |      | 148,407    |   | 72,694     |   |
| Securities Gains (Losses)                            |   | 148       |      | 0          |   | 6,248      |   |
|                                                 |   | 986,268   |      | 804,567    |   | 707,162    |   |
|                                                      |        |           |           |            |        |            |        |  |  |  |

 

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

 

36

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Logan County BancShares, Inc. and SubsidiaryConsolidated Statement of IncomeFor the Years Ended December 31, 2003, 2002 and 2001

 
|                                                             |   | **2003**  |      | **2002**  |   | **2001**  |   |
|------------------------------------------------------------------|--------|-----------|-----------|-----------|--------|-----------|--------|
| OTHER EXPENSES:                                                  |   |      |      |      |   |      |   |
| Salaries and Benefits                                            |   | $         | 2,377,040 |      | $      | 2,321,908 |   | $ | 2,216,849 |   |
| Taxes Other Than Payroll & Income                            |   | 109,713   |      | 129,951   |   | 84,970    |   |
| Depreciation                                                     |   | 259,804   |      | 273,928   |   | 269,956   |   |
| Repairs and Maintenance                                          |   | 277,374   |      | 230,105   |   | 222,734   |   |
| Fees Paid to Directors                                           |   | 77,400    |      | 80,125    |   | 79,950    |   |
| Equipment Rental                                                 |   | 39,073    |      | 42,739    |   | 41,384    |   |
| FDIC & Fidelity Insurance                                    |   | 106,944   |      | 109,544   |   | 112,347   |   |
| Data Processing                                                  |   | 558,676   |      | 532,884   |   | 513,965   |   |
| Bank Stationery and Printing                                     |   | 145,724   |      | 142,992   |   | 162,939   |   |
| Professional Fees                                                |   | 66,262    |      | 113,925   |   | 86,235    |   |
| Other Operating Expenses                                         |   | 710,271   |      | 710,734   |   | 839,321   |   |
|                                                             |   | $         | 4,728,283 |      | $      | 4,688,835 |   | $ | 4,630,650 |   |
|                                                             |   |      |      |      |   |      |   |
| INCOME BEFORE TAXES                                              |   | 2,934,382 |      | 2,905,609 |   | 2,665,211 |   |
|                                                             |   |      |      |      |   |      |   |
| INCOME TAXES:                                                    |   |      |      |      |   |      |   |
| Current                                                          |   | 1,082,066 |      | 1,194,397 |   | 1,123,259 |   |
| Deferred                                                         |   | (48,707   | )         | (130,620  | )      | (213,669  | )      |
| NET INCOME                                                       |   | $         | 1,901,023 |      | $      | 1,841,832 |   | $ | 1,755,621 |   |
|                                                             |   |      |      |      |   |      |   |
| NET INTEREST INCOME AFTER PER SHARE OF COMMON  STOCK: NET INCOME |   | $         | 2.70      |      | $      | 2.62      |   | $ | 2.49 |   |

 

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

 

37

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Logan County BancShares, Inc. and SubsidiaryConsolidated Statement of Stockholders’ EquityFor the Years Ended December 31, 2003, 2002, and 2001

 
|                                                  |   | **COMMON  STOCK** |      | **RETAINED  SURPLUS** |   | **TREASURY  EARNINGS** |      | **STOCK** |       | **ACCUMULATED  OTHER  COMPREHENSIVE  INCOME, NET** |   | **TOTAL**  |   |
|-------------------------------------------------------|--------|-------------------|-----------|-----------------------|--------|------------------------|-----------|-----------|------------|----------------------------------------------------|--------|------------|--------|
| Balance-December 2000                            |   | $                 | 1,300,000 |                  | $      | 2,408,426              |      | $         | 13,236,733 |                                               | $      | (860,198   | )      | $ | (70,745 | ) | $ | 16,014,216 |   |
|                                                  |   |              |      |                  |   |                   |      |      |       |                                               |   |       |   |
| Comprehensive Income                                  |   |              |      |                  |   |                   |      |      |       |                                               |   |       |   |
| Net Income - 2001                                     |   |              |      |                  |   | 1,755,621              |      |      |       |                                               |   | 1,755,621  |   |
| Net unrealized gain on securities available  for Sale |   |              |      |                  |   |                   |      |      |       | 105,779                                            |   | 105,779    |   |
|                                                  |   |              |      |                  |   |                   |      |      |       |                                               |   |       |   |
| Total Comprehensive Income                            |   |              |      |                  |   | $                      | 1,755,621 |      |       |                                               | $      | 105,779    |   | $ | 1,861,400 |   |
|                                                  |   |              |      |                  |   |                   |      |      |       |                                               |   |       |   |
| Dividends on 716,991 shares of Common                 |   |              |      |                  |   | (1,075,487             | )         |      |       |                                               |   | (1,075,487 | )      |
| Stock @ $1.34 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  |   |
| Net unrealized gain on securities available  for sale |   |              |      |                  |   |                   |      |      |       | 225,290                                            |   | 225,290    |   |
|                                                  |   |              |      |                  |   |                   |      |      |       |                                               |   |       |   |
| Total Comprehensive Income                            |   |              |      |                  |   | 1,841,833              |      |      |       | 225,290                                            |   | 2,067,123  |   |
|                                                  |   |              |      |                  |   |                   |      |      |       |                                               |   |       |   |
| Purchased 13,000 shares of Common stock@  #42.00/sh   |   |              |      |                  |   |                   |      | (546,000  | )          |                                               |   | (546,000   | )      |
| Dividends on 716,991 shares of common Stock  @ $1.53  |   |              |      |                  |   | (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  |   |
| Net unrealized gain on securites available  for sale  |   |              |      |                  |   |                   |      |      |       | (198,776                                           | )      | (198,776   | )      |
|                                                  |   |              |      |                  |   |                   |      |      |       |                                               |   |       |   |
| Total Comprehensive Income                            |   |              |      |                  |   | 1,901,023              |      |      |       | (198,776                                           | )      | 1,702,247  |   |
|                                                  |   |              |      |                  |   |                   |      |      |       |                                               |   |       |   |
| Dividends on 703,991 shares of Common Stock  @ $1.57  |   |              |      |                  |   | (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 |   |

 

38

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Logan County BancShares, Inc. and SubsidiaryConsolidated Statement of Change in Cash FlowsFor the Years Ended December 31, 2003, 2002 and 2001

 

INCREASES (DECREASES) IN CASH AND CASHEQUIVALENTS

 
|                                                                               |   | **2003**    |      | **2002**    |   | **2001**    |   |
|------------------------------------------------------------------------------------|--------|-------------|-----------|-------------|--------|-------------|--------|
|                                                                               |   |        |      |        |   |        |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |   |        |      |        |   |        |   |
| Net Income                                                                         |   | $           | 1,901,023 |        | $      | 1,841,833   |   | $ | 1,755,621 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |        |      |        |   |        |   |
| Depreciation and Amortization                                                      |   | 259,804     |      | 273,928     |   | 269,956     |   |
| Provision For Loan Losses                                                          |   | 2,850       |      | 533,819     |   | 700,000     |   |
| Provision for Deferred Taxes                                                       |   | (48,707     | )         | (130,620    | )      | (213,669    | )      |
| (Gain) Loss on Sale of Securities                                                  |   | (147        | )         | 0           |   | (6,248      | )      |
| Premium Amortization and Accretion                                                 |   |        |      |        |   |        |   |
| on Investment Securities                                                           |   | (329,208    | )         | 66,565      |   | (3,356      | )      |
| Increases (Decreases) in Income                                                    |   |        |      |        |   |        |   |
| Taxes Payable                                                                      |   | 25,093      |      | 7,887       |   | (35,561     | )      |
| (Increases) Decreases in Interest                                                  |   |        |      |        |   |        |   |
| Receivable and other Assets                                                        |   | (2,368,279  | )         | 196,970     |   | 503,222     |   |
| Increases (Decreases) in Interest                                                  |   |        |      |        |   |        |   |
| Payable and Other Liabilities                                                      |   | (463,886    | )         | 373,122     |   | (44,715     | )      |
| Market Value Adjustment                                                            |   |        |      |        |   |        |   |
| Amortization                                                                       |   | —      |      | —      |   | 4,028       |   |
|                                                                               |   |        |      |        |   |        |   |
| Net Cash Provided by Operating Activities                                          |   | (1,021,457  | )         | 3,163,504   |   | 2,929,278   |   |
|                                                                               |   |        |      |        |   |        |   |
| CASH FLOWS FROM INVESTING ACTIVTIES:                                               |   |        |      |        |   |        |   |
| Proceeds from Sale of Investment Sec:  Available for Sale                          |   | 35,831,883  |      | 19,925,000  |   | 8,006,248   |   |
| Held to Maturity                                                                   |   | 0           |      | 0           |   | 0           |   |
| Proceeds from Maturities of Inv. Sec:  Available for Sale                          |   | 20,000,000  |      | 0           |   | 41,000,000  |   |
| Held to Maturity                                                                   |   | 0           |      | 0           |   | 0           |   |
| Purchase of Investment Securities:  Available for Sale                             |   | (62,262,121 | )         | (24,612,311 | )      | (55,583,423 | )      |
| Held to Maturity                                                                   |   | 0           |      | 0           |   | 0           |   |
| Net (Increases) Decreases Federal Funds  Sold                                      |   | (2,015,000  | )         | (4,220,000  | )      | (2,870,000  | )      |
| Net (Increases) Decreases Commercial Loans                                         |   | 1,434,388   |      | 5,230,717   |   | (1,684,868  | )      |
| Net (Increases) Decreases Real Estate Loans                                        |   | 3,854,245   |      | 1,216,036   |   | (1,122,206  | )      |
| Net (Increases) Decreases Insallment Loans                                         |   | 992,034     |      | 2,528,069   |   | (459,727    | )      |
| Purchase of Bank Premises and Equipment                                            |   | (145,482    | )         | (107,713    | )      | (59,493     | )      |
|                                                                               |   |        |      |        |   |        |   |
| Net Cash Used by Investing Actvities                                               |   | (2,310,052  | )         | (40,202     | )      | (12,773,469 | )      |
|                                                                                    |        |             |           |             |        |             |        |  |  |  |

 

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

 

39

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Logan County BancShares, Inc. and SubsidiaryConsolidated Statement of Changes in Cash FlowsFor the Years Ended December 31, 2003, 2002 and 2001

 

INCREASES (DECREASES) IN CASH AND CASHEQUIVALENTS

 
|                                                             |   | **2003**   |      | **2002**   |   | **2001**   |   |
|------------------------------------------------------------------|--------|------------|-----------|------------|--------|------------|--------|
|                                                             |   |       |      |       |   |       |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                            |   |       |      |       |   |       |   |
|                                                             |   |       |      |       |   |       |   |
| Net Increases (Decreases) in Demand  Deposits                    |   | $          | 6,426,550 |       | $      | (2,014,618 | )      | $ | 6,163,724 |   |
| Net Increases (Decreases) in Savings  Deposits                   |   | (1,660,679 | )         | 5,060,425  |   | 7,516,489  |   |
| Net Increases (Decreases) in Time Deposits                       |   | (1,056,635 | )         | (4,630,899 | )      | (374,873   | )      |
| Net Increases (Decreases) in Repurchased  Agreements             |   | 2,000,000  |      | (1,000,000 | )      | 0          |   |
| Purchase of Treasury Stock at Cost                               |   | 0          |      | (546,000   | )      | 0          |   |
| Dividends Paid                                                   |   | (1,105,266 | )         | (1,096,996 | )      | (1,075,487 | )      |
|                                                             |   |       |      |       |   |       |   |
| Net Cash Provided by Financing Activities                        |   | $          | 4,603,970 |       | $      | (4,228,088 | )      | $ | 12,229,853 |   |
|                                                             |   |       |      |       |   |       |   |
| Net Increase (Decrease) in Cash and Cash  Equivalents            |   | 1,272,461  |      | (1,104,786 | )      | 2,385,662  |   |
|                                                             |   |       |      |       |   |       |   |
| Cash and Cash Equivalents at Beginning of  Year                  |   | 5,967,423  |      | 7,072,209  |   | 4,686,547  |   |
|                                                             |   |       |      |       |   |       |   |
| Cash and Cash Equivalents at End of Year                         |   | $          | 7,239,884 |       | $      | 5,967,423  |   | $ | 7,072,209 |   |
|                                                             |   |       |      |       |   |       |   |
| Supplemental Disclosures of Cash Flow  Infrmation Cash Paid for: |   |       |      |       |   |       |   |
|                                                             |   |       |      |       |   |       |   |
| Interest                                                         |   | $          | 2,097,994 |       | $      | 2,836,084  |   | $ | 4,876,027 |   |
| Income Taxes                                                     |   | $          | 1,107,160 |       | $      | 1,186,510  |   | $ | 1,118,983 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

40

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Logan County BancShares, Inc. and SubsidiaryNotes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

1.                                       Summaryof Significant Accounting Policies:

 

A.                                   Basisof Consolidation:

 

The Consolidated Financial Statements ofLogan County BancShares, Inc. and its subsidiary include the accounts of LoganCounty BancShares, Inc. a bank holding company and its wholly owned subsidiary,Logan Bank & Trust Company.  Asfurther discussed in Note 13, the Company’s subsidiary was merged into Logan Bank& Trust Company on May 28, 1996. The merger was accounted for under the Pooling of Interest Method ofaccounting and no restatement was necessary. All material intercompany balances and transactions have been eliminatedin consolidation.

 

B.                                     Natureof Operations:

 

The Bank operates under Federal charter, andprovides full banking services.  As aFederal bank, the Bank is subject to regulation by the Federal Reserve Systemand the Federal Deposit Insurance Corporation.

 

C.                                     Estimatesin the Financial Statements:

 

The presentation of the financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

D.                                    Cashand Cash Equivalents:

 

For purposes of reporting cash flows, cashand due from banks includes cash on hand and amounts due from banks (includingcash items in process of clearing). Cash flows from demand deposits, NOW accounts, money market demandaccounts, savings accounts and Federal funds purchased and sold are reportednet since their original maturities are less than three months.  Cash flows from loans and certificates ofdeposits and other time deposits are reported net.

 

41

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E.                                      InvestmentSecurities:

 

The Banks’ Investment Securities areclassified in two categories and accounted for as follows:

 

Securities Available for Sale:  Securities available for sale consist ofbonds, notes, debentures, and certain equity securities not classified assecurities held to maturity.  Thesesecurities are carried at their fair value. Unrealized gains and (losses), net of tax, are reported as a net amountin a separate component of Shareholders’ Equity until realized.

 

Securities to be Held to Maturity:  Bonds, notes and debentures for which thebanks have the positive intent and ability to hold to maturity are reported atcost, adjusted for amortization of premiums and accretion of discounts whichare recognized in interest income, using the  Constant  Yield Method, over the period tomaturity.  Gains and losses on sale ofsecurities available for sale are determined using the Specific-IndentificationMethod.

 

F.                                      Loansand Reserve for Loan Losses:

 

Loans are stated at the amount of unpaidprincipal, reduced by unearned income and an allowance for loan losses.  Interest income on loans is recognized onthe accrual basis except for those loans in a non-accrual income status.  The accrual of interest on impaired loans isdiscontinued when management believes, after consideration of economic andbusiness conditions and collection efforts, that the Borrowers’ financialcondition is such that collection of interest is doubtful.  When interest accrual is discontinued,interest income is subsequently recognized only to the extent cash payments arereceived.

 

The reserve for loan losses is establishedthrough a provision for loan losses charged to expense.  The reserve is an amount that managementbelieves will be adequate to absorb losses on existing loans that may becomeuncollectible based on evaluations of the collectibility of loans and priorloan loss experience.  The evaluationstake into consideration such factors as changes in the nature and volume of theloan portfolio, overall portfolio quality, review of specific

 

42

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problem loans and current economic conditions that may affect theborrowers’ ability to pay.  Loans arecharged against the  allowance for loanlosses when management believes the collection of the principal is unlikely.

 

A loan is considered to be impaired when itis probable all  principal and interestamounts will not be collected according to the loan contract. Impaired loans,other than certain large groups of smaller-balance, homogeneous loans that arecollectively evaluated for impairment, are to be reported at the present valueof expected future cash flows discounted using the loan’s original effectiveinterest rate or, alternatively, at the loan’s observable market price, or atthe fair value of the loan’s collateral if the loan is collateraldependent.  The method selected tomeasure impairment is made on a loan-by-loan basis, unless foreclosure isdeemed to be probable, in which case the fair value of the collateral method isused.

 

Certain loan origination fees and directorigination costs are capitalized and recognized as an adjustment of the yieldon the related loan.

 

G.                                     BankPremises and Equipment:

 

Bank premises and equipment are stated atcost, less accumulated depreciation. Repairs and maintenance expenditures are charged to operating expensesas incurred.  Major improvements andadditions to premises and equipment are capitalized.  Depreciation is provided over the estimated useful lives of theassets as follows:

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

 

43

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H.                                    RealEstate Acquired Through Foreclosure:

 

Real estate acquired through foreclosure iscarried 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.

 

I.                                         IncomeTaxes:

 

The Company and its subsidiary file aconsolidated federal income tax return. The Subsidiary is charged or credited an amount equal to the income taxthat would have been applicable on a separate return basis. The consolidatedprovision for income taxes includes Federal and State income taxes and is basedon pretax income reported in the financial statements, adjusted by nontax itemsin computing income taxes payable.

 

The Company uses the liability method forcomputing deferred income taxes.  Underthe liability method, deferred income taxes are based on the change during theyear in the deferred tax liability or asset established for the expected futuretax consequences of differences in the financial reporting and tax bases ofassets and liabilities.  The differencesrelate principally to premises and equipment, unrealized gains and losses oninvestment securities available for sale, and the allowance for loan losses.

 

J.                                        PerShare Information:

 

Primary earnings per share are computed bydividing net income by the weighted average number of shares of common stockoutstanding and the number of shares of common stock that would be assumed outstandingunder the treasury-stock method.

 

K.                                    ComprehensiveIncome:

 

Comprehensive income consists of net incomeand other comprehensive income.  Othercomprehensive income includes unrealized gains and losses on securitiesavailable for sale, which are also recognized as a separate component ofequity.  The accounting standard thatrequires reporting comprehensive income first applies for 2000, with priorinformation restated to be comparable.

 

44

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2.                                       InvestmentSecurities:

 

The carrying amounts of investment insecurities as shown in the consolidated balance sheets of the bank and theirapproximate full values at December 31 were as follows:

 
|                                               |   | **Cost**   |       | **Gains** |   | **Loss** |   | **Value**  |    |
|----------------------------------------------------|--------|------------|------------|-----------|--------|----------|--------|------------|---------|
|                                               |   |       |       |      |   |     |   |       |    |
| VALUES FOR THE YEAR ENDED DECEMBER 31,  2003: |   |       |       |      |   |     |   |       |    |
|                                               |   |       |       |      |   |     |   |       |    |
| Securities Available for Sale                      |   |       |       |      |   |     |   |       |    |
| Federal Agency Securities                          |   | $          | 38,509,935 |      | $      | 1,225    |   | $          | 0       |   | $ | 38,511,160 |   |
| U.S. Treasury Securities                           |   | 9,010,912  |       | 18,620    |   | 0        |   | 9,029,531  |    |
| Tax Exempt Federal Reserve Stock                   |   | 81,000     |       | 0         |   | 0        |   | 81,000     |    |
| Equity Securities                                  |   | 263,152    |       | 88,135    |   | 0        |   | 351,287    |    |
|                                               |   | $          | 47,864,999 |      | $      | 107,979  |   | $          | 0       |   | $ | 47,972,978 |   |
|                                               |   |       |       |      |   |     |   |       |    |
| VALUES FOR THE YEAR ENDED DECEMBER 31,  2002: |   |       |       |      |   |     |   |       |    |
|                                               |   |       |       |      |   |     |   |       |    |
| Securities Available for Sale                      |   |       |       |      |   |     |   |       |    |
| U.S. Treasury Securities                           |   | $          | 3,971,774  |      | $      | 103,226  |   | $          | 0       |   | $ | 4,075,000 |   |
| Federal Agency Securities                          |   | 36,532,502 |       | 284,636   |   | 18       |   | 36,817,120 |    |
| Tax Exempt Federal Reserve Stock                   |   | 81,000     |       | $         | 0      |     | 81,000 |       |    |   |
| Equity Securities                                  |   | 263,152    |       | $         | 68,866 |     | 0      |       | 332,018 |   |
|                                               |   | $          | 40,848,428 |      | $      | 456,728  |   | $          | 18      |   | $ | 41,305,138 |   |

 

Federal Reserve Bank stock is an equitysecurity that is included in securities available for sale in the accompanyingconsolidated financial statement.  Suchsecurities are carried at cost, since they may only be sold back to the issueror another member at par value.

 

45

----

 

The proceeds from sales, calls and maturitiesof securities, and the related gross gain and losses realized are as follows:

 
|                             |   | **Proceeds  From** |       | **Gross  Realized**       |   |
|----------------------------------|--------|--------------------|------------|---------------------------|--------|
| **Year Ended December 31,** |   | **Sales**          |       | **Calls and  Maturities** |   | **Gain** |   | **Losses** |   |
|                             |   |               |       |                      |   |   |   |   |   |
| 2003 Available for Sale          |   | $                  | 35,831,883 |                      | $      | 20,000,000 |   | $ | 147 |   | $ | 0 |   |
|                             |   |               |       |                      |   |   |   |   |   |
| 2002 Available for Sale          |   | $                  | 0          |                      | $      | 19,925,000 |   | $ | 0 |   | $ | 0 |   |
|                             |   |               |       |                      |   |   |   |   |   |
| 2001 Available for Sale          |   | $                  | 0          |                      | $      | 49,006,248 |   | $ | 6,248 |   | $ | 0 |   |

 

The par value of securities pledged to securepublic deposits and for other purposes amounted to $27,012,750 in 2003 and$26,056,196 in 2002.

 

The amortized cost and estimated market valueof investment in debt securities at December 31, 2003, by contractualmaturity, are shown below.  Expectedmaturities will differ from contractual maturities because borrowers may havethe right to call or prepay obligations with or without call as prepaymentpenalties.

 
|                         |   | **Securities  to be Held  to Maturity** |       | **Securities  Available  For Sale** |       |
|------------------------------|--------|-----------------------------------------|------------|-------------------------------------|------------|
|                         |   |                                    |       |                                |       |   |   |   |   |
|                         |   | **Amortized  Cost**                     | ** ** | **Fair  Value**                     | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
|                         |   |                                    |       |                                |       |   |   |   |   |
| Due in one yr or less        |   | $                                       | 0          |                                | $          | 0 |   | $ | 26,784,408 |   | $ | 26,804,331 |   |
|                         |   |                                    |       |                                |       |   |   |   |   |
| Due from one yr to five yrs  |   | $                                       | 0          |                                | $          | 0 |   | $ | 20,736,439 |   | $ | 20,736,360 |   |
|                         |   |                                    |       |                                |       |   |   |   |   |
| Due from five yrs to ten yrs |   | $                                       | 0          |                                | $          | 0 |   | $ | 0 |   | $ | 0 |   |
|                         |   |                                    |       |                                |       |   |   |   |   |
| Due after ten yrs            |   | $                                       | 0          |                                | $          | 0 |   | $ | 0 |   | $ | 0 |   |
|                         |   |                                    |       |                                |       |   |   |   |   |
| Equity Securities            |   | $                                       | 0          |                                | $          | 0 |   | $ | 344,152 |   | $ | 432,287 |   |
|                         |   | $                                       | 0          |                                | $          | 0 |   | $ | 47,864,999 |   | $ | 47,972,978 |   |

 

46

----

 

3.                   Restriction on Cash, Due from Banksand contingent Liabilities:

 

The Bank is required to maintain averagebalances with the Federal Reserve Bank. The average required reserve balances were $1,378,000 and $1,131,000 for2003 and 2002 respectively.  The Bankhas various claims and actions pending at December 31, 2003 arising in theordinary course of its business.  It isthe opinion of management and legal counsel that such litigation will notmaterially affect the Bank’s financial position or earnings.

 

4.                   Loans:

 

Major classifications of loans atDecember 31, 2003 and 2002 are as follows:

 
|                        |   | **2003**    |       | **2002**    |   |
|-----------------------------|--------|-------------|------------|-------------|--------|
|                        |   |        |       |        |   |
| Mortgage Loans              |   | $           | 51,031,399 |        | $      | 52,502,944 |   |
| Installment Loans           |   | 10,457,972  |       | 11,449,826  |   |
| Commercial and Other Loans  |   | 40,125,576  |       | 43,979,821  |   |
|                        |   | 101,614,947 |       | 107,932,591 |   |
| Less: Reserve for Loan Loss |   | 1,581,414   |       | 1,618,632   |   |
|                        |   | 100,033,533 |       | 106,313,959 |   |
|                             |        |             |            |             |        |  |  |

 

Loans on which accrual of interest has been discontinued or reduced,amounted to $992,428 and $1,705,845 at December 31, 2003 and 2002respectively.  Had the above loans notbeen placed on a non-accrual status, income for the Company would haveincreased approximately $49,621 and $89,407 for the two years.

 

The Company’s recorded investment in impaired loans was approximately$1,696,414 at December 31, 2003 and $1,058,478 at December 31,2002.  Of that amount in 2003, $944,421represents loans for which    anallowance for loan losses, amounting to $426,940, has been established underSFAS 114.  The average recordedinvestment in impaired loans was approximately $1,377,446 for 2003 and $992,980for 2002.  Interest income recognized onimpaired loans was approximately $44,693 for the year ended December 31,2003.

 

47

----

 

Reserve for Loan Losses:

 

Transactions in the reserve for loan losses for the years were asfollows:

 
|                                    |   | **2003** |      | **2002** |   | **2001**  |   |
|-----------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|
|                                    |   |     |      |     |   |      |   |
| Balance at Beginning of Year            |   | $        | 1,618,634 |     | $      | 1,152,777 |   | $ | 702,008 |   |
| Provision Charged to Operating Expenses |   | 2,850    |      | 533,818  |   | 700,000   |   |
| Recoveries credited to Reserve          |   | 43,607   |      | 29,565   |   | 7,890     |   |
| Losses Charged to Reserve               |   | (83,677  | )         | (97,529  | )      | (257,121  | )      |
|                                    |   |     |      |     |   |      |   |
| Balance at End of Year                  |   | $        | 1,581,414 |     | $      | 1,618,631 |   | $ | 1,152,777 |   |

 

The balance of the reserve for loan losses for income tax purposes was$281,723.at December 31, 2003 and 2002.

 

Certain directors and executive officers of the Bank and companies inwhich they have beneficial ownership, were loan customers of the Bank during2003 and 2002.  Such loans were made inthe ordinary course of business at the Bank’s normal credit terms and interestrates.  An analysis of the 2003 activitywith respect to all director and executive officer loans is as follows:

 
| **Balance  2002** |      | **New Loans  2003** |   | **Loan  Payments  2003** |   | **Balance  2003** |      |
|-------------------|-----------|---------------------|--------|--------------------------|--------|-------------------|-----------|
|              |      |                |   |                     |   |              |      |
| $                 | 3,811,861 |                | $      | 3,724,727                |   | $                 | 4,150,629 |   | $ | 3,385,958 |   |
|                   |           |                     |        |                          |        |                   |           |  |  |  |  |

 

48

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5.                                       BankPremises and Equipment:

 

Bank premises and equipment are summarized asfollows:

 
|                                                                                 |   | **2003**  |      | **2002**  |   |
|--------------------------------------------------------------------------------------|--------|-----------|-----------|-----------|--------|
|                                                                                 |   |      |      |      |   |
| Land                                                                                 |   | $         | 949,972   |      | $      | 949,972 |   |
| Banking House                                                                        |   | 3,303,308 |      | 3,277,794 |   |
| Furniture, Fixtures and Equipment                                                    |   | 2,564,916 |      | 2,445,398 |   |
|                                                                                 |   | 6,818,196 |      | 6,673,164 |   |
| Less:    Accumulated                                             |   |      |      |      |   |
|             Depreciation |   | 3,715,194 |      | 3,455,840 |   |
|                                                                                 |   |      |      |      |   |
| Bank Premises and Equipment                                                          |   | $         | 3,103,002 |      | $      | 3,217,324 |   |

 

Depreciation expense amounted to $259,804,$273,928, and $269,956 in 2003, 2002 and 2001 respectively.  Expenditures for maintenance and repairs arecharged against operations as incurred.

 

6.                                       Operating LeaseCommitments:

 

The Company has entered into lease agreementsfor certain premises at three of its facility locations.  Future minimum lease payments under theleases during the five years subsequent to December 31, 2003 are asfollows:

 
| **Year** |   | **Amount** |   |
|----------|--------|------------|--------|
|     |   |       |   |
| 2004     |   | $          | 21,400 |   |
| 2005     |   | $          | 21,400 |   |
| 2006     |   | $          | 21,400 |   |
| 2007     |   | $          | 21,400 |   |
| 2008     |   | $          | 21,400 |   |

 

49

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7.                                       Deposits:

 

The following is a summary of interestbearing deposits by type as of December 31, 2003 and 2002:

 
|                                                    |   | **2003** |        | **2002** |   |
|---------------------------------------------------------|--------|----------|-------------|----------|--------|
|                                                    |   |     |        |     |   |
| NOW and Super NOW accounts                              |   | $        | 17,661,908  |     | $      | 17,356,352 |   |
| Money market accounts                                   |   | $        | 5,594,501   |     | $      | 4,494,996 |   |
| Savings accounts                                        |   | $        | 43,203,543  |     | $      | 44,864,222 |   |
| Regular certificates of deposit                         |   | $        | 51,969,170  |     | $      | 53,256,894 |   |
| Individual retirement accounts and other  time deposits |   | $        | 5,625,482   |     | $      | 5,394,393 |   |
|                                                    |   |     |        |     |   |
| Total                                                   |   | $        | 124,054,604 |     | $      | 125,366,857 |   |

 

Time certificates of deposit in denominationsof $100,000 or more totaled $16,787,499 and $16,886,987  at December 31, 2003 and 2002.  Interest paid on all time certificatestotaled $1,671,827, $2,024,089 and $3,662,286 for the years endedDecember 31, 2003, 2002 and 2001, respectively.

 

50

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The following is a summary of the maturitydistribution of certificates of deposit in amounts of $100,000 or more as ofDecember 31, 2003:

 
|                      |   | **Amount** |       | **Percent** |   |
|---------------------------|--------|------------|------------|-------------|--------|
|                      |   |       |       |        |   |
| Three months or less      |   | $          | 2,804,125  |        | 16.7   | % |
| Three through six months  |   | $          | 1,990,932  |        | 11.9   | % |
| Six through twelve months |   | $          | 3,269,615  |        | 19.5   | % |
| Over twelve months        |   | $          | 8,722,827  |        | 52.0   | % |
|                      |   |       |       |        |   |
| Total                     |   | $          | 16,787,499 |        | 100.0  | % |

 

At December 31, 2003, the scheduledmaturities of time deposits are as follows:

 
| 2004          |   | $      | 12,351,601 |   |
|---------------|--------|--------|------------|--------|
| 2005          |   | $      | 10,825,460 |   |
| 2006          |   | $      | 14,115,153 |   |
| 2007          |   | $      | 6,890,048  |   |
| 2008 and over |   | $      | 13,412,390 |   |
|          |   |   |       |
| Total         |   | $      | 57,594,652 |   |

 

51

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8.                                       RepurchasedAgreements:

 

At December 31, the balance ofsecurities sold under repurchase agreements amounted to $3,000,000.  The following table summarizes theinformation on the repurchase agreements:

 
|                         |   | **2003** |      | **2002** |   |
|------------------------------|--------|----------|-----------|----------|--------|
|                         |   |     |      |     |   |
| Average balance for the year |   | $        | 2,852,461 |     | $      | 2,910,324 |   |
| Average interest rate        |   | 3.511    | %         | 5.377    | %      |
| Maximun month end balance    |   | $        | 3,000,000 |     | $      | 2,000,000 |   |

 

52

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9.                                       FederalIncome Taxes:

 

The Provisions for Federal income taxes for the years endedDecember 31, 2003, 2002, and 2001 were less than the respective amountsthat would result from applying the statutory Federal and State Income Taxrates, due primarily to the Banks’ investment income and expense accruals.

 

A reconciliation of the difference between the U.S. statutory incometax rate and the effective tax rates with resulting dollar amounts are shown inthe following table:

 
|                                  |   | **2003**   |    | **2002**    |   | **2001**   |   |
|---------------------------------------|--------|------------|---------|-------------|--------|------------|--------|
|                                  |   | **Amount** |    | **Percent** |   | **Amount** |   | **Percent** |   | **Amount** |   | **Percent** |   |
|                                  |   |       |    |        |   |       |   |   |   |   |   |   |   |
| Tax Expense at  Statutory Rate        |   | $          | 997,690 |        | 34.00  | %          | $      | 987,907 |   | 34.00 | % | $ | 907,953 |   | 34.00 | % |
| State income tax  net of tax benefits |   | 102,416    |    | 3.49        | %      | 112,647    |   | 3.87 | % | 78,724 |   | 3.89 | % |
|                                  |   | 1,100,106  |    | 37.49       | %      | 1,100,554  |   | 37.87 | % | 986,677 |   | 37.89 | % |
|                                  |   |       |    |        |   |       |   |   |   |   |   |   |   |
| Security  Transactions                |   | 15,028     |    | 0.51        | %      | (13,357    | )      | -0.46 | % | 0 |   | 0.00 | % |
| Loan Loss  Provision                  |   | (13,623    | )       | -0.46       | %      | 176,512    |   | 6.07 | % | 153,262 |   | 5.74 | % |
| Pension Accruals                      |   | 7,213      |    | 0.25        | %      | 4,443      |   | 0.15 | % | 4,443 |   | 0.17 | % |
| Other                                 |   | (26,657    | )       | -0.91       | %      | (73,755    | )      | -2.54 | % | (21,123 | ) | -0.79 | % |
| Deferred Income  Tax                  |   | (48,707    | )       | -1.66       | %      | (130,620   | )      | -4.48 | % | (213,669 | ) | -8.00 | % |
|                                  |   | 1,033,360  |    | 35.22       | %      | 1,063,777  |   | 36.61 | % | 909,590 |   | 35.01 | % |
|                                       |        |            |         |             |        |            |        |  |  |  |  |  |  |  |  |  |

 

The tax effect of significant temporary differences, which comprisenon-current, deferred tax assets and liabilities as of December 31, 2003and 2002 are as follows:

 
|                      |   | **2003** |    | **2002** |   |
|---------------------------|--------|----------|---------|----------|--------|
|                      |   |     |    |     |   |
| Assets:                   |   |     |    |     |   |
| Deferred Income           |   | $        | 4,935   |     | 0      |   |
| Reserve for Loan  Loss    |   | 571,864  |    | 588,240  |   |
|                      |   |     |    |     |   |
| Gross Deferred  Tax Asset |   | 576,799  |    | 588,240  |   |
|                      |   |     |    |     |   |
| Liablities:               |   |     |    |     |   |
| Property and  Equipment   |   | 116,045  |    | 175,141  |   |
| Allowance for  Investment |   | 1,051    |    | 166,773  |   |
|                      |   |     |    |     |   |
| Total  Liabilities        |   | 117,096  |    | 341,914  |   |
|                      |   |     |    |     |   |
| Net Deferred Tax  Asset   |   | $        | 459,703 |     | $      | 246,326 |   |
|                           |        |          |         |          |        |  |  |

 

53

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10.                                 EmployeeBenefit Plans:

 

During 1997, the Company terminated the qualified defined benefitpension plan.  The Company’s subsidiaryadopted a qualified profit sharing and 401K employee benefit plan coveringsubstantially all employees.  Thecontributions to the plans are at the discretion of the plan’s advisory boardand amounted to $124,470 in 2003 and $121,121 in 2002.

 

In November 2003 the company invested in bank owned life insurance(BOLI) policy that provides earnings to help cover the cost of employee benefitplans.  BOLI involves the purchasing oflife insurance by the Company on an executive. The company is the owner and beneficiary of the policy.  Cash flow from this policy will occur overan extended period of time.  The Companyperiodically reviews the creditworthiness of the insurance companies that haveunderwritten the policy.  The insurancecompanies are all highly rated by A.M. Best, and the earnings accruing to theCompany are derived from the general account investments of the insurancecompanies.  The policy appears on theCompany’s balance sheet and is subject to full regulatory capital requirements.

 

This policy is used to fund an executive supplemental retirementplan.  Under the plan, benefits of$4,261 were accrued at December 31, 2003 and the related cash value of$2,015,532 was reported in other assets.

 

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

 

The Bank is party to financial instruments with off-balance-sheet riskin the normal course of business to meet the financing needs of itscustomers.  These financial instrumentsinclude loan commitments, unused credit loan limits, and standby letters ofcredit.  The instruments involve, tovarying degrees, elements of credit and interest rate risk in excess of theamount recognized in the financial statements.

 

The Bank’s exposure to credit loss in the event of nonperformance bythe other party to the financial instrument for loan commitments and standbyletters of credit is represented by the contractual amount of thoseinstruments.  The Bank uses the samecredit policies in making commitments and conditional obligations as it doesfor on-balance-sheet instruments.

 

Commitments to extend credit are agreements to lend to a customer aslong as there is no violation of any condition established in thecontract.  Commitments generally havefixed expiration dates of other termination clauses and may require payment ofa fee.  Since many of the commitmentsare expected to expire without being drawn upon, the total commitment amountsdo not necessarily represent future cash requirements.  The exposure to credit loss in the event ofnonperformance by the other party to the financial instrument for these commitmentsis represented by the contractual amount. The credit risk involved in issuing letters of credit is essentially thesame as that involved in extending loan commitments to customers.

 

54

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The total amounts of Off-Balance-Sheet financial instruments withcredit risk are as follows:

 
|                       |   | **December 31,** |       |
|----------------------------|--------|-----------------------|------------|
|                       |   | **2003**              |       | **2002** |   |
| Loan  commitments          |   | $                     | 11,879,000 |   | $ | 11,061,000 |   |
| Standby letters  of credit |   | $                     | 817,000    |   | $ | 802,000 |   |

 

The Bank subsidiary grants retail, commercial and commercial realestate loans to customers located throughout West Virginia and EasternKentucky.

 

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 the customer.  Collateral held varies but may includeaccounts receivable, inventory, property, plant and equipment andincome-production commercial properties. Although the Bank has a diversified loan portfolio, a substantialportion of the debtors’ ability to honor their contracts is dependent upon theeconomic conditions in each loan’s respective location.

 

12.                                 RegulatoryMatters

 

The various regulatory agencies having supervisory authority overfinancial institutions have adopted risk-based capital guidelines, which definethe adequacy   of the capital levels ofregulated institutions.  These riskbased capital   guidelines requireminimum levels of capital based upon the risk rating of assets and certainoff-balance-sheet items.  Assets andoff-balance-sheet items are assigned regulatory risk-weights ranging from 0% to100% depending on their level of credit risk. The guidelines classify capital in two tiers, Tier I and Tier II, thesum of which is total capital.  Tier Icapital is essentially common equity less intangible assets.  Tier II capital is essentially qualifyinglong-term debt and a portion of the reserve for loan losses.

 

55

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The Company’s and Bank’s actual capital amounts and ratios arepresented below in thousands of dollars:

 
|                                                                  |   |     |   |      |   | **For  Capital  Adequacy  Purposes** |   | **To  Be Well  Capitalized** |   |
|-----------------------------------------------------------------------|--------|----------|--------|-----------|--------|--------------------------------------|--------|------------------------------|--------|
|                                                                  |   | **Amt.** |   | **Ratio** |   | **Amt.**                             |   | **Ratio**                    |   | **Amt.** |   | **Ratio** |   |
| As of  December 31, 2003                                         |   |     |   |      |   |                                 |   |                         |   |   |   |   |   |
| Total Capital  (to Risk Weighted Assets)                              |   | 17,790   |   | 18.82     | %      | 7,564                                |   | 8.00                         | %      | 9,455 |   | 10.00 | % |
| Tier I  Capital (to Risk Weighted Assets)                        |   | 17,755   |   | 18.78     | %      | 3,782                                |   | 4.00                         | %      | 5,673 |   | 6.00 | % |
| Risk-Based  Capital (to Average Assets)                               |   | 18,942   |   | 10.75     | %      | 7,050                                |   | 4.00                         | %      | 8,812 |   | 5.00 | % |
|                                                                  |   |     |   |      |   |                                 |   |                         |   |   |   |   |   |
| As of  December 31, 2002 Total Capital (to Risk Weighted Assets) |   | 17,193   |   | 17.61     | %      | 7,809                                |   | 8.00                         | %      | 9,761 |   | 10.00 | % |
| Tier I  Capital (to Risk Weighted Assets)                        |   | 16,943   |   | 17.36     | %      | 3,904                                |   | 4.00                         | %      | 5,857 |   | 6.00 | % |
| Risk-Based  Capital (to Average Assets)                               |   | 16,948   |   | 9.79      | %      | 6,924                                |   | 4.00                         | %      | 4,881 |   | 5.00 | % |

 

The Company’s principal source of funds fordividend payments is dividends received from the subsidiary Bank.  Banking regulations limit the amount ofdividends that may be paid without prior approval of regulatory agencies.  Under these regulations, the amount ofdividends that may be paid in any calendar year is limited to the currentyear’s net profits, as defined, combined with the retained net profits of thepreceding two years, subject to the capital requirements as defined above.  During 2003, the Bank could, without priorapproval, declare dividends of approximately $1,424,971 plus any 2003 netprofits returned to the date of the dividend declaration. In 2003 the bankdeclared dividends of $2,726,471 to the holding company.

 

56

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13.                                 Disclosuresabout Fair Value of Financial Instruments

 

The following methods are assumptions were used to estimate the fairvalue of each class of financial instruments for which it is practicable toestimate the value:

 

Cash and Cash Equivalents – For those short-term instruments, thecarrying amount is a reasonable estimate of fair value.

 

Investment Securities – For investment securities, fair values arebased on quoted market prices or dealer quotes.

 

Loans – Fair value is estimated by discounting the future cash flowsusing the current rates at which similar loans would be made to borrowers withsimilar credit ratings and for the same remaining maturities.

 

Deposit Liabilities – The fair value of demand deposits, savingsaccounts, and certain money market deposits is the amount payable on demand atthe reporting date.  The fair value offixed-maturity certificates of deposit is estimated by discounting future cashflows using the rates currently offered for deposits of similar remainingmaturities.

 

Securities Sold Under Agreements to Repurchase – For these short-terminstruments, the carrying amount is a reasonable estimate of fair value.

 

Federal Home Loan Bank Advances – Rates currently available to theCompany for advances with similar terms and remaining maturities are used toestimate fair value of existing debt.

 

Note Payable –the carrying value of variable rate borrowed funds is areasonable estimate of fair value.

 

Commitments to Extend Credit and Standby Letters of Credit –Commitments to extend credit and standby letters of credit represent agreementsto lend to a customer at the market rate when the loan is extended, thus thecommitments and letters of credit are not considered to have a fair value.

 

57

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The fair values of the Company’s financial instruments atDecember 31, 2003 are as follows:

 
|                            |   | **Carrying  Amount** |        | **Fair  Value** |   |
|---------------------------------|--------|----------------------|-------------|-----------------|--------|
| Financial  Assets:              |   |                 |        |            |   |
| Cash and cash  equivalents      |   | $                    | 7,239,884   |            | $      | 5,967,423 |   |
| Investmet  scurities            |   | 47,972,978           |        | 41,305,138      |   |
| Federal funds  sold             |   | 13,385,000           |        | 11,370,000      |   |
| Loans                           |   | 102,099,419          |        | 109,106,568     |   |
| Interest  receivable            |   | 843,052              |        | 811,373         |   |
|                            |   | $                    | 171,540,333 |            | $      | 168,560,502 |   |
|                            |   |                 |        |            |   |
| Financial  liabilities:         |   |                 |        |            |   |
| Deposits &  Repo. Agreement |   | $                    | 157,750,574 |            | $      | 151,823,589 |   |

 

14.                                 Stockholders’ Equity:

 

On June 16,1999, the Board of Directors declared a stock dividend of three shares ofcommon stock for each two shares of common stock outstanding.  All related financial information includingearnings per share gives retroactive effect to issurance of this stockdividend.  This results in a totalauthorized common stock of 780,000 shares and 716,991 shares outstanding.  In December 2002, the company purchased13,000 shares of treasury stock.  Thisresulted in 703,991 outstanding in 2003 and 2002 and 716,991 in 2001.

 

58

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15.                                 ParentOnly Condensed Financial Information:

 
|                                 |   | **December 31,** |       |
|--------------------------------------|--------|-----------------------|------------|
|                                 |   | **2003**              |       | **2002** |   | **2001** |   |
| Condensed  Balance Sheet:            |   |                  |       |   |   |   |   |
| Assets:                              |   |                  |       |   |   |   |   |
| Cash                                 |   | $                     | 1,897,530  |   | $ | 369,744 |   | $ | 420,887 |   |
| Other Assets                         |   | 382,086               |       | 378,886 |   | 268,295 |   |
| Investment In  Subsidiary            |   | 15,894,269            |       | 16,869,078 |   | 16,510,065 |   |
|                                 |   |                  |       |   |   |   |   |
|                                 |   | $                     | 18,173,885 |   | $ | 17,617,708 |   | $ | 17,199,247 |   |
|                                 |   |                  |       |   |   |   |   |
| Liabilities and  Equity:             |   |                  |       |   |   |   |   |
| Accrued  Liablities                  |   | $                     | 384,303    |   | $ | 425,107 |   | $ | 399,117 |   |
| Common Stock                         |   | 1,300,000             |       | 1,300,000 |   | 1,300,000 |   |
| Surplus                              |   | 2,408,426             |       | 2,408,426 |   | 2,408,426 |   |
| Retained  Earnings                   |   | 15,487,354            |       | 14,890,373 |   | 13,951,902 |   |
| Treasury Stock                       |   | (1,406,198            | )          | (1,406,198 | ) | (860,198 | ) |
|                                 |   |                  |       |   |   |   |   |
|                                 |   | $                     | 18,173,885 |   | $ | 17,617,708 |   | $ | 17,199,247 |   |
|                                 |   |                  |       |   |   |   |   |
| Condensed  Statement of Income:      |   |                  |       |   |   |   |   |
| Equity in Net  Earnings of Subsdiary |   | $                     | 1,961,462  |   | $ | 1,852,880 |   | $ | 1,787,359 |   |
| Other Income                         |   | 10,440                |       | 67,285 |   | 8,208 |   |
| Operating  Expenses                  |   | 70,839                |       | 78,332 |   | 39,946 |   |
|                                 |   |                  |       |   |   |   |   |
| Net Income                           |   | $                     | 1,901,063  |   | $ | 1,841,833 |   | $ | 1,755,621 |   |

 

59

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|                                                                                      |   | **December 31,** |      |
|-------------------------------------------------------------------------------------------|--------|-----------------------|-----------|
|                                                                                      |   | **2003**              |      | **2002** |   | **2001** |   |
| Condensed  Statement of Changes in Cash Flow                                              |   |                  |      |   |   |   |   |
| Cash Flows From  Increases (Decreases) in Cash and Cash Equivalents Operating Activities: |   |                  |      |   |   |   |   |
| Net Income                                                                                |   | $                     | 1,901,063 |   | $ | 1,841,833 |   | $ | 1,755,621 |   |
| Net Change in  Other Assets                                                               |   | (3,200                | )         | (110,591 | ) | (13,420 | ) |
| net Change in  Accrued Liabilities                                                        |   | (40,804               | )         | 25,990 |   | 105,820 |   |
|                                                                                      |   |                  |      |   |   |   |   |
| Net Cash  Provided by Operating Activities                                                |   | 1,857,059             |      | 1,757,232 |   | 1,848,021 |   |
|                                                                                      |   |                  |      |   |   |   |   |
| Cash Flows From  Investing Activities:                                                    |   |                  |      |   |   |   |   |
| NetChange in  Investment in Subsidiary                                                    |   | 775,993               |      | (165,379 | ) | (712,113 | ) |
|                                                                                      |   |                  |      |   |   |   |   |
| Net Cash  Provided (Used) in Investing Activities                                         |   | 775,993               |      | (165,379 | ) | (712,113 | ) |
| Cash Flows From  Financing Activities:                                                    |   |                  |      |   |   |   |   |
| Dividends                                                                                 |   | (1,105,266            | )         | (1,642,996 | ) | (1,075,487 | ) |
|                                                                                      |   |                  |      |   |   |   |   |
| Net Cash Used  in Financing Activities                                                    |   | (1,105,266            | )         | (1,642,996 | ) | (1,075,487 | ) |
|                                                                                      |   |                  |      |   |   |   |   |
| Net Change in  Cash and Cash Equivalents During the Year                                  |   | 1,527,786             |      | (51,143 | ) | 60,421 |   |
|                                                                                      |   |                  |      |   |   |   |   |
| Cash Account:                                                                             |   |                  |      |   |   |   |   |
| Beginning of  Year                                                                        |   | 369,744               |      | 420,887 |   | 360,466 |   |
|                                                                                      |   |                  |      |   |   |   |   |
| End of Year                                                                               |   | $                     | 1,897,530 |   | $ | 369,744 |   | $ | 420,887 |   |

 

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ITEM 9 –DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

PART III.

 

ITEM 10 – DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

 

The information appearing on Page of the Corporation’s Proxy Statement,dated May 7, 2004, is incorporated herein by reference in response to thisitem.

 

EXECUTIVE OFFICERS OF THE REGISTRANT:

 
| **NAME**            |   | **AGE** |   | **POSITION  AND OFFICE**                                                                                                                                                                                                                       |
|---------------------|--------|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |    |   |                                                                                                                                                                                                                                           |
| Harvey Oakley       |   | 82      |   | Chairman of the Board and President, Logan County BancShares,  Inc.  Mr. Oakley has been an Officer  and Director of Logan Bank & Trust Company since 1963, a attorney at law,  and Circuit Judge, State of West Virginia.            |
|                |   |    |   |                                                                                                                                                                                                                                           |
| Eddie D. Canterbury |   | 54      |   | Executive Vice President and CEO Of Logan County BancShares, Inc. Mr.  Canterbury has been President/CEO Of Logan Bank & Trust Company since  1998 and Sr. Vice President since 1980. He is a Director of Logan Bank &  Trust Company. |

 

61

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ITEM 11– EXECUTIVE COMPENSATION

 

The information appearing in the Corporation’s Definitive ProxyStatement, dated May 7, 2004, is incorporated herein by reference in responseto this item.

 

ITEM 12– SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The information appearing in the Corporation’s Definitive ProxyStatement, dated May 7, 2004, is incorporated herein by reference in responseto this item.

 

ITEM 13– CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

The information appearing in the Corporation’s Definitive ProxyStatement, dated May 7, 2004, is incorporated herein by reference in responseto this item.

 

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

 

None.

 

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May 7, 2004

 

Dear Stockholder:

 

Your Board of Directors is pleased to invite you to attend the AnnualMeeting of Stockholders of Logan County BancShares, Inc. on May 27, 2004, at3:00 p.m.  The Notice of Meeting andProxy Statement are attached.

 

The meeting will be held at Logan Bank and Trust Company’s lobby,Washington and Main Street, Logan, West Virginia. The business of the meetingwill be the election of the Directors and to transact such other business asmay properly come before the meeting.

 

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

 

LOGAN COUNTY BANCSHARES, INC.

 

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

 

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LOGAN COUNTY BANCSHARES, INC.

P.O. BOX 597

LOGAN, WEST VIRGINIA  25601

 

MAY 7, 2004

### ** **

### **PROXY STATEMENT**

### ** **

# SOLICITATION ANDREVOCABILITY OF PROCESS

#  

This Proxy Statement is furnished in connection with the solicitationby the Board of Directors of Logan County BancShares, Inc. (Corporation) ofproxies for the Annual Meeting of Stockholders of the corporation to be heldMay 27, 2004, and any adjournment thereof. Shares represented by properly executed proxies which are received intime and not revoked will be voted at the meeting in the manner described inthe proxies.  Any proxy may be revokedat any time before it is exercised.

 

## ***INFORMATION ASTO VOTING SECURITIES***

## *** ***

The Board of Directors has fixed the close of business onApril 25, 2004, as the record date for the determination of stockholdersentitled to notice of and to vote at the Annual Meeting.  At the record date, 703,991 shares of CommonStock of the Corporation were outstanding and entitled to be voted at themeeting.  Each share of Common Stock isentitled to one vote.

 

## ***ELECTION OFDIRECTORS***

## *** ***

The Board of Directors of the Corporation has, in accordance with thebylaws, fixed the number of Directors of the Corporation at not less thanthree.  Accordingly, nine Directors areproposed to be elected to serve until the next Annual Meeting of Stockholdersand until their respective successors are duly elected and have qualified.  It is intended that shares represented byproxies solicited by the Board of Directors will, unless contrary instructionsare given, be voted in favor of the election as Directors of the nomineeslisted below.  If any nominee isunavailable for election, the shares may be voted for a substitute nominee.  The following nominees have been proposed toserve as Directors of the Corporation. They are:

 
| **NAME**      |   | **AGE** |   | **PRINCIPAL  OCCUPATION**                                                                                                         |   | **COMMON  STOCK  BENEFICIALLY OWNED** |
|---------------|--------|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|
|          |   |    |   |                                                                                                                              |   |                                  |   |   |
| Harvey Oakley |   | 83      |   | President/Chairman of the Board, Logan County BancShares, Inc.;  Attorney at Law; Chairman of the Board of Logan Bank and Trust . |   | (A)                                   |   | 53,346 |

 

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| Clell Peyton      |   | 67     |   | Director, Logan Bank and Trust Retired, Nationwide Insurance Company.                                                                      |   |   |   | 10,773 |
|-------------------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
|              |
|              |   |   |   |                                                                                                                                       |   |   |   |   |
| Earle B. Queen    |   | 76     |   | Director, Logan Bank and Trust; President, James Funeral Home.                                                                             |   | (B)    |   | 19,755 |
|              |   |   |   |                                                                                                                                       |   |   |   |   |
| LaVeta Jean Ray   |   | 72     |   | Retired Counselor, Chapmanville High School.                                                                                               |   | (C)    |   | 7,428  |
|              |   |   |   |                                                                                                                                       |   |   |   |   |
| William W. Wagner |   | 71     |   | Director, Logan Bank and Trust; Former Director and Executive Comm.,  United Bancshares; Former Chairman Eagle Bancorp, Inc.               |   | (D)    |   | 16,900 |
|              |   |   |   |                                                                                                                                       |   |   |   |   |
| Eddie Canterbury  |   | 55     |   | Director and Executive Vice President/ CEO, Logan County BancShares,  Inc.; Director and President/CEO Logan Bank and Trust.               |   | (E)    |   | 7,650  |
|              |   |   |   |                                                                                                                                       |   |   |   |   |
| Walter D. Vance   |   | 53     |   | Vice President, Logan County BancShares, Inc.; Vice President,  Aracoma Drug Company.                                                      |   | (F)    |   | 4,569  |
|              |   |   |   |                                                                                                                                       |   |   |   |   |
| Glenn T. Yost     |   | 46     |   | Director, Logan Bank and Trust; President, W.W. McDonald Land Co.;  President, Triadelphia Land Co.; President, Bruce McDonald Holding Co. |   | (G)    |   | 29,063 |
|              |   |   |   |                                                                                                                                       |   |   |   |   |
| David McCormick   |   | 56     |   | Director, Logan Bank and Trust; President, McCormick’s, Inc.;  President, Bodaco, Co.                                                 |   | (H)    |   | 38,058 |

 

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(A)            Includes 6,982 shares jointly owned withspouse.

 

(B)              Includes 18,000 shares owned by Earle B.Queen, Trust, 355 shares owned by Funeral Services, Inc. and 400 shares ownedby Queen Brothers, Inc.

 

(C)              Includes 1,428 shares jointly owned withsister, Erma Ray Butcher.

 

(D)             Includes 654 shares jointly owned with spouse.

 

(E)               Includes 357 shares owned in IRA, 50shares custodian for Alexis Jo Canterbury, and 100 shares jointly owned withspouse.

 

(F)               Includes 849 shares owned by AracomaDrug Company.

 

(G)              Includes 1,225 shares jointly owned withspouse; and 27,163 shares for which voting and investment powers are deemed;20,625 shares owned by W.W. McDonald Land Company; 5,863 shares owned by BruceMcDonald Holding Company; 675 shares owned by Triadelphia Land Company.

 

(H)             Includes 37,908 shares owned by Bodaco,Co.

 

EXECUTIVE COMPENSATION

 

All Executive Officers of Logan County BancShares, Inc. werecompensated $7,400.00 in Director’s fees during 2003.

 

OTHER MATTERS

 

As of the date of this Proxy Statement, the Board of Directors was notaware of any matters not referred to in the form proxy that would be presentedfor action at the meeting.  If any otherbusiness comes before the meeting, the persons named in the proxy will havediscretionary authority to vote the shares represented by them in accordancewith their best judgement.

 

DATE FOR SUBMISSION OF STOCKHOLDER PROPOSALS

 

All proposals must be submitted to the Board of Directors 30 days priorto the Annual Meeting of Stockholders.

 

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**NOTICE OF ANNUAL MEETING OF STOCKHOLDERS**

 

**MAY 7, 2004**

 

The Annual Meeting of Stockholders of Logan County BancShares, Inc.will be held at Logan Bank and Trust Company’s lobby at 3:00 p.m. on May 27,2004, for the following purposes:

 

1.               To elect Directors of the Corporation.

 

2.               To transact such other business as mayproperly come before the meeting.

 

Only stockholders of record at the close of business on April 25,2004, are entitled to notice of and to vote at the meeting.

 

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# SIGNATURES

#  

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

 
|   |   | LOGAN COUNTY BANCSHARES, INC. |   |
|--------|--------|-------------------------------|--------|
|   |   | (Registrant)                  |   |
|   |   |                          |   |
|   |   | /s/Eddie Canterbury           |   |   |
|   |   | Eddie Canterbury              |   |
|   |   | President/CEO                 |   |
|   |   |                          |   |
|   |   | April 14, 2004           |   |
|        |        |                               |        |  |

 

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

 
| **SIGNATURE**        |                            |                       |
|----------------------|---------------------------------|----------------------------|
|                 |                            |
| Harvey Oakley        | Director, Chairman of the Board |
|                 |                            |
| Clell Peyton         | Director By:                    | /s/ Eddie Canterbury       |   |
|                 |                            | Eddie Canterbury           |
|                 |                            |
| Earle B. Queen       | Director                        | Attorney in Fact           |
|                 |                            | April 14, 2004        |
|                 |                            |
| Lavetta J. Ray       | Director                        |
|                 |                            |
| Walter D. Vance      | Director                        |
|                 |                            |
| William W. Wagner    | Director                        |
|                 |                            |
| Glenn T. Yost        | Director                        |
|                 |                            |
| David McCormick      | Director                        |
|                 |                            |
| /s/ Eddie Canterbury |                            | President/CEO and Director |
| Eddie Canterbury     |                            |
| Director             |                            |
|                      |                                 |                            |  |  |  |  |  |

 

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