**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-K/A**

 

**Amendment No. 1**

 

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

 

**For the calendar year ended:**

**December 31, 2003**

 

**Commission File Number:  2-95114**

 

**LOGAN COUNTY BANCSHARES, INC.**

(Exact name of Registrant as specified in its Charter)

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

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  ý Yes  o No.

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Act).   o Yes  ý 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 November 24,  2004** |
|--------------------------------------------------|
|                                             |   |   |   |
| Common Stock ($1.67 Par Value)                   |   | 703,991  Shares |   |

 

The aggregate market value of the voting stock held by non-affiliatesof registrant as of November 24, 2004, was $12,472,548, which was based onthe last trade price of $44.00.

 

DocumentsIncorporated by Reference:  None

 

 

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**LOGAN COUNTY BANCSHARES, INC.**

 

**Table of Contents**

 
| **EXPLANATORY NOTE** |                                                                                           |
|----------------------|------------------------------------------------------------------------------------------------|
|                 |                                                                                           |   |
| **PART I**           |
|                 |                                                                                           |   |
| **ITEM 1.**          | **BUSINESS**                                                                                   |   |
|                 |                                                                                           |   |
| **ITEM 2.**          | **PROPERTIES**                                                                                 |   |
|                 |                                                                                           |   |
| **PART II**          |
|                 |                                                                                           |   |
| **ITEM 6.**          | **SELECTED FINANCIAL  DATA**                                                                   |   |
|                 |                                                                                           |   |
| **ITEM  7.**         | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION** |   |
|                 |                                                                                           |   |
| **ITEM  7A.**        | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                                |   |
|                 |                                                                                           |   |
| **ITEM 8.**          | **FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA**                                               |   |
|                 |                                                                                           |   |
| **ITEM 9A.**         | **CONTROLS AND  PROCEDURES**                                                                   |   |
|                 |                                                                                           |   |
| **PART III**         |
|                 |                                                                                           |   |
| **ITEM  10.**        | **DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT**                                        |   |
|                 |                                                                                           |   |
| **ITEM 11.**         | **EXECUTIVE COMPENSATION**                                                                     |   |
|                 |                                                                                           |   |
| **ITEM 12.**         | **SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**                            |   |
|                 |                                                                                           |   |
| **ITEM 13.**         | **CERTAIN RELATIONSHIPS  AND RELATED TRANSACTIONS**                                            |   |
|                 |                                                                                           |   |
| **ITEM 14.**         | **PRINCIPAL ACCOUNTING FEES  AND SERVICES**                                                    |   |
|                 |                                                                                           |   |
| **PART IV**          |
|                 |                                                                                           |   |
| **ITEM 15.**         | **EXHIBITS, FINANCIAL  STATEMENT SCHEDULES**                                                   |   |

 

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**EXPLANATORYNOTE**

 

ThisAmendment No. 1 on Form 10-K/A amends Items 1, 2, 6, 7, 8, 10, 11, 12, 13 and14, and adds Item 7A, 9A and certain Exhibits. As disclosed on Form 8-K filed with the Securities and ExchangeCommission (the “Commission”) on July 23, 2004, Logan BancShares, Inc.(the “Company”), working with its outside auditors and specially retainedsecurities counsel, learned that it was subject to the Sarbanes-Oxley Act of2002 (“Sarbanes-Oxley”).  The amendmentsto Item 10 adding the disclosures relating to an audit committee financialexpert and the adoption of a code of ethics applicable to the senior financialofficers and the amendments to Item 14 relating to the adoption of pre-approvalpolicies and procedures for audit and non-audit services are necessary in orderfor the Company to comply with Sarbanes-Oxley. In addition, the Company has made additional disclosures in Management’sDiscussion and Analysis of Financial Condition and Results of Operation in Item7 to bring the discussion into compliance with Sarbanes-Oxley and to conform the disclosures to the re-audit performed by S.R.Snodgrass, A.C. discussed below.

 

ThisAmendment No. 1 on Form 10-K/A also revises the consolidated financialstatements as of December 31, 2003, and for the year then ended, includingthe notes thereto.  As disclosed on Form8-K filed with the Commission on August 4, 2004, the Company was informedby its independent auditor, McNeal, Williamson & Co. (“McNeal Williamson”)that McNeal Williamson was no longer permitted to issue audit reports for theCompany and was no longer permitted to perform interim reviews in accordancewith SAS 100 for the Company as a result of McNeal Williamson’s failure toregister with the Public Company Accounting Oversight Board (“PCAOB”).  McNeal Williamson advised the Company that itshould obtain new independent accountants. Accordingly, the Company retained S. R. Snodgrass, A.C. on August 10,2004, to:  (i) review all interim periodsthat were reviewed by McNeal Williamson after the adoption of Sarbanes-Oxley;(ii) re-audit the audit report for the period ended December 31, 2003; and(iii) review the audit report for the period ended December 31, 2002.  As a result of S. R. Snodgrass, A.C.’sre-audit, adjustments were made to the previously issued financial statements.

 

Significantadjustments or restatements are as follows:

 

•                                          In the Consolidated Statement of Condition asof December 31, 2003 cash and due from banks was reduced by $1,897,531,non-interest bearing deposits were reduced by $376,292 and interest bearingdeposits were reduced by $1,521,238 to eliminate intercompany accountbalances.  Federal Reserve Bank Stock wasreclassified from investment securities to other assets and deferred taxliabilities were netted against deferred tax assets, resulting in a reductionin investment securities of $81,000, a reduction in other assets of $77,502 andreduction in other liabilities of $158,502. The aggregate effect of the adjustments and reclassifications was toreduce total assets and total liabilities each in the amount of $2,056,033.  In addition, federal funds sold have beenincluded in the Company’s definition of cash and cash equivalents and have beenreclassified as such, and bank owned life insurance in the amount of $2,011,532has been separately stated.

 

•                                          No adjustments or restatements have been madeto previously reported net income or net income pershare.  The weighted-average sharesoutstanding for each of the three years 2003, 2002 and 2001 have been includedon the consolidated statement of income.

 

•                                          Comprehensive income for 2003, 2002 and 2001has been more clearly reflected on the consolidated statement of stockholders’equity by use of a separate column.

 

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•                                          The consolidated statement of cash flows for2003, 2002 and 2001 has been restated to reflect federal funds sold as a cashequivalent and to account for the elimination of intercompany deposits.  The 2003 consolidated statement of cash flowshas also been restated to reflect the Company’s purchase of bank owned lifeinsurance as an investing activity, rather than an operating activity

 

•                                          Significant changes to the notes to theconsolidated financial statements include the following:

 

•                                          Note 11 - Disclosure of the current anddeferred components of income tax expense; correction of the reconciliation ofthe reported amount of income tax expense and the amount computed at statutoryrates for 2003, 2002 and 2001; and correction of the composition of deferredtax assets and deferred tax liabilities as of December 31, 2003 and 2002.

 

•                                          Note 17 - Correction of the disclosureregarding the limitation on dividend payments bythe subsidiary bank.

 

•                                          Note 18 - Correction of fair valueinformation.

 

•                                          Note 19 - Restatement of parent onlystatements of income for 2003, 2002 and 2001 to reflect the receipt ofdividends from the subsidiary bank and to disclose income tax expense.  Restatement of parent only statement of cashflows for 2003, 2002 and 2001 to properly reflect operating and financingactivities and to reflect the purchase of treasury stock in 2002.

 

Theadjustments and reclassifications discussed above are also reflected in thetotal assets and total deposits reported in Item 6 - Selected FinancialData.  The shareholders’ equitypercentage in the table has also been restated for the adjustment in totalassets.

 

Theamendments to Items 1, 2, 7A, 9A, 10 (with respect to information concerningthe Company’s Directors, nominees for Director and Executive Officers), 11, 12,13, and 14 include information that was required to be disclosed on Form 10-K,but was inadvertently not disclosed by the Company.  There were no disclosures for Items 7A and 9Aon Form 10-K.  The information containedin the amendments to Items 1 and 2 supplements the prior disclosures made onForm 10-K, and the information contained in Items 10, 11, 12, 13, and 14replaces the prior disclosures made on Form 10-K.

 

**PART I**

 

ITEM 1 – BUSINESS

 

Employees

 

As of December 31, 2003, the Company and its subsidiaries hadapproximately 64 full-time equivalent employees. None of these employees arerepresented by a collective bargaining unit and management considers employeerelations to be excellent.

 

FinancialInformation

 

The Company’s revenue is derived from interest and fees on loans,interest on investment securities, interest on federalfunds sold, service charges and other fees, gains on securities

 

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and other sources of income.  Thebreakdown of revenue is set forth in the Management’s Discussion and Analysis ofFinancial Condition and Results of Operations appearing on pages 12 through 25herein.

 

ITEM 2 – PROPERTIES

 

Allof the office buildings and branches of the Company are owned by theCompany.  The land upon which the branchlocated at Route 10, South Man, West Virginia issituated, is leased.

 

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**PART II**

 

ITEM6 – 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                                                               |       | 173,603  |       | 169,329  |       | 171,599  |       | 157,480  |       | 152,746  |       |
|                                                                       |       |     |       |     |       |     |       |     |       |     |       |
| Total Deposits                                                             |       | 152,255  |       | 150,073  |       | 152,028  |       | 138,723  |       | 127,619  |       |
| Short-Term Debt                                                            |       | 3,000    |       | 1,000    |       | 2,000    |       | 2,000    |       | 9,840    |       |
| Total 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    | %          | 10.15    | %          | 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     | %          |

 

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ITEM7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATION

 

INTRODUCTION

 

The following discussion and analysispresents the significant changes in financial condition and the results ofoperations at Logan County Bancshares, Inc. and its subsidiary (the Company).

 

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

 

FORWARD-LOOKING STATEMENTS

 

This report may contain certainforward-looking statements, including certain plans, expectations, goals andprojections, which are subject to numerous assumptions, risks anduncertainties.  Actual results could differmaterially from those contained in or implied by such statements for a varietyof factors including: changes in economic conditions which may affect theCompany’s primary market area; rapid movements in interest rates; competitivepressures on product pricing and services; success and timing of businessstrategies; the nature and extent of governmental actions and reforms; andrapidly changing technology and evolving financial industry standards.

 

CORPORATE STRUCTURE AND ACQUISITIONS

 

Logan County Bancshares, Inc. is a bankholding company, which was organized under the laws of the State of WestVirginia in 1985.  On May 17, 1985, theCompany acquired all the outstanding capital stock of Logan Bank & TrustCompany (LB&T) and also all of the outstanding stock of Bank ofChapmanville (BC).  Both of thesesubsidiaries were banking corporations organized under the laws of the State ofWest Virginia.  The subsidiaries each hadone business segment, community banking. On October 7, 1996, the subsidiary banks combined and Bank ofChapmanville merged into Logan Bank & Trust Company.

 

CRITICAL ACCOUNTING POLICIES

 

The Company’s accounting and reportingpolicies are an integral part of the results reported.  Accounting policies are described in detailin Note 1 to the Consolidated Financial Statements.  The Company’s accounting and reportingpolicies are in accordance with accounting principles generally accepted in theUnited States of America, and they conform to general practices within thefinancial services industry.  The Company’smost complex accounting policies require management’s judgment to ascertain thevaluation of assets, liabilities, commitments and contingencies.  A variety of factors could affect theultimate value obtained by the use of assumptions that involve significantuncertainty at the time of estimation. In some instances we use a discount factor to determine the presentvalue of assets and liabilities.  Achange in the discount factor could increase or decrease the values of thoseassets and liabilities, resulting in either a beneficial or adverse impact toour financial results.  The following isa brief description of the Company’s current accounting policies involvingsignificant management valuation judgments.

 

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ACCOUNTING, LEGISLATIVE AND REGULATORYMATTERS

 

EffectiveJanuary 1, 2003, the Company adopted the provisions of FASB InterpretationNo. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Guarantees of Indebtedness of Others (an interpretationof FASB statements No.5, 57, and 107 and rescission of FASB Interpretation No.34).” FIN 45 clarifies the requirements of FASB Statement No. 5 (FAS 5), “Accountingfor Contingencies”, relating to a guarantor’s accounting for, and disclosureof, the issuance of certain types of guarantees.  For guarantees that fall within the scope ofFIN 45, the Interpretation requires that guarantors recognize a liability equalto the fair value of the guarantee upon its issuance.  The Company’s primary guarantee includedwithin the scope of FIN 45 relates to financial standby letters of creditissued to commercial customers.  FIN 45requires the liability recognized in stand-alone arm’s-length transactions tobe the premium received or receivable by the guarantor.  FIN 45 requires disclosure of the nature ofthe guarantee, the maximum potential amount of future payments the guarantorcould be required to make under the guarantee, and the current amount of theliability, if any, for the guarantor’s obligations under the guarantee.  Implementation of this interpretation did nothave a material impact on the Company’s consolidated financial position orconsolidated results of operations.

 

InJanuary 2003 the Financial Accounting Standards Board issued FASBInterpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities(an interpretation of RB No. 51). “FIN 46 addresses the consolidation bybusiness enterprises of certain variable interest entities (VIEs).  In December 2003, the FASB reissued FIN46 with certain modifications and clarifications. Application of this guidancewas effective for interests in certain VIEs commonly referred to asspecial-purpose entities (SPEs) as of December 31, 2003.  Application for all other types of entitiesis required for periods ending after March 14, 2004, unless previouslyapplied.  Management does not anticipatethe implementation of this interpretation to have a material impact on theCompany’s consolidated financial position or consolidated results ofoperations.

 

InApril 2003, FASB issued Statement of Financial Accounting Standards No.149 “Amendment of Statement 133 on Derivative Instruments and HedgingActivities” (SFAS 149).  FASB StatementsNo. 133” Accounting for Derivative Instruments and Hedging Activities” and No138, “Accounting for Certain Derivative Instruments and Certain HedgingActivities”, establish accounting and reporting standards for derivativeinstruments including derivatives embedded in other contracts, (collectivelyreferred to as derivatives) and for hedging activities.  This SFAS 149 amends SFAS 133 for certaindecisions made by the Board as part of the Derivatives Implementation Group(DIG) process.  This Statement containsamendments relating to FASB Concepts Statement No. 7, “Using Cash FlowInformation and Present Value in Accounting Measurements’, and FASB StatementsNo. 65, “Accounting for Certain Mortgage Banking Activities”, No. 91 “Accountingfor Nonrefundable Fees and Costs Associated with Originating or Acquiring Loansand Initial Direct Costs of Leases”, No.95, “Statement of Cash Flows”, and No.126, “Exemption Associated with Originating or Acquiring Loans and InitialDirect Costs of Leases, No. 95, “Statement of Cash Flows”, and No. 126, “Exemptionfrom Certain Required Disclosures about Financial Instruments for CertainNonpublic Entities”.  In general, SAFS149 was effective for derivative transactions entered into or modified and forhedging relationships designated after June 30, 2003.  Management does not believe that the Companyhas any derivative or hedging activities.

 

InMay 2003, FASB issued Statement of Financial Accounting Standards No. 150 “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity” (SFAS 150).  This Statementestablished standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity. Itrequires that an issuer classify a financial instrument that is within its scopeas a liability (or an asset in some circumstances).  Many of those instruments were previouslyclassified as equity.  Some of theprovisions of this SFAS are consistent with the current definition ofliabilities in FASB Concepts Statement No. 6, “Elements of Financial Statements”.  The

 

7

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remainingprovisions of this SFAS are consistent with the Board’s proposal to revise thatdefinition to encompass certain obligations that a reporting entity can or mustsettle by issuing its own equity shares, depending on the nature of therelationship established between the holder and the issuer.  While the Board still plans to revise thatdefinition through an amendment to Concepts Statement 6, the Board decided to deferissuing that amendment until it has concluded its deliberations on the nextphase of this project.  That next phasewill deal with certain compound financial instruments including puttableshares, convertible bonds, and dual-indexed financial instruments.  This Statement was effective for financialinstruments entered into or modified after May 31, 2003, and otherwise waseffective at the beginning of the first interim period beginning after June 15,2003, except for mandatorily redeemable financial instruments of non-publicentities.  Implementation of thisstatement did not have a material impact on the Company’s consolidatedfinancial position or consolidated results of operations.  In December 2003, the FASB deferred foran indefinite period the application of the guidance in SFAS 150 tononcontrolling interests that are classified as equity in the financialstatements of a subsidiary, but would be classified as a liability in theparent’s financial statements under SAFS 150. The deferral is limited to mandatorily redeemable noncontrollinginterests associated with finite-lived subsidiaries.  Management does not believe that the Companyhas such applicable entities as of December 31, 2003.

 

In December 2003, the Financial Accounting Standards Board (“FASB”)revised Statement of Financial Accounting Standards (“FAS”) No. 132, *Employers’ Disclosures about Pension and OtherPostretirement Benefit.* Thisstatement retains the disclosures required by FAS No. 132, which standardizedthe disclosure requirements for pensions and other postretirement benefits tothe extent practicable and requires additional information on changes in thebenefit obligations and fair value of plan assets.  Additional disclosures include informationdescribing the types of plan assets, investment strategy, measurement date(s),plan obligations, cash flows, and components of net periodic benefit costrecognized during interim periods.  Thisstatement retains reduced disclosure requirements for nonpublic entities fromFAS No. 132, and it includes reduced disclosure for certain of the newrequirements.  This statement iseffective for financial statements with fiscal years ending after December 15,2003.  The interim disclosures requiredby this statement are effective for interim periods beginning after December 15,2003.  The adoption of this statement did not have a material effecton the Company’s disclosure requirements.

 

Duringthe first quarter of 2003, the Securities and Exchange Commission promulgatedrules to implement several provisions of The Sarbanes-Oxley Act of 2002.  These rules included conditions for usingfinancial measures that exclude information that would be required undergenerally accepted accounting principles, (“non-GAAP financial measures”).  Additionally, new rules expand the number ofevents that require current reporting on Form 8-K.  Furthermore, new rules have been issuedpertaining to an audit committee and its need for a financial expert and codeof ethics requirements for senior management. Also, new rules were issued defining audit committee responsibility forexternal auditor retention and determination of external auditorindependence.  Management anticipatesadditional costs to implement the various provisions of this law; however, itis difficult to determine the full impact of implementation until such time asall rules have been promulgated.

 

OnDecember 11, 2003, the SEC staff announced its intention to release aStaff Accounting Bulletin that would require all registrants to account formortgage loan interest rate lock commitments related to loans held for sale aswritten options, effective no later than for commitments entered into after March 31,2004.  This guidance, if issued, wouldrequire the Company to recognize a liability on its balance sheet equal to thefair value of the commitment at the time the loan commitment is issued.  As a result, this guidance would delay therecognition of any revenue related to these commitments until such time as theloan is sold, however, it would have no effect on the ultimate amount ofrevenue or cash flows recognized over time. Management does not anticipate this guidance to have a material impacton the Company’s consolidated financial position or consolidated results ofoperations.

 

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INCOME STATEMENT ANALYSIS

 

EARNINGS OVERVIEW

 

Netincome for 2003, was $1,901,000 or $2.70 per share, an increase of $59,000 or3.2% from the $1,842,000 or $2.57 per share earned in 2002 and $86,000 morethan the $1,756,000 or $2.45 per share earned in 2001.  These earnings reflect a decrease in netinterest income of $644,000 or 8.8%, due primarily to limitations in theopportunity to reduce interest expense on deposits in a historically lowinterest rate environment relative to the investment options for loans andinvestment securities.  Management’songoing efforts to enhance asset quality and increase income from other sourcespartially offset the reduction in net interest income for the year ended December 31,2003, through a decrease in the provision for loan losses of $531,000 andincrease of other income of $181,000.

 

EARNINGS PER SHARE

 

The Earnings PerShare Table summarizes the principal sources of changes in earnings per sharefor 2003.

 
| Net income per share – 2002      |   | $      | 2.57   |   |
|---------------------------------------|--------|--------|--------|--------|
| with 2003 shares                      |   | $      | 2.62   |   |
|                                  |   |   |   |
| Increase (decrease) due to change in: |   |   |   |
| Net interest income                   |   | (0.91  | )      |
| Provision for loan losses             |   | 0.75   |   |
| Other operating income                |   | 0.26   |   |
| Operating expense                     |   | (0.06  | )      |
| Tax expense                           |   | 0.04   |   |
|                                  |   |   |   |
| Net income per share – 2003      |   | $      | 2.70   |   |

 

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**CONDENSED STATEMENTS OF FINANCIAL CONDITIONStatistical Summary 2003 - 1999**

 
| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2003**              | ** ** | **%** | ** ** | **2002** | ** ** | **%** | ** ** | **2001** | ** ** | **%** | ** ** | **2000** | ** ** | **%** | ** ** | **1999** | ** ** | **%** | ** ** |
| Loans                           |       | $                     | 101,615    |   | 58 |   | $ | 107,933 |   | 63 |   | $ | 116,907 |   | 69 |   | $ | 113,641 |   | 72 |   | $ | 109,571 |   | 72 |   |
| Investments                     |       | $                     | 47,892     |   | 28 |   | 41,224 |   | 25 |   | 36,355 |   | 21 |   | 29,318 |   | 19 |   | 30,028 |   | 19 |   |
| Federal Funds Sold              |       | 13,385                |       | 8 |   | 11,370 |   | 7 |   | 7,150 |   | 4 |   | 4,280 |   | 3 |   | — |   | 0 |   |
|                            |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-Earning Assets         |       | $                     | 162,892    |   | 94 |   | $ | 160,527 |   | 95 |   | $ | 160,412 |   | 94 |   | $ | 147,239 |   | 93 |   | $ | 139,599 |   | 91 |   |
|                            |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and Due from Banks         |       | 5,342                 |       | 3 |   | 5,597 |   | 3 |   | 7,072 |   | 4 |   | 4,687 |   | 3 |   | 7,184 |   | 5 |   |
| Premises and Equipment          |       | 3,103                 |       | 2 |   | 3,217 |   | 2 |   | 3,384 |   | 2 |   | 3,594 |   | 2 |   | 3,774 |   | 2 |   |
| Other Assets                    |       | 3,847                 |       | 2 |   | 1,606 |   | 1 |   | 1,883 |   | 1 |   | 2,363 |   | 2 |   | 2,889 |   | 27 |   |
| Reserve for Loan Losses         |       | (1,581                | )          | -1 |   | (1,619 | ) | -1 |   | (1,153 | ) | -1 |   | (702 | ) | 0 |   | (701 | ) | 0 |   |
| Total Assets                    |       | $                     | 173,603    |   | 100 |   | $ | 169,329 |   | 100 |   | $ | 171,599 |   | 100 |   | $ | 157,480 |   | 100 |   | $ | 152,746 |   | 100 |   |
|                            |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings & Interest DDA      |       | $                     | 64,939     |   | 38 |   | $ | 66,716 |   | 39 |   | $ | 61,174 |   | 36 |   | $ | 51,723 |   | 33 |   | $ | 50,023 |   | 33 |   |
| Time Deposits                   |       | 57,595                |       | 33 |   | 58,651 |   | 34 |   | 63,282 |   | 37 |   | 63,657 |   | 41 |   | 58,265 |   | 38 |   |
| Short-Term Debt                 |       | 3,000                 |       | 2 |   | 1,000 |   | 1 |   | 2,000 |   | 1 |   | 2,000 |   | 1 |   | 9,840 |   | 6 |   |
|                            |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-Bearing Liabilities    |       | 125,534               |       | 73 |   | 127,367 |   | 74 |   | 126,456 |   | 74 |   | 117,380 |   | 75 |   | 118,128 |   | 77 |   |
|                            |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand Deposits                 |       | 29,721                |       | 17 |   | 24,706 |   | 15 |   | 27,571 |   | 16 |   | 23,343 |   | 15 |   | 19,332 |   | 13 |   |
| Other Liabilities               |       | 558                   |       | 0 |   | 1,063 |   | 1 |   | 772 |   | 0 |   | 743 |   | 0 |   | 842 |   | 0 |   |
|                            |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Liabilities               |       | 155,813               |       | 90 |   | 152,136 |   | 90 |   | 154,799 |   | 90 |   | 141,466 |   | 90 |   | 138,302 |   | 90 |   |
|                            |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Shareholders’ Equity |       | 17,790                |       | 10 |   | 17,193 |   | 10 |   | 16,800 |   | 10 |   | 16,014 |   | 10 |   | 14,444 |   | 10 |   |
|                            |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Liabilities & Equity  |       | $                     | 173,603    |   | 100 |   | $ | 169,329 |   | 100 |   | $ | 171,599 |   | 100 |   | $ | 157,480 |   | 100 |   | $ | 152,746 |   | 100 |   |
|                            |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Deposits                  |       | $                     | 152,255    |   |   |   | $ | 150,073 |   |   |   | $ | 152,027 |   |   |   | $ | 138,723 |   |   |   | $ | 127,620 |   |   |   |
|                            |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Book Value per Share            |       | $                     | 25.27      |   |   |   | $ | 24.42 |   |   |   | $ | 23.86 |   |   |   | $ | 22.75 |   |   |   | $ | 20.52 |   |   |   |

 

10

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**SUMMARY OF OPERATIONSStatistical Summary 2003 - 1999**

 
| ** **                                                    | ** ** | **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 Shares:  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 |   |
|                                                          |       |     |       |     |       |     |       |     |       |     |       |
| Common Dividend Payout                                        |       |     |       |     |       |     |       |     |       |     |       |

 

11

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BALANCE SHEET ANALYSIS

 

LOANS

 

The Company’s primary goal is to maximize thereturn to shareholders.  An importantfactor in accomplishing this goal is meeting the credit needs of the retail andcommercial customers in the Company’s primary markets of southern WestVirginia.  Total loans decreasedapproximately $6,318,000 or 5.9% in 2003, following a 7.7% decrease of$8,975.000 in 2002.  Competition in theCompany’s market is very aggressive for originating new loans.  Loan demand was relatively strong during mostof 2003, as interest rates remained at historically low levels. Managementcontinued to adhere to its philosophy of not offering long-term fixed-rateloans in this low interest rate cycle. At December 31, 2003, the loan portfolio comprised 62.4% of totalinterest-earning assets as compared to 67.2% of total interest-earning assetsat December 31, 2002, and contributed 86.5% of total interest income in2003 and 84.4% in 2002 and 82.6% in 2001. See Note 4 to the Consolidated Financial Statement for additionalinformation on loans.

 

During 2003, the Company’s strong emphasiscontinued to be on lending to local companies with known local management andexcellent financial stability.  Most ofthe commercial loans in the portfolio were made at variable rates of interest.  Additionally, the Company continued to makeloans available in an expanding retail marketplace.  Consistent with management’s philosophy onrelationship banking, most borrowers are also depositors and utilize otherbanking services.  The average yield ofthe loan portfolio decreased to an average rate of 7.30% in 2003 compared to7.71% in 2002.  This reflected thehistorically low interest rate environment during 2003, and the continuedrepricing of loans at lower interest rates.

 

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

 

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

 

Commitments to extend credit are agreementsto lend to a customer provided there is no violation of any conditionestablished in the contract.  See Note 14to the Consolidated Financial Statements for additional information onCommitments and Contingencies. Commitments generally have fixed expiration dates or other terminationclause and may require the payment of a fee. Since many of the commitments are expected to expire without being drawnupon, the total amount of commitments does not necessarily represent futurecash requirements.  Logan Bank and TrustCompany had outstanding commitments to extend credit of approximately$12,696,000 at December 31, 2003, and $10,287,000 at December 31,2002.  These commitments includedunfunded loan commitments and unused lines of credit totaling $11,669,000 at December 31,2003 and $10,881,000 at December 31, 2002. Additionally, standby letters of credit totaled $1,027,000 at December 31,2003 and $1,062,000 at December 31, 2002. Financial standby letters of credit are conditional commitments issuedby Logan Bank & Trust Company to guarantee the financial performance of acustomer to a third party.  Thoseguarantees are primarily used to support public and private borrowingarrangements.

 

12

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A table follows in this discussion andanalysis which details the amount and expected maturities of significantcommitments of as December 31, 2003.

 

Nonperforming assets, including nonaccrualloans, loans past-due 90 days or more, restructured loans and other real estateowned, decreased $1,109,000 or approximately 44%, from December 31, 2002to December 31, 2003, following a decrease of $373,000, or approximately13% in 2002.  These decreases reflectmanagement’s ongoing efforts to enhance the quality of the loan portfolio.  This improvement was further enhanced by theCompany’s adhering to a stricter set of criteria in the determination ofgranting renewals and extensions.  TheCompany’s policy is to discontinue the accrual of interest on loans that arepast due more than 90 days, unless such loans are well collateralized and inprocess of collection.  Loans that are ona current payment status or past due less those 90 days may also be classifiedas nonaccrual if repayment of principal or interest is in doubt.  The Company’s holdings of other real estateowned increased approximately 3%, or $6,000 in 2003,following a decrease of approximately $31,000 in 2002.  See the following schedule in thisdiscussion and analysis titled Nonperforming Assets and Loan Loss Analysis.

 

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

 

The Company uses an outsourcing arrangementfor its loan review function with an independent third-party firm.  This process includes a through evaluation ofthe credit administration systems and personnel. The objective is to have aneffective loan review system that provides management with information thatwill produce a more focused and effective approach in managing credit riskinherent in the loan portfolio.  As apart of this process, a system of loan grades is utilized to further supportthe adequacy of the loan loss allowance.

 

In addition to the review of credit qualitythrough the credit review process, the Company constructs a comprehensiveanalysis of the allowance for loan losses for its loan portfolio at leastquarterly.  The procedures that areutilized entail preparation of a loan “watch” list and assigning each loan aclassification.  For those individuallysignificant loans where it is determined that it is not probable that the borrowerwill make all payments in accordance with the original loan agreement,management performs an impairment analysis as required by SFAS Nos. 114 and118.  Specific reserves are recorded onimpaired loans of $427,000 and $267,000 at December 31, 2003 and 2002,respectively.  Other classified loans arecategorized and allocated appropriate reserves. Other loans more than 90 days past due that have not been considered inthe aforementioned procedures are assigned a classification of Substandard andare reserved for accordingly.  Theremaining portfolio is segregated into consumer, commercial, and residentialreal estate loans, and the historical net charge off percentage of eachcategory is applied to the current amount outstanding in that category.  Also, a review of concentrations of credit,classes of loans and pledged collateral is performed to determine the existenceof any deterioration.  In addition,volume and trends in delinquencies and nonaccural loans, off-balance sheetcredit risks, the loan portfolio composition, loan volume and maturity of theportfolio, national and local economic conditions and the experience, abilityand depth of lending management and staff are given consideration.  See Notes 4, 5 and 15 to the ConsolidatedFinancial Statements for additional information on loan quality, the allowancefor loan losses and concentration of credit risk.

 

13

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ALLOWANCE FOR LOAN LOSSES

 

The Company maintains, through its provision,an allowance for loan losses believed by management to be adequate to absorbprobable credit losses inherent in the portfolio.  Management continues to enhance themethodology and procedures for determining the adequacy of the allowance forloan losses.  This allowance is alsoreviewed by banking regulators and the Company’s independent auditors.  The procedures that are utilized entailpreparation of a loan watch list and assigning each loan a classification.  For those individually significant loanswhere it is determined that it is not probable that the borrower will make allpayments in accordance with the original loan agreement, management performs animpairment analysis.  The measurement ofimpaired loans is based on either the fair value of the underlying collateral,the present value of the future cash flows discounted at the historicaleffective interest rate stipulated in the loan agreement, or the estimatedmarket value of the collateral.

 

Other classified loans are categorized andallocated appropriate reserves.  Loansare designated as nonaccrual when, in the opinion of management, the collectionof principal or interest is doubtful. This generally occurs when a loan becomes 90 days past due as toprincipal or interest unless the loan is both well secured and in the processof collection.  Other loans more that 90days past due, which have not been considered in the aforementioned procedures,are reserved for accordingly.  Theremaining portfolio is segregated into consumer, commercial and residentialreal estate loans, and the historical net charge off percentage of eachcategory is applied to the current amount outstanding in those categories.  Additionally, concentrations of credit,collateral deficient loans, volume and trends in delinquencies, off-balance sheetcredit risks, loan portfolio composition, loan volume and maturity of theportfolio, national and local economic conditions and the experience, abilityand depth of lending management and staff are given consideration.  (See Notes 4, 5 and 15 to the ConsolidatedFinancial Statements for additional information on loan quality, the allowancefor loan losses and concentration of credit risk.

 

14

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**NONPERFORMING ASSETS AND LOAN LOSS ANALYSIS**

 
| ** **                                       | ** ** | **Year Ended December 31** | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **2003**                        | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
| ** **                                       | ** ** | **(Dollars in Thousands)**      | ** ** |
| Amount of Loans Outstanding at End of Period     |       | $                               | 100,033    |   | $ | 106,314 |   | $ | 115,754 |   | $ | 112,938 |   | $ | 108 870 |   |
| Average Amount of Loans                          |       | $                               | 103,873    |   | $ | 110,174 |   | $ | 110,289 |   | $ | 109,447 |   | $ | 101,197 |   |
| Balance of Allowance for Possible Loan Losses:   |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at Beginning of Year                     |       | $                               | 1,619      |   | $ | 1,153 |   | $ | 702 |   | $ | 700 |   | $ | 701 |   |
| Loans Charged Off:                               |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                                       |       | $                               | 0          |   | $ | 9 |   | $ | 32 |   | $ | 0 |   | $ | 0 |   |
| Real Estate                                      |       | 35                              |       | 16 |   | 30 |   | 7 |   | 0 |   |
| Consumer                                         |       | 49                              |       | 73 |   | 205 |   | 99 |   | 29 |   |
| Total Loans Charged Off                          |       | 84                              |       | 98 |   | 257 |   | 106 |   | 29 |   |
| Recovers 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 |   |
| Provision for Loan Losses                        |       | 3                               |       | 534 |   | 700 |   | 100 |   | 23 |   |
| Balance at End of Period                         |       | $                               | 1,581      |   | $ | 1,619 |   | $ | 1,153 |   | $ | 702 |   | $ | 700 |   |
| Ratio of net Charge-Offs to Average Loans        |       | 0.039                           | %          | 0.062 | % | 0.226 | % | 0.090 | % | 0.024 | % |
| Allowance at year end as a % of Loans            |       | 1.580                           | %          | 1.523 | % | 0.996 | % | 0.622 | % | 0.643 | % |
| Provisions for loan losses as a % of Loans       |       | 0.003                           | %          | 0.502 | % | 0.605 | % | 0.089 | % | 0.021 | % |
| Nonperforming assets (at year end)               |       |                            |       |   |   |   |   |   |   |   |   |
| Nonaccrual                                       |       | 149                             |       | 617 |   | 864 |   | 426 |   | 555 |   |
| Past-due  ninety days or more and still accruing |       | 992                             |       | 1,706 |   | 1,801 |   | 3,338 |   | 3,272 |   |
| Troubled  debt restructurings                    |       | 0                               |       | 0 |   | 0 |   | 0 |   | 0 |   |
| Other real  estate owned                         |       | 202                             |       | 196 |   | 227 |   | 200 |   | 358 |   |
| Total  Nonperforming Assets                      |       | 1,410                           |       | 2,519 |   | 2,892 |   | 3,964 |   | 4,185 |   |
| Nonperforming assets/total loans                 |       | 1.41                            | %          | 2.37 | % | 2.50 | % | 3.51 | % | 3.84 | % |
| Nonperforming assets/total assets                |       | 0.81                            | %          | 1.49 | % | 1.69 | % | 2.53 | % | 2.75 | % |

 

15

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**ALLOCATION OF ALLOWANCE FOR LOAN LOSSES**

 
| ** **         | ** ** | **December 31, 2003** | ** ** | **December 31, 2002** | ** ** | **December 31, 2001** | ** ** | **December 31, 2000** | ** ** |
|--------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| **Types of Loans** | ** ** | **Allowance**              | ** ** | **%  Loan  Class**         | ** ** | **Allowance**              | ** ** | **%  Loan  Class**         | ** ** | **Allowance** | ** ** | **%  Loan  Class** | ** ** | **Allowance** | ** ** | **%  Loan  Class** | ** ** |
| Commercial         |       | $                          | 854        |                       | 2.13       | %                          | $          | 854                        |       | 1.94 | % | $ | 749 |   | 1.52 | % | $ | 464 |   | 0.98 | % |
| Real Estate        |       | 596                        |       | 1.17                       | %          | 623                        |       | 1.19                       | %          | 288 |   | 0.54 | % | 163 |   | 0.31 | % |
| Consumer           |       | 132                        |       | 1.26                       | %          | 142                        |       | 1.24                       | %          | 116 |   | 0.83 | % | 75 |   | 5.50 | % |
| Total              |       | $                          | 1,581      |                       | 1.58       | %                          | $          | 1,619                      |       | 1.52 | % | $ | 1,153 |   | 1.00 | % | $ | 702 |   | 0.62 | % |

 

16

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SECURITIES

 

Securities, the secondlargest asset of the Company, increased by $6,668,000 or 16.2% during 2003.  Thisincrease resulted from the decrease in the loan portfolio.  At December 31, 2003, securitiescomprised 29.4% of total interest-earning assets compared to 25.7% of totalinterest-earning assets at December 31, 2002.  The composition of the Company’s securitiesportfolio reflects management’s investment strategy of maximizing theappropriate level of asset liquidity and providing management a tool to assistin controlling and managing the Company’s interest rate risk while at the sametime producing appropriate levels of interest income.  Management of the maturity of the securitiesportfolio is necessary to ensure adequate liquidity and manage interest raterisk.  During 2003, in order to maintainliquidity and flexibility, management continued categorizing all investments inthe available for sale portfolio.  Managementbelieves that the potential for increased loan demand requires maintaining theliquidity of the securities portfolio. See the following schedules in this discussion and analysis for moreinformation on the securities portfolio. In addition, see Note 2 to the Consolidated Financial Statements foradditional information.

 

The following table shows the carrying valuesof securities at the respective periods, which is market value for availablefor sale securities.  For additionalinformation see Note 2 to the Consolidated Financial Statements.  There are no securities held to maturity.

 
| ** **                          | ** ** | **December 31,**     | ** ** |
|-------------------------------------|------------|---------------------------|------------|
| ** **                          | ** ** | **2003**                  | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                          | ** ** | **(Dollar in Thousands)** | ** ** |
| Securities available for  sale      |       |                      |       |   |   |   |   |
| U. S. Government securities         |       | $                         | 9,011      |   | $ | 3,972 |   | $ | 3,489 |   |
| U. S. Government agency securities  |       | 38,510                    |       | 36,532 |   | 32,366 |   |
| Other securities                    |       | 263                       |       | 263 |   | 250 |   |
|                                |       |                      |       |   |   |   |   |
| TOTAL SECURITIES AVAILABLE FOR SALE |       | $                         | 47,784     |   | $ | 40,767 |   | $ | 36,105 |   |

 

17

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The following table shows the maturity periods for InvestmentSecurities as of December 31, 2003. There were no securities held to maturity.

 
| **December 31, 2003**        | ** ** | **One Year  or Less**      | ** ** | **One Year  Through  Five Years** | ** ** | **Years  Through  Ten Years** | ** ** | **Over Ten  Years** | ** ** | **Total**     | ** ** | **Market  Value** | ** ** |
|-----------------------------------|------------|----------------------------|------------|-----------------------------------|------------|-------------------------------|------------|---------------------|------------|---------------|------------|-------------------|------------|
| **(Dollars in**                   | ** ** | **(Dollars in Thousands)** | ** ** |
| **thousands)**                    | ** ** | **Amt.Yield**              | ** ** | **Amt.Yield**                     | ** ** | **Amt.Yield**                 | ** ** | **Amt.Yield**       | ** ** | **Amt.Yield** | ** ** | **Amt.Yield**     | ** ** |
| U. S. Government                  |       |                       |       |                              |       |                          |       |                |       |          |       |              |       |
| Available for sale                |       | $                          | 9,001      |                              | $          | 0                             |       | $                   | 0          |          | $          | 0                 |       | $ | 9,001 |   | $ | 9,030 |   |
|                              |       |                       |       |                              |       |                          |       |                |       |          |       |              |       |
| U. S. Federal Agency/and Equities |       |                       |       |                              |       |                          |       |                |       |          |       |              |       |
| Available for sale                |       | 17,783                     |       | 20,737                            |       | 0                             |       | 263                 |       | 38,783        |       | 38,862            |       |
|                              |       |                       |       |                              |       |                          |       |                |       |          |       |              |       |
| Total Securities                  |       |                       |       |                              |       |                          |       |                |       |          |       |              |       |
| Available for sale                |       | 26,784                     |       | 20,737                            |       | 0                             |       | 263                 |       | 47,784        |       | 47,892            |       |
|                              |       |                       |       |                              |       |                          |       |                |       |          |       |              |       |
| TOTAL                             |       | $                          | 26,784     |                              | $          | 20,737                        |       | $                   | 0          |          | $          | 263               |       | $ | 47,784 |   | $ | 47,892 |   |
|                              |       |                       |       |                              |       |                          |       |                |       |          |       |              |       |
| Percent of Total                  |       | 56.05                      | %          | 43.40                             | %          |                          |       | 0.55                | %          | 100.00        | %          | 100.00            | %          |
|                              |       |                       |       |                              |       |                          |       |                |       |          |       |              |       |
| Weighted average yield            |       |                       |       |                              |       |                          |       |                |       |          |       |              |       |
|                              |       | 2.09                       | %          | 1.92                              | %          |                          |       | 3.95                | %          | 2.02          | %          | 2.02              | %          |

 

NET INTEREST INCOME

 

The major portion of the Company’s earningsis derived from net interest income, which is the interest income oninterest-earning assets less the interest expense on interest-bearingliabilities.  During 2003 net interestincome decreased $644,000 or 8.8%.  Thisfollowed a .5% increase in 2002, and a 9.1% increase in 2001.  For the year ended December 31, 2003,interest income decreased $1,322,000, or approximately 13.1%, compared to adecrease of $2,002,000 or 16.6% for 2002, and an increase of $582,000 or 5.1%for 2001.  The net interest margindecreased from 4.45% in 2002 to 4.01% in 2003. This follows a decrease in 2002 from 4.56% in 2001.  A detailed analysis of the net interestmargin for each of these three years follows in this MD&A.  Interest on loans, which decreased $939,000or 11.0%, contributed to the decrease for 2003, along with interest onsecurities, which decreased $359,000 or 26.3%. The decrease in interest income was accompanied by a decrease ininterest expense of $677,000 or 24.5% for 2003. This followed a decrease in interest expense of $2,037,000 or 42.4% for2002, and a decrease of $27,000 or .5% for 2001.

 

Net interest income is affected by prevailingmarket interest rates.  Two otherimportant factors are the changes in the balances (volume) of the earningsassets and interest bearing liabilities and the spread between the varioussources and uses of funds.  Theperformance for 2003 is indicative of the historically low interest rateenvironment that followed the rapid decline in interest rates that prevailedthroughout 2001 and early 2002.  This isreflected in the following volume/rate analysis that shows how both interestrates and the volumes of interest earning assets and interest bearingliabilities combine to change the net interest income.

 

18

----

 

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

 
| ** **                                            | ** ** | **Year Ended 12/31/03** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|
| ** **                                            | ** ** | **Average Balance**     | ** ** | **Interest** | ** ** | **Yield/Rate** | ** ** |
| ASSETS                                                |       |                    |       |   |   |   |   |
| INTEREST EARNING ASSETS:                              |       |                    |       |   |   |   |   |
| LOANS:                                                |       |                    |       |   |   |   |   |
| Commercial                                            |       | $                       | 41,444     |   | $ | 2,665 |   | 6.43 | % |
| Real Estate                                           |       | 51,764                  |       | 4,004 |   | 7.74 | % |
| Consumer                                              |       | 10,665                  |       | 910 |   | 8.53 | % |
| Total Loans                                           |       | $                       | 103,873    |   | $ | 7,579 |   | 7.30 | % |
|                                                  |       |                    |       |   |   |   |   |
| INVESTMENT SECURITIES                                 |       |                    |       |   |   |   |   |
| Held to Maturity                                      |       | 0                       |       | 0 |   | 0.00 | % |
| Available for Sale                                    |       | 45,014                  |       | 1,005 |   | 2.23 | % |
| Total Securities                                      |       | 45,014                  |       | 1,005 |   | 2.23 | % |
| Federal Funds Sold                                    |       | 17,472                  |       | 182 |   | 1.04 | % |
|                                                  |       |                    |       |   |   |   |   |
| Total Interest Earnings Assets                        |       | $                       | 166,359    |   | $ | 8,766 |   | 5.27 | % |
|                                                  |       |                    |       |   |   |   |   |
| Allowance for Loan Losses                             |       | (1,582                  | )          |   |   |   |   |
| Cash and Due From Banks                               |       | 5,339                   |       |   |   |   |   |
| Bank Premises                                         |       | 3,145                   |       |   |   |   |   |
| Other Assets                                          |       | 1,882                   |       |   |   |   |   |
|                                                  |       |                    |       |   |   |   |   |
| TOTAL ASSETS                                          |       | $                       | 175,143    |   |   |   |   |   |
|                                                  |       |                    |       |   |   |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY:            |       |                    |       |   |   |   |   |
| Interest-Bearing Demand Deposits and Savings Deposits |       | $                       | 67,047     |   | $ | 315 |   | 0.47 | % |
| Time Deposits                                         |       | 58,224                  |       | 1,672 |   | 2.87 | % |
| Repurchase Agreement                                  |       | 2,852                   |       | 100 |   | 3.51 | % |
|                                                  |       |                    |       |   |   |   |   |
| Total Interest-Bearing Liabilities                    |       | $                       | 128,123    |   | $ | 2,087 |   | 1.63 | % |
|                                                  |       |                    |       |   |   |   |   |
| Demand Deposits                                       |       | 28,166                  |       |   |   |   |   |
| Accrued Expenses                                      |       | 899                     |       |   |   |   |   |
|                                                  |       |                    |       |   |   |   |   |
| TOTAL LIABILITIES                                     |       | $                       | 157,188    |   |   |   |   |   |
|                                                  |       |                    |       |   |   |   |   |
| Stockholders’ Equity                             |       | 17,955                  |       |   |   |   |   |
|                                                  |       |                    |       |   |   |   |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY       |       | $                       | 175,143    |   |   |   |   |   |
|                                                  |       |                    |       |   |   |   |   |
| Average rate paid to fund earnings assets             |       |                    |       |   |   | 1.25 | % |
| NET INTEREST MARGIN                                   |       |                    |       | $ | 6,679 |   | 4.01 | % |

 

For purposes of this schedule, interest on nonaccuralloans have been included only to the extent reflected in the incomestatement.  However, the nonaccrual loansbalance is included in the average amount outstanding.

 

19

----

 

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

 
| ** **                                             | ** ** | **Year Ended 12/31/02** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **Average Balance**     | ** ** | **Interest** | ** ** | **Yield/Rate** | ** ** |
| ASSETS                                                 |       |                    |       |   |   |   |   |
| INTEREST EARNING ASSETS:                               |       |                    |       |   |   |   |   |
| LOANS:                                                 |       |                    |       |   |   |   |   |
| Commercial                                             |       | $                       | 44,680     |   | $ | 3,103 |   | 6.94 | % |
| Real Estate                                            |       | 53,180                  |       | 4,262 |   | 8.01 | % |
| Consumer                                               |       | 12,564                  |       | 1,154 |   | 9.18 | % |
| Total Loans                                            |       | $                       | 110,424    |   | $ | 8,519 |   | 7.71 | % |
|                                                   |       |                    |       |   |   |   |   |
| INVESTMENT SECURITIES                                  |       |                    |       |   |   |   |   |
| Held to Maturity                                       |       | 0                       |       | 0 |   | 0.00 | % |
| Available for Sale                                     |       | 40,988                  |       | 1,364 |   | 3.32 | % |
| Total Securities                                       |       | 40,988                  |       | 1,364 |   | 3.32 | % |
| Federal Funds Sold                                     |       | 13,106                  |       | 206 |   | 1.57 | % |
|                                                   |       |                    |       |   |   |   |   |
| Total Interest Earnings Assets                         |       | $                       | 164,518    |   | $ | 10,089 |   | 6.13 | % |
|                                                   |       |                    |       |   |   |   |   |
| Allowance for Loan Losses                              |       | (1,250                  | )          |   |   |   |   |
| Cash and Due From Banks                                |       | 5,187                   |       |   |   |   |   |
| Bank Premises                                          |       | 3,337                   |       |   |   |   |   |
| Other Assets                                           |       | 1,658                   |       |   |   |   |   |
| TOTAL ASSETS                                           |       | $                       | 173,450    |   |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY:             |       |                    |       |   |   |   |   |
| Interest-Bearing Demand Deposits and  Savings Deposits |       | $                       | 65,384     |   | $ | 584 |   | 0.89 | % |
| Time Deposits                                          |       | 60,861                  |       | 2,024 |   | 3.33 | % |
| Repurchase Agreement                                   |       | 2,910                   |       | 157 |   | 5.39 | % |
|                                                   |       |                    |       |   |   |   |   |
| Total Interest-Bearing Liabilities                     |       | $                       | 129,155    |   | $ | 2,765 |   | 2.14 | % |
|                                                   |       |                    |       |   |   |   |   |
| Demand Deposits                                        |       | 25,559                  |       |   |   |   |   |
| Accrued Expenses                                       |       | 966                     |       |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| TOTAL LIABILITIES                                      |       | $                       | 155,680    |   |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| Stockholders’ Equity                              |       | 17,770                  |       |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY        |       | $                       | 173,450    |   |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| Average rate paid to fund earnings assets              |       |                    |       |   |   | 1.68 | % |
| NET INTEREST MARGIN                                    |       |                    |       | $ | 7,324 |   | 4.45 | % |

 

For purposes of this schedule,interest on nonaccural loans have been included only to the extent reflected inthe income statement.  However, thenonaccrual loans balance is included in the average amount outstanding.

 

20

----

 

**ANALYSIS OF NET INTEREST MARGIN FOR 2001:**

** **
| ** **                                             | ** ** | **Year Ended 12/31/01** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **Average Balance**     | ** ** | **Interest** | ** ** | **Yield/Rate** | ** ** |
| ASSETS                                                 |       |                    |       |   |   |   |   |
| INTEREST EARNING ASSETS:                               |       |                    |       |   |   |   |   |
| LOANS:                                                 |       |                    |       |   |   |   |   |
| Commercial                                             |       | $                       | 46,696     |   | $ | 4,209 |   | 9.01 | % |
| Real Estate                                            |       | 52,514                  |       | 4,376 |   | 8.33 | % |
| Consumer                                               |       | 14,079                  |       | 1,397 |   | 9.92 | % |
| Total Loans                                            |       | $                       | 113,289    |   | $ | 9,982 |   | 8.81 | % |
|                                                   |       |                    |       |   |   |   |   |
| INVESTMENT SECURITIES                                  |       |                    |       |   |   |   |   |
| Held to Maturity                                       |       | 0                       |       | 0 |   | 0.00 | % |
| Available for Sale                                     |       | 25,967                  |       | 1,354 |   | 5.21 | % |
| Total Securities                                       |       | 25,967                  |       | 1,354 |   | 5.21 | % |
| Federal Funds Sold                                     |       | 20,540                  |       | 754 |   | 3.67 | % |
|                                                   |       |                    |       |   |   |   |   |
| Total Interest Earnings Assets                         |       | $                       | 159,796    |   | $ | 12,090 |   | 7.57 | % |
|                                                   |       |                    |       |   |   |   |   |
| Allowance for Loan Losses                              |       | (788                    | )          |   |   |   |   |
| Cash and Due From Banks                                |       | 5,027                   |       |   |   |   |   |
| Bank Premises                                          |       | 3,561                   |       |   |   |   |   |
| Other Assets                                           |       | 2,785                   |       |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| TOTAL ASSETS                                           |       | $                       | 170,381    |   |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY:             |       |                    |       |   |   |   |   |
| Interest-Bearing Demand Deposits and  Savings Deposits |       | $                       | 57,807     |   | $ | 1,139 |   | 1.97 | % |
| Time Deposits                                          |       | 64,549                  |       | 3,522 |   | 5.46 | % |
| Repurchase Agreement                                   |       | 2,000                   |       | 140 |   | 7.00 | % |
|                                                   |       |                    |       |   |   |   |   |
| Total Interest-Bearing Liabilities                     |       | $                       | 124,356    |   | $ | 4,801 |   | 3.86 | % |
|                                                   |       |                    |       |   |   |   |   |
| Demand Deposits                                        |       | 28,052                  |       |   |   |   |   |
| Accrued Expenses                                       |       | 1,023                   |       |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| TOTAL LIABILITIES                                      |       | $                       | 153,431    |   |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| Stockholders’ Equity                              |       | 16,950                  |       |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY        |       | $                       | 170,381    |   |   |   |   |   |
|                                                   |       |                    |       |   |   |   |   |
| Average rate paid to fund earnings assets              |       |                    |       |   |   | 3.00 | % |
| NET INTEREST MARGIN                                    |       |                    |       | $ | 7,289 |   | 4.56 | % |

 

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

 

21

----

 

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

 
| ** **                                      | ** ** | **2003 vs 2002**               | ** ** | ** **                               | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|------------------------------------------|------------|
| ** **                                      | ** ** | **Increase   Due to   Volume** | ** ** | **(Decrease)   Due to   Change in Rate** | ** ** | **Total** | ** ** |
| INTEREST INCOME ON LOANS:                       |       |                           |       |                                     |       |   |   |
| Commercial                                      |       | $                              | (312       | )                                        | $          | (126 | ) | $ | (438 | ) |
| Real Estate                                     |       | (113                           | )          | (145                                     | )          | (258 | ) |
| Consumer                                        |       | (174                           | )          | (70                                      | )          | (244 | ) |
|                                            |       |                           |       |                                     |       |   |   |
| TOTAL LOANS                                     |       | (599                           | )          | (341                                     | )          | (940 | ) |
|                                            |       |                           |       |                                     |       |   |   |
| SECURITIES                                      |       |                           |       |                                     |       |   |   |
|                                            |       |                           |       |                                     |       |   |   |
| Available for Sale                              |       | 134                            |       | (493                                     | )          | (359 | ) |
|                                            |       |                           |       |                                     |       |   |   |
| TOTAL SECURITIES                                |       | 134                            |       | (493                                     | )          | (359 | ) |
|                                            |       |                           |       |                                     |       |   |   |
| FEDERAL FUNDS SOLD                              |       |                           |       |                                     |       |   |   |
|                                            |       |                           |       |                                     |       |   |   |
| Federal Funds Sold                              |       | 69                             |       | (93                                      | )          | (24 | ) |
|                                            |       |                           |       |                                     |       |   |   |
| TOTAL INTEREST INCOME                           |       | (396                           | )          | (927                                     | )          | (1,323 | ) |
|                                            |       |                           |       |                                     |       |   |   |
| INTEREST EXPENSE ON:                            |       |                           |       |                                     |       |   |   |
| Savings & Interest Bearing Demand  Deposits |       | 148                            |       | (417                                     | )          | (269 | ) |
| Time Deposits                                   |       | (88                            | )          | (264                                     | )          | (352 | ) |
|                                            |       |                           |       |                                     |       |   |   |
| Purchased Agreements                            |       | (3                             | )          | (54                                      | )          | (57 | ) |
|                                            |       |                           |       |                                     |       |   |   |
| TOTAL INTEREST EXPENSE                          |       | 57                             |       | (735                                     | )          | (678 | ) |
|                                            |       |                           |       |                                     |       |   |   |
| NET INTEREST INCOME                             |       | $                              | (453       | )                                        | $          | (192 | ) | $ | (645 | ) |

 

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

 

22

----

 

**THE FOLLOWING TABLE IS AN ANALYSIS OF THE CHANGES IN INTEREST INCOMEAND INTEREST EXPENSE FOR THE DATES SHOWN.**

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

 

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

 

23

----

 

**THE FOLLOWING TABLE IS AN ANALYSIS OF THE CHANGES IN INTEREST INCOMEAND INTEREST EXPENSE FOR THE DATES SHOWN.**

** **
| ** **                                      | ** ** | **2001 vs 2000**               | ** ** | ** **                               | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|------------------------------------------|------------|
| ** **                                      | ** ** | **Increase   Due to   Volume** | ** ** | **(Decrease)   Due to   Change in Rate** | ** ** | **Total** | ** ** |
| INTEREST INCOME ON LOANS:                       |       |                           |       |                                     |       |   |   |
| Commercial                                      |       | (140                           | )          | (966                                     | )          | $ | (1,106 | ) |
| Real Estate                                     |       | 54                             |       | (168                                     | )          | (114 | ) |
| Consumer                                        |       | (139                           | )          | (104                                     | )          | (243 | ) |
|                                            |       |                           |       |                                     |       |   |   |
| TOTAL LOANS                                     |       | (225                           | )          | (1,238                                   | )          | (1,463 | ) |
|                                            |       |                           |       |                                     |       |   |   |
| SECURITIES                                      |       |                           |       |                                     |       |   |   |
|                                            |       |                           |       |                                     |       |   |   |
| Available for Sale                              |       | 500                            |       | (490                                     | )          | 10 |   |
|                                            |       |                           |       |                                     |       |   |   |
| TOTAL SECURITIES                                |       | 500                            |       | (490                                     | )          | 10 |   |
|                                            |       |                           |       |                                     |       |   |   |
| FEDERAL FUNDS SOLD                              |       |                           |       |                                     |       |   |   |
|                                            |       |                           |       |                                     |       |   |   |
| Federal Funds Sold                              |       | (117                           | )          | (431                                     | )          | (548 | ) |
|                                            |       |                           |       |                                     |       |   |   |
| TOTAL INTEREST INCOME                           |       | 158                            |       | (2,159                                   | )          | (2,001 | ) |
|                                            |       |                           |       |                                     |       |   |   |
| INTEREST EXPENSE ON:                            |       |                           |       |                                     |       |   |   |
| Savings & Interest Bearing Demand  Deposits |       | 49                             |       | (32                                      | )          | 17 |   |
| Time Deposits                                   |       | (6                             | )          | (2, 030                                  | )          | (2,036 | ) |
|                                            |       |                           |       |                                     |       |   |   |
| Purchased Agreements                            |       | $                              | 164        |                                     | $          | (129 | ) | $ | 35 |   |
|                                            |       |                           |       |                                     |       |   |   |
| TOTAL INTEREST EXPENSE                          |       | 57                             |       | (735                                     | )          | (678 | ) |
|                                            |       |                           |       |                                     |       |   |   |
| NET INTEREST INCOME                             |       | $                              | (453       | )                                        | $          | (192 | ) | $ | (645 | ) |

 

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

 

24

----

 

PROVISIONSFOR LOAN LOSSES

 

TheCompany experienced a significant decrease in the provision for loan lossesduring 2003.  The provision for loanlosses was $3,000 for 2003, compared to $534,000 for 2002 and $700,000 for2001.  Factors contributing to thedecreased provision in 2003 included decreased charge-offs in certaincommercial mortgage loans, along with fewer charge-offs in the retailsector.  In evaluating the loan portfolioat December 31, 2003, with the improved level of nonaccrual and past-due loans,it is anticipated that loan losses will remain stable in 2004.

 

NONINTERESTINCOME AND EXPENSE

 

Noninterestincome increased $182,000 or 22.6% in 2003, following a $97,000 or 13.8%increase in 2002, and a $62,000 or 8.1% decrease in 2001.  The largest component of non-interest incomeis service charges on deposit accounts. These fees increased approximately $201,000 or 30.6% in 2003, after anincrease of approximately $28,000 or 4.5% in 2002, and a decrease ofapproximately $41,000 or 6.1% in 2001.

 

Noninterest expense increased .8% in 2003,following 1.3% increase in 2002 and a 10.6% increase in 2001.  Personnel expense is the largest component ofnoninterest expense.  Personnel expenseincreased 2.4% in 2003, following an increase of 4.7% in 2002, and 3.2% in2001.  In the years presented managementhas been able to control noninterest expense by utilizing new technology andreassignment of personnel.

 

DEPOSITS

 

Deposits,the Company’s major source of funds, increased approximately $2,181,000 or1.45% in 2003, following an increase of $1,585,000 or .98% in 2002.  These increases occurred primarily in demanddeposits as management placed emphasis on attracting this type of account andproviding superior service for these customers. The average rate paid oninterest-bearing deposits in 2003 was 1.63% and 2.14% in 2002.  Strong competition for deposits exists in theCompany’s primary markets among commercial banks, savings banks, thriftinstitutions, credit unions, mutual funds, brokerage houses, insurancecompanies, and certain national retailers. Despite this intense competition, management continues to evaluatepricing strategies that will ensure the Company’s long-term goal of maintainingmarket share without sacrificing profitability.

 

25

----

 

AVERAGEDEPOSITS

 

Thefollowing table shows average deposits and rates paid for the years indicated:

 
| ** **                            | ** ** | **2003   Average** | ** ** | **2002   Average** | ** ** | **2001   Average** | ** ** |
|---------------------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|
| ** **                            | ** ** | **Balance**        | ** ** | **Rates   Paid**   | ** ** | **Balance**        | ** ** | **Rates   Paid** | ** ** | **Balance** | ** ** | **Rates   Paid** | ** ** |
|                                  |       |               |       |               |       |               |       |   |   |   |   |   |   |
| Non-interest bearing demand deposits  |       | $                  | 28,166     |               | N/A        |               | $          | 25,559 |   | N/A |   | $ | 28,052 |   | N/A |   |
| Interest bearing Demand & Savings |       | 67,047             |       | 0.47               | %          | 65,384             |       | 0.89 | % | 57,807 |   | 1.97 | % |
| Time Deposits                         |       | 58,224             |       | 2.87               | %          | 60,861             |       | 3.33 | % | 64,549 |   | 5.46 | % |
| Repurchased Agreements                |       | 2,852              |       | 3.51               | %          | 2,910              |       | 5.39 | % | 2,000 |   | 7.00 | % |
| TOTAL INTEREST-BEARING DEPOSITS       |       | $                  | 128,123    |               | 1.63       | %                  | $          | 129,155 |   | 2.14 | % | $ | 124,356 |   | 3.86 | % |

 

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

 

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

 

Thefollowing table shows the maturities of certificates of deposits of $100,000 ormore at December 31, 2003

 
| Under 3 months                                           |   | $      | 2,804  |   |
|----------------------------------------------------------|--------|--------|--------|--------|
| 3 to 6 months                                            |   | 1,991  |   |
| 6 to 12 months                                           |   | 3,270  |   |
| Over 12 months                                           |   | 8,723  |   |
|                                                     |   |   |   |
| TOTAL CERTIFICATES OF DEPOSIT OF $ 100,000  OR MORE |   | $      | 16,788 |   |
|                                                          |        |        |        |        |  |

 

26

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SHORT-TERMBORROWED FUNDS

 

Thefollowing table shows the Company’s short-term borrowings for 2003, 2002 and2001:

 
| ** **                                     | ** ** | **December,31**            | ** ** |
|------------------------------------------------|------------|----------------------------|------------|
| ** **                                     | ** ** | **2003**                   | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                     | ** ** | **(Dollars in Thousands)** | ** ** |
|                                           |       |                       |       |   |   |   |   |
| Securities sold under agreement to  repurchase |       | $                          | 3,000      |   | $ | 1,000 |   | $ | 2,000 |   |
|                                           |       |                       |       |   |   |   |   |
| TOTAL BORROWED FUNDS                           |       | $                          | 3,000      |   | $ | 1,000 |   | $ | 2,000 |   |

 

Theapproximate average interest rates, average amounts outstanding, and maximumamounts outstanding at any month-end for securities sold under agreements torepurchase are as follows:

 
| ** **                                    | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Average interest rates at December 31         |       | 4.00     | %          | 6.00     | %          | 7.00     | %          |
| Maximum amounts outstanding at any  month-end |       | $        | 3,000      |     | $          | 3,000    |       | $ | 2,000 |   |
| Average daily amount outstanding              |       | $        | 2,852      |     | $          | 2,910    |       | $ | 2,000 |   |
| Weighted average interest rates               |       | 3.51     | %          | 5.39     | %          | 7.00     | %          |

 

27

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INCOMETAXES

 

Applicableincome taxes for 2003 decreased $30,000 or 2.9%.  This followed a $154,000 or 17.0% increasefor 2002, and a $222,000 or 19.6% decrease for 2001.  Income taxes computed at the statutory ratedo not differ materially from income tax expense reported on the Company’sfinancial statements.  For a completediscussion of the Company’s tax position, refer to Note 11 of the Notes toConsolidated Financial Statements, presented elsewhere in this report.

 

RETURNON EQUITY AND ASSETS

 

Thefollowing chart shows various percentages relating to equity and assets:

 
| ** **                                                                        | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                        | ** ** | **2003**         | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                                                              |       |             |       |   |   |   |   |
| Percentage of net income to:                                                      |       |             |       |   |   |   |   |
| Average stockholders’ equity                                                 |       | 10.59            | %          | 10.37 | % | 10.36 | % |
| Average total assets                                                              |       | 1.09             | %          | 1.06 | % | 1.03 | % |
| Percentage of dividends declared per common  share to net income per common share |       | 58.15            | %          | 59.56 | % | 61.12 | % |
| Percentage of average stockholders’ equity  to average total assets          |       | 10.25            | %          | 10.24 | % | 9.95 | % |

 

28

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CAPITALRESOURCES

 

Cashdividends paid to stockholders during 2003 totaled $1,105,000, following$1,097,000 in 2002 and $1,075,000 for 2001. This represents a dividend pay-out ratio (dividends divided by net income)of 58% in 2003, 60% in 2002 and 61% in 2001. Cash dividends per share equaled $1.57 per share in 2003, $1. 53 pershare in 2002 and $1.34 per share in 2001. The Company is dependent upon dividends paid by its subsidiary bank tofund dividends to the stockholders and to cover other Holding Company operatingcosts.  The Company’s board of directorsconsiders historical financial performance, future prospects, and anticipatedneeds for capital in formulating the dividend payment policy.  Future dividends are dependent upon theCompany’s financial results, future prospects, capital requirements and generaleconomic conditions.

 

Oneof management’s primary objectives is to maintain a strong capitalposition.  Stockholders’ equity increased$597,000 or 3.5% in 2003. This increase resulted primarily from a net increasein retained earnings of $796,000 offset by a decrease in accumulated othercomprehensive income of $199,000.

 

Thepercentage of earnings reinvested in the Company (net income less dividends asa percentage of net income) for the years 2003, 2002 and 2001 was 42%, 40% and39%, respectively.  The internal capitalformation rate (net income less dividends as a percentage of averagestockholders’ equity) indicates the rate at which assets can grow whilemaintaining the current ratio of stockholders’ equity to assets.  The internal capital information rate was4.4% in 2003, 4.2% in 2002 and 4.0% in 2001.

 

REGULATORYCAPITAL

 

Asof December 31, 2003, the Company and its subsidiary bank were considered wellcapitalized by the Federal Reserve. Management is not aware of any changes which would affect thisclassification.  For more information,see Note 16 to the Consolidated Financial Statements.

 

Risk-basedcapital regulations require all banks and bank holding companies to have aminimum total risk-based capital ratio of 8% with half of the capital composedof core capital.  Conceptually,risk-based capital requirements assess the risk of a financial institution’sbalance sheet and off-balance sheet commitments in relation to itscapital.  Under the guidelines capitalstrength is measured in two tiers, which are used in conjunction withrisk-adjusted assets in determining the risk-based capital ratios.  The Company’s Tier I capital, which consistsof stockholders’ equity, adjusted for certain intangible assets, amounted to$17,755,000 at December 31, 2003, or 18.8% of total risk-weighted assets,compared to $16,943,000 at December 31, 2002, or 17.4% of total risk-weightedassets.  Tier II capital, or supplementarycapital, includes capital components such as qualifying allowance for loanlosses, and can equal up to 100% of an institution’s Tier I capital withcertain limitations.  The Company’s TierII capital amounted to $1,187,000 at December 31, 2003, or 1.26% of totalrisk-weighted assets, compared to $5,000 at December 31, 2002, or .05% of totalrisk-weighted assets.

 

TheCompany’s total consolidated risk-based capital was $18,942,000 at December 31,2003, or 10.75% of total risk-weighted assets, compared to $16,948,000, or9.79% of total risk-weighted assets as of December 31, 2002.  Additionally, risk-based capital guidelinesrequire a minimum leverage ratio (Tier I capital divided by average adjustedtotal consolidated assets) of 4%, which may be increased for institutions withhigher levels of risk or that are experiencing or anticipating significantgrowth.  The Company has not been advisedby any regulatory agency of a higher leverage ratio applicable to it.  As of December 31, 2003 and 2002, theCompany’s leverage ratio was 10.75% and 9.79% respectively; therefore, theCompany exceeded all current minimum capital requirements.

 

29

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COMMITMENTS

As of December 31, 2003,this table shows off-balance-sheet commitments classified by expiration date:

 
| ** **                          | ** ** | **1 Year**                 | ** ** | **1 to 3** | ** ** | **3 to 5** | ** ** | **Over 5** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|----------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **or Less**                | ** ** | **Years**  | ** ** | **Years**  | ** ** | **Years**  | ** ** | **Total**  | ** ** |
| ** **                          | ** ** | **(Dollars in Thousands)** | ** ** |
|                                |       |                       |       |       |       |       |       |       |       |       |       |
| Unused Lines of Credits             |       |                       |       |       |       |       |       |       |       |       |       |
| Home equity lines                   |       | $                          | 279        |       | $          | —     |       | $          | —     |       | $          | — |   | $ | 279 |   |
| Commercial and financial            |       | 1,250                      |       | —     |       | —     |       | —     |       | 1,250      |       |
| Other unused commitments            |       | 10,140                     |       | —     |       | —     |       | —     |       | 10,140     |       |
| Financial standby letters of credit |       | 1,027                      |       | —     |       | —     |       | —     |       | 1,027      |       |
|                                     |            |                            |            |            |            |            |            |            |            |            |            |  |  |  |  |  |

 

AMOUNTOF LOANS OUTSTANDING

The following table reflectsa summary of loans outstanding by classification at December 31 for the yearsindicated:

 
| ** **                             | ** ** | **December 31,**           | ** ** |
|----------------------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | **2003**                   | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
| ** **                             | ** ** | **(Dollars in Thousands)** | ** ** |
| Commercial, Financial and Agricultural |       | $                          | 40,125     |   | $ | 43,980 |   | $ | 39,706 |   | $ | 36,582 |   | $ | 32,936 |   |
| Real Estate Mortgage                   |       | 51,031                     |       | 52,503 |   | 55,532 |   | 56,282 |   | 55,437 |   |
| Installment loans to Individuals       |       | 10,458                     |       | 11,450 |   | 21,669 |   | 20,776 |   | 21,198 |   |
|                                   |       |                       |       |   |   |   |   |   |   |   |   |
| TOTAL LOANS OUTSTANDING                |       | $                          | 101,614    |   | $ | 107,933 |   | $ | 116,907 |   | $ | 113,640 |   | $ | 109,571 |   |

 

Thefollowing is a summary of loans outstanding as a percent of total loans as ofDecember 31:

 
| ** **                             | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|------------------|------------|
| ** **                             | ** ** | **2003**         | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
| Commercial, Financial and Agricultural |       | 39.49            | %          | 40.75 | % | 33.96 | % | 32.19 | % | 30.06 | % |
| Real Estate Mortgage                   |       | 50.22            | %          | 48.64 | % | 47.50 | % | 49.53 | % | 50.59 | % |
| Installment Loans to Individuals       |       | 10.29            | %          | 10.61 | % | 18.54 | % | 18.28 | % | 19.35 | % |
|                                   |       | 100.00           | %          | 100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % |

 

30

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Thefollowing table shows the maturity of 1-4 family residential loans, commercialand all other loans outstanding as of December 31, 2003:

 
| ** **                     | ** ** | **Less Than  One Year** | ** ** | **One Year to  Five Years** | ** ** | **Greater  Than Five  Years** | ** ** | **Total** | ** ** |
|--------------------------------|------------|-------------------------|------------|-----------------------------|------------|-------------------------------|------------|-----------|------------|
| One to Four Family Residential |       | $                       | 4,212      |                        | $          | 13,381                        |       | $         | 32,406     |   | $ | 49,999 |   |
| Commercial and Other           |       | 19,330                  |       | 17,468                      |       | 13,758                        |       | 50,556    |       |
| Total                          |       | $                       | 23,542     |                        | $          | 30,849                        |       | $         | 46,164     |   | $ | 100,555 |   |

 

Note: Schedule does not include loans innonaccrual status.

 

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LIQUIDITYMANAGEMENT

 

Liquiditymanagement involves the ability to meet the cash flow requirements ofdepositors wanting to withdraw funds and to have sufficient funds available tomeet borrowers’ credit needs.  In theopinion of management, the Company maintains sufficient liquidity to satisfythe needs of its customers.  To ensurethe Company is positioned to meet immediate and future cash demands, managementrelies on liquidity analysis, knowledge of business trends over past economiccycles and forecasts of future conditions.

 

Liquiditycan best be demonstrated by an analysis of the Company’s cash flows.  The primary source of cash flows for theCompany is operating activities. Operating activities provided $979,000 of liquidity for the year endedDecember 31, 2003, compared to providing $3,164,000 and $2,929,000 in 2002 and2001, respectively.  The principalelements of these operating flows are net income, increased for significantnon-cash expenses for the provision for loan losses and depreciation andamortization.  In 2003, 2002 and 2001,these funds were utilized primarily to fund increasing investments aggregating$62,262,000, $24,612,000 and $55,583,000, respectively.

 

Asecondary source of liquidity for the Company comes from investing activities,principally the maturities of investment securities.  During 2003, due to the continued lowinterest rate environment, maturities and calls of investment securitiesamounted to $55,832,000, compared to $19,925,000 in 2002 and $49,006,000 in2001.  As of December 31, 2003, theCompany had approximately $47,530,000 of investment securities that maturewithin 36 months.  It is anticipated thatas interest rates begin to stabilize, the rapidity of calls in investmentsecurities will decline.  For the yearended December 31, 2003, $62,262,000 of cash was redeployed in investmentsecurities.

 

THEEFFECTS OF INFLATION AND CHANGING PRICES

 

Inflationaffects the Company in several ways, but not to the same extent that it does acompany that makes large capital expenditures or has a large investment in inventory.  The Company’s asset and liability structureis primarily monetary in nature and, therefore, its financial results are moreaffected by changes in interest rates than by inflation.  However, the actions of the Federal ReserveBoard indicate that interest rate management will continue to be the primarytool used to curtail inflationary pressures. Inflation does affect noninterest expense, such as personnel expense andthe cost of services and supplies.  Tothe extent these higher costs cannot be recovered by pricing of loans anddeposits, these increases must be offset to the extent possible, by increasesin noninterest income and by control of noninterest expense.

 

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PERSHARE DATA BY QUARTER

 

The shares of Logan CountyBancShares, Inc. are infrequently traded in the local over-the counter marketand are not listed on any exchange or national association.  Management is not aware of any securitydealer, which makes a market in the stock; therefore, no active trading marketshould be deemed to exist.

 

The sales price for LoganCounty BancShares, Inc. stock is determined by negotiations between individualbuyers and sellers.  Although the Companykeeps no records of sale prices paid for the Company stock, and has no directknowledge of such prices, for purposes of presentation and based on theinformation available, Company’s management estimates the approximate marketvalue ranges for 2003 and 2003 to be as shown in the following table.  The number of stockholders at December 31,2003 was 401 and outstanding shares totaled 703,991, net of 26,000 treasuryshares.

 

PER SHARE DATA BY QUARTER

 
| ** **     | ** ** | ** **    | ** ** | ** ** | ** ** | **Estimated Sales Prices** | ** ** |
|----------------|------------|---------------|------------|------------|------------|----------------------------|------------|
| ** **     | ** ** | **Dividends** | ** ** | **2003**   | ** ** | **2002**                   | ** ** |
| ** **     | ** ** | **2003**      | ** ** | **2002**   | ** ** | **High**                   | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| Quarter        |       |          |       |       |       |                       |       |   |   |   |   |   |   |
| First Quarter  |       | $             | 0.35       |       | $          | 0.34                       |       | $ | 42.00 |   | $ | 42.00 |   | $ | 42.00 |   | $ | 42.00 |   |
| Second Quarter |       | 0.35          |       | 0.34       |       | 42.00                      |       | 42.00 |   | 42.00 |   | 42.00 |   |
| Third Quarter  |       | 0.35          |       | 0.34       |       | 42.00                      |       | 42.00 |   | 42.00 |   | 42.00 |   |
| Fourth Quarter |       | 0.51          |       | 0.50       |       | 42.00                      |       | 42.00 |   | 42.00 |   | 42.00 |   |
|           |       | $             | 1.57       |       | $          | 1.53                       |       |   |   |   |   |   |   |   |   |
|                |            |               |            |            |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

33

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ITEM 7A – QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

ASSETAND LIABILITY MANAGEMENT AND INTEREST RATE SENSITIVITY

 

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

 

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

 

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

 

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

 

34

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Thefollowing table presents the Company’s Interest Rate Sensitivity position atDecember 31, 2003:

 

INTEREST RATE SENSITIVEANALYSIS TABLE

 

(In Thousands of Dollars)

 
| **As of December 31, 2003**                                               | ** ** | **0-90** | ** ** | **91-180** | ** ** | **181-365** | ** ** | **Total  One  Year** | ** ** | **Over  One Year** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------|------------|----------|------------|------------|------------|-------------|------------|----------------------|------------|--------------------|------------|-----------|------------|
| Earning Assets                                                            |       |     |       |       |       |        |       |                 |       |               |       |      |       |
| Loans                                                                     |       | $        | 17,606     |       | $          | 2,572       |       | $                    | 3,364      |               | $          | 23,542    |       | $ | 78,073 |   | $ | 101,615 |   |
| Investments                                                               |       | 13,591   |       | 6,607      |       | 6,607       |       | 26,805               |       | 21,087             |       | 47,892    |       |
| Federal Funds Sold                                                        |       | 13,385   |       | 0          |       | 0           |       | 13,385               |       | 0                  |       | 13,385    |       |
|                                                                      |       |     |       |       |       |        |       |                 |       |               |       |      |       |
| Total Earning Assets                                                      |       | 44,582   |       | 9,179      |       | 9,971       |       | 63,732               |       | 99,160             |       | 162,892   |       |
|                                                                      |       |     |       |       |       |        |       |                 |       |               |       |      |       |
| Interest Bearing Liabilities                                              |       |     |       |       |       |        |       |                 |       |               |       |      |       |
| Demand Deposits                                                           |       | 21,735   |       | 0          |       | 0           |       | 21,735               |       | 0                  |       | 21,735    |       |
| 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    |       |
| Repurchase Agreements                                                     |       | 0        |       | 0          |       | 0           |       | 0                    |       | 3,000              |       | 3,000     |       |
|                                                                      |       |     |       |       |       |        |       |                 |       |               |       |      |       |
| Total Interest Bearing Liability                                          |       | 43,558   |       | 18,387     |       | 30,941      |       | 92,886               |       | 32,648             |       | 125,534   |       |
|                                                                      |       |     |       |       |       |        |       |                 |       |               |       |      |       |
| Interest Sensitivity Gap                                                  |       | $        | 1,024      |       | $          | (9,208      | )          | $                    | (20,970    | )                  | $          | (29,154   | )          | $ | 66,512 |   | $ | 27,358 |   |
|                                                                      |       |     |       |       |       |        |       |                 |       |               |       |      |       |
| Cumulative Gap                                                            |       | $        | 1,024      |       | $          | (8,184      | )          | $                    | (29,154    | )                  | $          | (29,154   | )          | $ | 37,358 |   | $ | 37,358 |   |
|                                                                      |       |     |       |       |       |        |       |                 |       |               |       |      |       |
| Rate Sensitive Assets/Rate Sensitive  Liabilities (Cumulative Percentage) |       | 102.35   | %          | 49.92      | %          | 32.23       | %          | 68.61                | %          | 149.08             | %          | 129.76    | %          |

 

35

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ITEM 8 – FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors and Stockholders of Logan County BancShares, Inc.

 

Wehave audited the accompanying consolidated balance sheet of Logan CountyBancShares, Inc. and subsidiary as of December 31, 2003, and the relatedconsolidated statements of income, changes in stockholders’ equity, and cashflows for the year then ended.  Theseconsolidated financial statements are the responsibility of the company’smanagement.  Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudit.  The consolidated balance sheet asof December 31, 2002, and the related consolidated statements of income,changes in stockholders’ equity, and cash flows for each of the two years inthe period ended December 31, 2002, were audited by other auditors whose reportdated February 26, 2003, expressed an unqualified opinion on those statements.

 

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

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Logan CountyBancShares, Inc. and subsidiary, as of December 31, 2003, and the results oftheir operations and their cash flows for the year then ended, in conformitywith accounting principles generally accepted in the United States of America.

 
| /s/  S. R. SNODGRASS, A.C. |   |
|----------------------------|--------|
|                       |
| Wheeling,  West Virginia   |
| October  7, 2004           |

 

 

36

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**Logan County BancShares, Inc. andSubsidiary**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                           | ** ** | **December 31,** | ** **  |
|------------------------------------------------------------------------------------------------------|------------|------------------|-------------|
| ** **                                                                                           | ** ** | **2003**         | ** **  | **2002** | ** ** |
|                                                                                                 |       |             |        |   |   |
| **ASSETS**                                                                                           |       |             |        |   |   |
| Cash and cash equivalents:                                                                           |       |             |        |   |   |
| Cash and due from banks                                                                              |       | $                | 5,342,353   |   | $ | 5,597,679 |   |
| Federal funds sold                                                                                   |       | 13,385,000       |        | 11,370,000 |   |
| Total cash and cash equivalents                                                                      |       | 18,727,353       |        | 16,967,679 |   |
|                                                                                                 |       |             |        |   |   |
| Investment securities:                                                                               |       |             |        |   |   |
| Available-for-sale (at fair value)                                                                   |       | 47,891,978       |        | 41,224,138 |   |
|                                                                                                 |       |             |        |   |   |
| 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 |   |
|                                                                                                 |       | 101,614,707      |        | 107,932,591 |   |
| Less allowance for loan losses                                                                       |       | (1,581,414       | )           | (1,618,632 | ) |
| Net loans                                                                                            |       | 100,033,293      |        | 106,313,959 |   |
|                                                                                                 |       |             |        |   |   |
| Premises and equipment, net                                                                          |       | 3,103,002        |        | 3,217,324 |   |
| Accrued income receivable                                                                            |       | 843,052          |        | 811,373 |   |
| Bank owned life insurance                                                                            |       | 2,011,532        |        | — |   |
| Other assets                                                                                         |       | 992,800          |        | 794,556 |   |
|                                                                                                 |       |             |        |   |   |
| Total assets                                                                                         |       | $                | 173,603,010 |   | $ | 169,329,029 |   |
|                                                                                                 |       |             |        |   |   |
| **LIABILITIES**                                                                                      |       |             |        |   |   |
|                                                                                                 |       |             |        |   |   |
| Noninterest bearing deposits:                                                                        |       |             |        |   |   |
| Demand                                                                                               |       | $                | 29,721,377  |   | $ | 24,706,436 |   |
| Interest bearing deposits:                                                                           |       |             |        |   |   |
| Demand                                                                                               |       | 21,735,171       |        | 21,851,348 |   |
| Savings                                                                                              |       | 43,203,543       |        | 44,864,222 |   |
| Time                                                                                                 |       | 57,594,652       |        | 58,651,287 |   |
| Total deposits                                                                                       |       | 152,254,743      |        | 150,073,293 |   |
| Repurchase agreements                                                                                |       | 3,000,000        |        | 1,000,000 |   |
| Other liabilities                                                                                    |       | 558,685          |        | 1,063,135 |   |
| Total liabilities                                                                                    |       | 155,813,428      |        | 152,136,428 |   |
|                                                                                                 |       |             |        |   |   |
| **STOCKHOLDERS'  EQUITY**                                                                            |       |             |        |   |   |
|                                                                                                 |       |             |        |   |   |
| Common stock - 780,000 shares authorized at  $1.67 par value: 703,991 shares issued in 2003 and 2002 |       | 1,300,000        |        | 1,300,000 |   |
| Treasury Stock- 76,000 shares at cost                                                                |       | (1,406,198       | )           | (1,406,198 | ) |
| Surplus                                                                                              |       | 2,408,426        |        | 2,408,426 |   |
| Retained earnings                                                                                    |       | 15,425,806       |        | 14,630,049 |   |
| Accumulated other comprehensive income                                                               |       | 61,548           |        | 260,324 |   |
| Total stockholders' equity                                                                           |       | 17,789,582       |        | 17,192,601 |   |
|                                                                                                 |       |             |        |   |   |
| Total liabilities and stockholders' equity                                                           |       | $                | 173,603,010 |   | $ | 169,329,029 |   |

 

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

 

37

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**Logan County BancShares, Inc. andSubsidiary**

**CONSOLIDATED STATEMENTS OF INCOME**

 
| ** **                                                    | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **2003**                    | ** ** | **2002** | ** ** | **2001** | ** ** |
| **INTEREST INCOME**                                           |       |                        |       |   |   |   |   |
| Interest and fees on loans                                    |       |                        |       |   |   |   |   |
| Taxable                                                       |       | $                           | 7,578,902  |   | $ | 8,518,297 |   | $ | 9,981,814 |   |
| Investment securities:                                        |       |                        |       |   |   |   |   |
| Available-for-sale                                            |       | 1,005,086                   |       | 1,363,725 |   | 1,354,163 |   |
| Interest on 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 POSSIBLE LOAN LOSSES**                        |       | 2,850                       |       | 533,819 |   | 700,000 |   |
|                                                          |       |                        |       |   |   |   |   |
| Net interest income after provision  for possible loan losses |       | 6,676,397                   |       | 6,789,877 |   | 6,588,699 |   |
|                                                          |       |                        |       |   |   |   |   |
| **NONINTEREST INCOME**                                        |       |                        |       |   |   |   |   |
| Service charges and other fees                                |       | 857,099                     |       | 656,160 |   | 628,220 |   |
| Securities gains, net                                         |       | 148                         |       | — |   | 6,248 |   |
| Other operating income                                        |       | 129,021                     |       | 148,407 |   | 72,694 |   |
| Total noninterest income                                      |       | 986,268                     |       | 804,567 |   | 707,162 |   |
|                                                          |       |                        |       |   |   |   |   |
| **NONINTEREST EXPENSE**                                       |       |                        |       |   |   |   |   |
| Salary and employee benefits                                  |       | 2,377,040                   |       | 2,321,908 |   | 2,216,849 |   |
| Taxes - other                                                 |       | 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 and 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                                      |       | 710,273                     |       | 710,734 |   | 839,321 |   |
| Total noninterest expense                                     |       | 4,728,283                   |       | 4,688,835 |   | 4,630,650 |   |
|                                                          |       |                        |       |   |   |   |   |
| Income before income taxes                                    |       | 2,934,382                   |       | 2,905,609 |   | 2,665,211 |   |
|                                                          |       |                        |       |   |   |   |   |
| **INCOME TAXES**                                              |       | 1,033,359                   |       | 1,063,777 |   | 909,590 |   |
|                                                          |       |                        |       |   |   |   |   |
| Net income                                                    |       | $                           | 1,901,023  |   | $ | 1,841,832 |   | $ | 1,755,621 |   |
|                                                          |       |                        |       |   |   |   |   |
| **WEIGHTED AVERAGE SHARES OUTSTANDING**                       |       | 703,991                     |       | 716,991 |   | 716,991 |   |
|                                                          |       |                        |       |   |   |   |   |
| **EARNINGS PER COMMON SHARE**                                 |       | $                           | 2.70       |   | $ | 2.57 |   | $ | 2.45 |   |

 

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

 

38

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**LoganCounty BancShares, Inc. and Subsidiary**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY**

 
| ** **                                                                            | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | ** **   | ** ** | **Accumulated**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|--------------|------------|--------------|------------|--------------------|------------|-------------|------------|------------|------------|
| ** **                                                                            | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | ** **   | ** ** | **Other**          | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                                                                            | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | ** **   | ** ** | **Compre-**        | ** ** | **Compre-** | ** ** | ** ** | ** ** |
| ** **                                                                            | ** ** | **Common** | ** ** | ** **  | ** ** | **Retained** | ** ** | **Treasury** | ** ** | **hensive**        | ** ** | **hensive** | ** ** | ** ** | ** ** |
| ** **                                                                            | ** ** | **Stock**  | ** ** | **Surplus** | ** ** | **Earnings** | ** ** | **Stock**    | ** ** | **Income  (Loss)** | ** ** | **Income**  | ** ** | **Total**  | ** ** |
| **BALANCE,  DECEMBER 31, 2000**                                                       |       | $          | 1,300,000  |        | $          | 2,408,426    |       | $            | 13,236,733 |               | $          | (860,198    | )          | $          | (70,745    | ) |   |   | $ | 16,014,216 |   |
|                                                                                  |       |       |       |        |       |         |       |         |       |               |       |        |       |       |       |
| Comprehensive  income:                                                                |       |       |       |        |       |         |       |         |       |               |       |        |       |       |       |
| Net income - 2001                                                                     |       | —     |       | —      |       | 1,755,621    |       | —       |       | —             |       | $           | 1,755,621  |       | 1,755,621  |   |
| Other  comprehensive income, net of tax                                               |       |       |       |        |       |         |       |         |       |               |       |        |       |       |       |
| Unrealized gains  on securities available-for-sale                                    |       | —     |       | —      |       | —       |       | —       |       | 105,779            |       | 105,779     |       | 105,779    |       |
|                                                                                  |       |       |       |        |       |         |       |         |       |               |       |        |       |       |       |
| Comprehensive  income                                                                 |       |       |       |        |       |         |       |         |       |               |       | $           | 1,861,400  |       |       |   |
|                                                                                  |       |       |       |        |       |         |       |         |       |               |       |        |       |       |       |
| Cash dividend  ($1.34 per share)                                                      |       | —     |       | —      |       | (1,075,487   | )          | —       |       | —             |       |        |       | (1,075,487 | )          |
|                                                                                  |       |       |       |        |       |         |       |         |       |               |       |        |       |       |       |
| **BALANCE,  DECEMBER 31, 2001**                                                       |       | 1,300,000  |       | 2,408,426   |       | 13,916,867   |       | (860,198     | )          | 35,034             |       |        |       | 16,800,129 |       |
|                                                                                  |       |       |       |        |       |         |       |         |       |               |       |        |       |       |       |
| **Correction  of error**                                                              |       |       |       |        |       | (31,655      | )          |         |       |               |       |        |       | (31,655    | )          |
|                                                                                  |       |       |       |        |       |         |       |         |       |               |       |        |       |       |       |
| Comprehensive  income:                                                                |       |       |       |        |       |         |       |         |       |               |       |        |       |       |       |
| Net income - 2002                                                                     |       | —     |       | —      |       | 1,841,833    |       |         |       | —             |       | $           | 1,841,833  |       | 1,841,833  |   |
| Other  comprehensive income, net of tax                                               |       |       |       |        |       |         |       |         |       |               |       |        |       |       |       |
| Unrealized gains  on securities net of reclassification adjustment available-for-sale |       | —     |       | —      |       | —       |       |         |       | 225,290            |       | 225,290     |       | 225,290    |       |
|                                                                                  |       |       |       |        |       |         |       |         |       |               |       |        |       |       |       |
| Comprehensive  income                                                                 |       |       |       |        |       |         |       |         |       |               |       | $           | 2,067,123  |       |       |   |
|                                                                                  |       |       |       |        |       |         |       |         |       |               |       |        |       |       |       |
| Purchase of  13,000 shares of common stock @ $42 per share                            |       |       |       |        |       |         |       | (546,000     | )          |               |       |        |       | (546,000   | )          |
|                                                                                  |       |       |       |        |       |         |       |         |       |               |       |        |       |       |       |
| Cash dividend  ($1.53 per share)                                                      |       | —     |       | —      |       | (1,096,996   | )          | —       |       | —             |       |        |       | (1,096,996 | )          |
|                                                                                  |       |       |       |        |       |         |       |         |       |               |       |        |       |       |       |
| **BALANCE,  DECEMBER 31, 2002**                                                       |       | 1,300,000  |       | 2,408,426   |       | 14,630,049   |       | (1,406,198   | )          | 260,324            |       |        |       | 17,192,601 |       |
|                                                                                  |       |       |       |        |       |         |       |         |       |               |       |        |       |       |       |
| Comprehensive  income:                                                                |       |       |       |        |       |         |       |         |       |               |       |        |       |       |       |
| Net income - 2003                                                                     |       | —     |       | —      |       | 1,901,023    |       | —       |       | —             |       | $           | 1,901,023  |       | 1,901,023  |   |
| Other  comprehensive income, net of tax                                               |       |       |       |        |       |         |       |         |       |               |       |        |       |       |       |
| Unrealized gains  (losses) on securities available-for-sale                           |       | —     |       | —      |       | —       |       | —       |       | (198,776           | )          | (198,776    | )          | (198,776   | )          |
|                                                                                  |       |       |       |        |       |         |       |         |       |               |       |        |       |       |       |
| Comprehensive  income                                                                 |       |       |       |        |       |         |       |         |       |               |       | $           | 1,702,247  |       |       |   |
|                                                                                  |       |       |       |        |       |         |       |         |       |               |       |        |       |       |       |
| Cash dividend ($1.57  per share)                                                      |       | —     |       | —      |       | (1,105,266   | )          | —       |       | —             |       |        |       | (1,105,266 | )          |
|                                                                                  |       |       |       |        |       |         |       |         |       |               |       |        |       |       |       |
| **BALANCE,  DECEMBER 31, 2003**                                                       |       | $          | 1,300,000  |        | $          | 2,408,426    |       | $            | 15,425,806 |               | $          | (1,406,198  | )          | $          | 61,548     |   |   |   | $ | 17,789,582 |   |

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

39

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **Year  Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                         | ** ** | **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: |       |                         |       |   |   |   |   |
| Allowance for loan losses                                                          |       | 2,850                        |       | 533,819 |   | 700,000 |   |
| Depreciation and amortization                                                      |       | 259,804                      |       | 273,928 |   | 269,956 |   |
| Provision for deferred taxes                                                       |       | (48,707                      | )          | (130,620 | ) | (213,669 | ) |
| Gain on sale of securities                                                         |       | (147                         | )          | — |   | (6,248 | ) |
| Increase in value of bank owned life  insurance                                    |       | (11,532                      | )          | — |   | — |   |
| Premium amortization and accretion on  investment securities                       |       | (329,208                     | )          | 66,565 |   | (3,356 | ) |
| Net change in accrued income and other  assets                                     |       | (229,923                     | )          | 196,970 |   | 503,222 |   |
| Net change in other liabilities                                                    |       | (504,450                     | )          | 381,009 |   | (80,276 | ) |
| Other, net                                                                         |       | (61,178                      | )          | — |   | 4,028 |   |
| Net cash provided by operating activities                                          |       | 978,532                      |       | 3,163,504 |   | 2,929,278 |   |
|                                                                               |       |                         |       |   |   |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                           |       |                         |       |   |   |   |   |
| Proceeds from sales/calls of securities  available-for-sale                        |       | 35,831,883                   |       | 19,925,000 |   | 8,006,248 |   |
| Proceeds from maturities of securities  available-for-sale                         |       | 20,000,000                   |       | — |   | 41,000,000 |   |
| Purchases of securities available-for-sale                                         |       | (62,262,121                  | )          | (24,612,311 | ) | (55,583,423 | ) |
| Purchase of bank owned life insurance                                              |       | (2,000,000                   | )          | — |   | — |   |
| Net change in loans                                                                |       | 6,280,678                    |       | 8,974,822 |   | (3,266,801 | ) |
| Purchase of bank premises and equipment                                            |       | (145,482                     | )          | (107,713 | ) | (59,493 | ) |
| Net cash provided by (used in) investing  activities                               |       | (2,295,042                   | )          | 4,179,798 | ) | (9,903,469 | )  |
|                                                                               |       |                         |       |   |   |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                           |       |                         |       |   |   |   |   |
| Net change in deposits                                                             |       | 2,181,450                    |       | (1,954,836 | ) | 13,305,340 |   |
| Net change in repurchase agreements                                                |       | 2,000,000                    |       | (1,000,000 | ) | — |   |
| Purchase of Treasury Stock, at cost                                                |       | —                       |       | (546,000 | ) | — |   |
| Dividends paid                                                                     |       | (1,105,266                   | )          | (1,096,996 | ) | (1,075,487 | ) |
| Net cash provided by (used in) financing  activities                               |       | 3,076,184                    | )          | (4,597,832 | )  | 12,229,853 | ) |
|                                                                               |       |                         |       |   |   |   |   |
| **INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**                               |       | 1,759,674                    |       | 2,745,470 |   | 5,255,662 |   |
|                                                                               |       |                         |       |   |   |   |   |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF****YEAR**                                |       | 16,967,679                   |       | 14,222,209 |   | 8,966,547 |   |
|                                                                               |       |                         |       |   |   |   |   |
| **CASH AND CASH EQUIVALENTS, END OF YEAR**                                         |       | $                            | 18,727,353 |   | $ | 16,967,679 |   | $ | 14,222,209 |   |
|                                                                               |       |                         |       |   |   |   |   |
| **Supplemental Disclosures:**                                                      |       |                         |       |   |   |   |   |
| Cash paid for interest                                                             |       | $                            | 2,097,994  |   | $ | 2,836,084 |   | $ | 4,876,027 |   |
| Cash paid for income taxes                                                         |       | $                            | 1,107,160  |   | $ | 1,186,510 |   | $ | 1,118,983 |   |

 

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

 

40

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

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2003, 2002, AND 2001**

 

**NOTE 1– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

Nature of Operations – Logan County BancShares, Inc. (the “Company”) is a West Virginiacorporation.  The Company provides avariety of banking services to individuals and businesses through the branchnetwork of its subsidiary, Logan Bank and Trust (the “Bank”).  The Bank operates four full service locationsin Logan County, West Virginia and one in Lincoln County, West Virginia.  Primary deposit products consist of checkingaccounts, savings accounts, and certificates of deposit.  Primary lending products consist of commercialand residential real estate loans, consumer loans, and business loans.

 

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

 

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

 

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

 

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

 

*Securities Available-for-Sale*:  Securities available-for-saleconsist of bonds, notes, debentures, and certain equity securities notclassified as securities held-to-maturity. These securities are carried at their fair value.  Unrealized gains and losses, net of tax, arereported as a net amount in a separate component of stockholders’ equity untilrealized.

 

*Securities Held-to-Maturity:*  Bonds, notes, and debenturesfor which the Bank has the positive intent and ability to hold to maturity arereported at cost, adjusted for amortization of premiums and accretion ofdiscounts, which are recognized in interest income using the Constant YieldMethod over the period to maturity.

 

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

 

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

 

41

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

 

Certainloan origination fees and direct origination costs are capitalized andrecognized as an adjustment of the yield on the related loan.  The total of such fees and costs are recordedas a reduction to Loan.

 

Allowance for Loan Losses – The allowance for possible loan losses represents the amount whichmanagement estimates is adequate to provide for probable losses inherent in itsloan portfolio. The allowance method is used in providing for loan losses.Accordingly, all loan losses are charged to the allowance, and all recoveriesare credited to it. The allowance for loan losses is established through aprovision for loan losses which is charged to operations. The provision isbased upon management’s periodic evaluation of individual loans, the overallrisk characteristics of the various portfolio segments, past experience withlosses, the impact of economic conditions on borrowers, and other relevantfactors. The estimates used in determining the adequacy of the allowance forloan losses including the amounts and timing of future cash flows expected onimpaired loans, are particularly susceptible to significant change in the nearterm.  This is due to the variability ofkey variables.

 

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

 

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

 

42

----

 

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

 

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

###  

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

 

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

 

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

 

Earnings Per Common Share – Earnings per common share are calculated by dividing net income bythe weighted-average number of common stock outstanding during the year.  The Company had no securities which would beconsidered potential common stock.

 

Equity – InDecember 2002, the Company purchased 13,000 shares of Treasury Stock, bringingthe total shares held in Treasury to 76,000. After the purchase, 703,991 shares of the Company’s stock remainedoutstanding, net of treasury shares.

 

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

 

Reclassifications – Certain amounts in 2002 have beenreclassified to conform to the 2003 presentation.

 

43

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**NOTE 2– INVESTMENT SECURITIES**

 

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

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

 
| ** **                      | ** ** | **December 31, 2002** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **Amortized  Cost**   | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
| Securities  available-for-sale: |       |                  |       |   |   |   |   |   |   |
| Federal agency securities       |       | $                     | 36,532,502 |   | $ | 284,636 |   | $ | — |   | $ | 36,817,120 |   |
| U.S. Treasury securities        |       | 3,971,774             |       | 103,226 |   | 18 |   | 4,075,000 |   |
| Equity securities               |       | 263,152               |       | 68,866 |   | — |   | 332,018 |   |
|                            |       |                  |       |   |   |   |   |   |   |
| Total                           |       | $                     | 40,767,428 |   | $ | 456,728 |   | $ | 18 |   | $ | 41,224,138 |   |

 

TheCompany’s investment securities portfolio contains unrealized losses on U.S.Government agency securities, which are generally viewed as having the impliedguarantee of the U.S. government.  Noneof the individual securities have been in an unrealized loss position for morethan twelve months as of December 31, 2003.

 

Ona monthly basis, the Company evaluates the severity and duration of impairmentfor its investment securities portfolio unless the Company has the ability tohold the security to maturity without incurring a loss.  Generally, impairment is considered otherthan temporary when an investment security has sustained a decline in marketvalue of ten percent or more for a period of six months.

 

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

 

Theamortized cost and estimated market value of investment in debt securities atDecember 31, 2003, by contractual maturity, are shown below.  Expected maturities will differ fromcontractual maturities because borrowers may have the right to call or prepayobligations with or without call as prepayment penalties.

 

44

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**NOTE 2 –INVESTMENT SECURITIES (CONTINUED)**

 
| ** **                   | ** ** | **Securities  Available-for-Sale** | ** ** |
|------------------------------|------------|------------------------------------|------------|
| ** **                   | ** ** | **Amortized  Cost**                | ** ** | **Estimated  Fair  Value** | ** ** |
|                         |       |                               |       |   |   |
| Due in 1 year or less        |       | $                                  | 26,784,408 |   | $ | 26,804,331 |   |
| Due from 1 year to 5 years   |       | 20,736,439                         |       | 20,736,360 |   |
| Due from 5 years to 10 years |       | —                             |       | — |   |
| Due after 10 years           |       | —                             |       | — |   |
| Equity securities            |       | 263,152                            |       | 351,287 |   |
|                         |       |                               |       |   |   |
| Total                        |       | $                                  | 47,783,999 |   | $ | 47,891,978 |   |

 

Theproceeds from sales of investment securities available for sale were$4,976,883, resulting in gross gains of $147 and no losses.  No securities were sold in 2002 or 2001.  Gross gains of $6,248 were realized in 2001as the result of securities called prior to maturity.

 

Thepar value of securities pledged to secure public deposits and for otherpurposes amounted to $27,012,750 in 2003 and $26,056,196 in 2002.

 

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

 

Asa condition of membership, the Bank is required to maintain average balanceswith the Federal Reserve Bank.  Theaverage required reserve balances were $1,378,000 and $1,131,000 for 2003 and2002, respectively.  The Bank has variousclaims and actions pending at December 31, 2003, arising in the ordinary courseof business.  It is the opinion of managementand legal counsel that such litigation will not materially affect the Bank’sfinancial position or earnings.

 

**NOTE 4– LOANS**

 

Majorclassifications of loans at December 31, 2003 and 2002, are as follows:

 
| ** **                     | ** ** | **2003**    | ** **  | **2002**    | ** ** |
|--------------------------------|------------|-------------|-------------|-------------|------------|
|                           |       |        |        |        |       |
| 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                          |       | 101,614,707 |        | 107,932,591 |       |
| Less allowance for loan losses |       | 1,581,414   |        | 1,618,632   |       |
|                           |       |        |        |        |       |
| Net loans                      |       | $           | 100,033,293 |        | $          | 106,313,959 |   |

 

45

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**NOTE 4 – LOANS (CONTINUED)**

 

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

 
| ** **                                     | ** ** | **December  31,** | ** ** |
|------------------------------------------------|------------|-------------------|------------|
| ** **                                     | ** ** | **2003**          | ** ** | **2002** | ** ** |
|                                           |       |              |       |   |   |
| Impaired loans without a valuation  allowance  |       | $                 | 751,993    |   | $ | 203,589 |   |
| Impaired loans with a valuation allowance      |       | 944,421           |       | 854,889 |   |
|                                           |       |              |       |   |   |
| Total impaired loans                           |       | $                 | 1,696,414  |   | $ | 1,058,478 |   |
|                                           |       |              |       |   |   |
| Valuation allowance related to impaired  loans |       | $                 | 426,940    |   | $ | 504,554 |   |
|                                           |       |              |       |   |   |
| Total non-accrual loans                        |       | $                 | 992,428    |   | $ | 1,705,845 |   |

 
| ** **                                    | ** ** | **December  31,** | ** ** |
|-----------------------------------------------|------------|-------------------|------------|
| ** **                                    | ** ** | **2003**          | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                          |       |              |       |   |   |   |   |
| Average investment in impaired loans          |       | $                 | 1,377,446  |   | $ | 992,980 |   | $ | 1,250,972 |   |
|                                          |       |              |       |   |   |   |   |
| Interest income recognized on impaired  loans |       | $                 | 44,693     |   | $ | 50,741 |   | $ | 45,357 |   |

 

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

 

Hadthe above loans not been placed on a non-accrual status, income for the Companywould have increased approximately $49,621, $89,407 and $55,753 for 2003, 2002,and 2001, respectively.

 

**NOTE 5– ALLOWANCE FOR LOAN LOSSES**

 

Activityin the allowance for loan losses is summarized as follows:

 
| ** **                             | ** ** | **December  31,** | ** ** |
|----------------------------------------|------------|-------------------|------------|
| ** **                             | ** ** | **2003**          | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                   |       |              |       |   |   |   |   |
| Balance at beginning of year           |       | $                 | 1,618,632  |   | $ | 1,152,777 |   | $ | 702,008 |   |
| Additions charged to operating expense |       | 2,852             |       | 533,818 |   | 700,000 |   |
| Recoveries                             |       | 43,607            |       | 29,565 |   | 7,890 |   |
| Total                                  |       | 1,665,091         |       | 1,716,160 |   | 1,409,898 |   |
| Less loans charged-off                 |       | 83,677            |       | 97,528 |   | 257,121 |   |
|                                   |       |              |       |   |   |   |   |
| Balance at end of year                 |       | $                 | 1,581,414  |   | $ | 1,618,632 |   | $ | 1,152,777 |   |

 

46

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**NOTE 6 – RELATED PARTY TRANSACTIONS**

 

Directorsand officers of the Company and its subsidiaries, and their associates, werecustomers of, and had other transactions with the Bank in the normal course ofbusiness. All loans and commitments included in such transactions were made onsubstantially the same terms, including interest and collateral, as thoseprevailing at the time for comparable transactions with other persons and donot involve more than the normal risk of collectibility.  Such loans totaled $3,385,958 at December 31,2003, and $3,811,861 at December 31, 2002.

 

Thefollowing is an analysis of loan activity to directors, executive officers, andassociates of the Company and its subsidiary for 2003:

 
| ** **                   | ** ** | ** ** | ** ** |
|------------------------------|------------|------------|------------|
| Balance, January 1           |       | $          | 3,811,861  |   |
| New loans during the period  |       | 3,724,726  |       |
| Repayments during the period |       | (4,150,629 | )          |
|                         |       |       |       |
| Ending balance               |       | $          | 3,385,958  |   |

 

**NOTE 7– BANK PREMISES AND EQUIPMENT**

 

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

 
| ** **                         | ** ** | ** **        | ** ** | **Original  Useful Life  Years** | ** ** |
|------------------------------------|------------|-------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **December  31,** | ** ** | ** **                       |
| ** **                         | ** ** | **2003**          | ** ** | **2002**                         | ** ** | ** ** |
|                               |       |              |       |                             |       |   |   |
| Land                               |       | $                 | 949,972    |                             | $          | 949,972 |   |   |   |
| Banking house                      |       | 3,303,308         |       | 3,277,794                        |       | 10 – 40 |   |
| Furniture, fixtures, and equipment |       | 2,564,916         |       | 2,445,398                        |       | 3 – 20 |   |
| Total                              |       | 6,818,196         |       | 6,673,164                        |       |   |   |
| Less accumulated depreciation      |       | 3,715,194         |       | 3,455,840                        |       |   |   |
|                               |       |              |       |                             |       |   |   |
| Net bank premises and equipment    |       | $                 | 3,103,002  |                             | $          | 3,217,324 |   |   |   |

 

Chargesto operations for depreciation amounted to $259,804, $273,928, and $269,956 in2003, 2002, and 2001, respectively. Expenditures for maintenance and repairs were charged against operationsas incurred.

 

**NOTE 8– OPERATING LEASE COMMITMENTS**

 

TheCompany has entered into lease agreements for certain premises at three of itsfacility locations.  Future minimum leasepayments under the leases amount to $21,400 per year for each of the 5 yearssubsequent to December 31, 2003.

 

47

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**NOTE 9– DEPOSITS**

 

Thefollowing is a summary of interest-bearing deposits, by type, as of December31:

 
| ** **                                              | ** ** | **2003**   | ** **  | **2002**   | ** ** |
|---------------------------------------------------------|------------|------------|-------------|------------|------------|
|                                                    |       |       |        |       |       |
| NOW and Super NOW accounts                              |       | $          | 17,661,908  |       | $          | 17,356,352 |   |
| Money market accounts                                   |       | 4,073,263  |        | 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                                                   |       | $          | 122,533,366 |       | $          | 125,366,857 |   |

 

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

 

Amaturity distribution of time certificates of deposit of $100,000 or more atDecember 31, 2003, follows:

 
| ** **                | ** ** | **Amount** | ** ** | **Percent** | ** ** |
|---------------------------|------------|------------|------------|-------------|------------|
|                      |       |       |       |        |       |
| Three months or less      |       | $          | 2,804,125  |        | 16.7       |   |
| Three through six months  |       | 1,990,932  |       | 11.8        |       |
| Six through twelve months |       | 3,269,615  |       | 19.5        |       |
| Over twelve months        |       | 8,722,827  |       | 52.0        |       |
|                      |       |       |       |        |       |
| Total                     |       | $          | 16,787,499 |        | 100.0      |   |

 

AtDecember 31, 2003, the scheduled maturities 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 |   |
|          |   |       |       |

 

48

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**NOTE 10– REPURCHASE AGREEMENTS**

 

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

 
| ** **                            | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|---------------------------------------|------------|-----------|------------|-----------|------------|
|                                  |       |      |       |      |       |
| Balance at end of year                |       | $         | 3,000,000  |      | $          | 1,000,000 |   |
| Average balance during the year       |       | 2,852,461 |       | 2,910,324 |       |
| Maximum month-end balance             |       | 3,000,000 |       | 3,000,000 |       |
| Weighted-average rate during the year |       | 3.511     | %          | 5.377     | %          |
| Weighted-average rate at December 31  |       | 3.580     | %          | 2.250     | %          |
|                                       |            |           |            |           |            |  |  |

 

**NOTE 11– INCOME TAX**

 

Theprovisions for federal income taxes for the years ended December 31, 2003,2002, and 2001, were less than the respective amounts that would result fromapplying the statutory federal and state income tax rates due primarily to theBank’s investment income and expense accruals.

 

Theprovisions for income taxes at December 31 consist of:

 
| ** **         | ** ** | **2003** | ** ** | **2002** | ** ** | **2001**  | ** ** |
|--------------------|------------|----------|------------|----------|------------|-----------|------------|
|               |       |     |       |     |       |      |       |
| Current            |       | $        | 1,082,066  |     | $          | 1,194,397 |       | $ | 1,123,259 |   |
| Deferred           |       | (48,707  | )          | (130,620 | )          | (213,669  | )          |
|               |       |     |       |     |       |      |       |
| Income tax expense |       | $        | 1,033,359  |     | $          | 1,063,777 |       | $ | 909,590 |   |

 

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

 
| ** **                                          | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Items giving rise to  deferred tax assets:          |       |       |       |       |       |
| Allowance for loan losses in excess of tax  reserve |       | $          | 483,275    |       | $          | 588,240 |   |
| Deferred compensation                               |       | 26,808     |       | —     |       |
| Other                                               |       | 62,629     |       | —     |       |
| Total deferred tax assets                           |       | 572,712    |       | 588,240    |       |
| Items giving rise to deferred tax  liabilities:     |       |       |       |       |       |
|   Property and equipment                  |       | (94,893    | )          | (175,141   | )          |
|   Investment accretion                    |       | (16,013    | )          | (14,830    | )          |
| Other                                               |       | —     |       | (25,476    | )          |
| Unrealized gain on securities available for  sale   |       | (46,431    | )          | (196,385   | )          |
| Total deferred tax liabilities                      |       | (157,337   | )          | (411,832   | )          |
|                                                |       |       |       |       |       |
| Net deferred tax asset                              |       | $          | 415,375    |       | $          | 176,408 |   |

 

49

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**NOTE 11 – INCOME TAX (CONTINUED)**

 

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

 
| ** **                                           | ** ** | **2003**   | ** ** | **2002**    | ** ** | **2001**   | ** ** |
|------------------------------------------------------|------------|------------|------------|-------------|------------|------------|------------|
| ** **                                           | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
|                                                 |       |       |       |        |       |       |       |   |   |   |   |   |   |
| Computed tax at statutory federal rate               |       | $          | 997,690    |        | 34.0       | %          | $          | 987,907 |   | 34.0 | % | $ | 906,172 |   | 34.0 | % |
| Plus state income taxes net of federal tax  benefits |       | 67,595     |       | 2.3         |       | 74,346     |       | 2.6 |   | 56,716 |   | 2.1 |   |
|                                                 |       | 1,065,285  |       | 36.3        |       | 1,062,253  |       | 36.6 |   | 962,888 |   | 36.1 |   |
| Effect of:                                           |       |       |       |        |       |       |       |   |   |   |   |   |   |
| Dividends received deduction                         |       | (3,634     | )          | (0.1        | )          | (2,193     | )          | (0.1 | ) | (1,953 | ) | (0.1 | ) |
| Life insurance earnings                              |       | (3,921     | )          | (0.1        | )          | —     |       | 0.0 |   | — |   | 0.0 |   |
| Travel and dues                                      |       | 1,593      |       | 0.1         |       | 1,593      |       | 0.0 |   | 1,578 |   | 0.1 |   |
| Others - net                                         |       | (25,964    | )          | (1.0        | )          | 2,124      |       | 0.1 |   | (52,923 | ) | (2.0 | ) |
|                                                 |       |       |       |        |       |       |       |   |   |   |   |   |   |
| Actual tax expense                                   |       | $          | 1,033,359  |        | 35.2       | %          | $          | 1,063,777 |   | 36.6 | % | $ | 909,590 |   | 34.1 | % |

 

**NOTE 12– EMPLOYEE BENEFIT PLANS**

 

The Company’s subsidiary hasa qualified profit sharing and 401(k) employee benefit plan coveringsubstantially all employees.  Thecontributions to the plans are at the discretion of the plan’s advisory boardand amounted to $124,470, $121,121 and $125,165 in 2003, 2002 and 2001,respectively.

 

**NOTE 13– DEFERRED COMPENSATION AND LIFE INSURANCE**

 

On October 28, 2003 theCompany entered into an agreement with an Executive Officer for the payment ofdeferred compensation upon retirement. As a result the Company has made a provision for the futurecompensation.  At December 31, 2003$11,216 has been accrued under this contract and this liability has beenrecognized in the financial statements. Deferred compensation is to be paid to the individual or his beneficiaryupon reaching age 65.  Payments will bemade over his lifetime, with a minimum payment of fourteen years.

 

In order to offset the costof the deferred compensation arrangement described above, the Company purchaseda life insurance policy on the executive. The Company is the owner and beneficiary of the policy with a deathbenefit of $4,380,000 on the life of the employee.  The policy had a cash surrender value of$2,011,532 at December 31, 2003.

 

50

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**NOTE 14– COMMITMENTS AND CONTINGENCIES**

 

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

 

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

 

The total amount ofoff-balance-sheet financial instruments with credit risk are as follows:

 
| ** **                | ** ** | **December 31,** | ** ** |
|---------------------------|------------|------------------|------------|
| ** **                | ** ** | **2003**         | ** ** | **2002** | ** ** |
|                      |       |             |       |   |   |
| Loan commitments          |       | $                | 11,669,000 |   | $ | 11,061,000 |   |
| Standby letters of credit |       | 1,027,000        |       | 802,000 |   |
|                           |            |                  |            |  |  |  |  |

 

Commitments to extend creditare agreements to lend to a customer as long as there is no violation of anycondition established in the contract. Commitments generally have fixed expiration dates or other terminationclauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawnupon, the total commitment amounts do not necessarily represent future cashrequirements.  The Bank evaluates eachcustomer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if deemednecessary by the Bank upon extension of credit, is based on management’s creditevaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory,property, plant, and equipment, and income-producing commercialproperties.

 

Standby letters of creditare conditional commitments issued by the Company to guarantee the performanceof a customer to a third party.  Theseguarantees are primarily issued to support public and private borrowing arrangements.  All of the standby letters of credit expirein 2004.  The credit risk involved inissuing letters of credit is essentially the same as that involved in extendingloans to customers.

 

51

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**NOTE 15– CONCENTRATION OF CREDIT RISK**

 

Most of the Bank’s loans andcommitments have been granted to customers in the Bank’s primary market area ofLogan and Lincoln Counties in West Virginia. In the normal course of business, however, the Bank has originated loansoutside of its primary market area.  Theaggregate loan balances outstanding in any one geographic area, other than theBank’s primary lending areas, do not exceed 10 percent of total loans.  No specific industry concentrations exceeded10 percent of total exposure.  Theconcentrations of credit by type of loan are set forth in Note 4.

 

**NOTE 16 – REGULATORY MATTERS**

 

The Bank is subject tovarious regulatory capital requirements administered by the federal bankingagencies.  Failure to meet minimumcapital requirements can initiate certain mandatory, and possibly additionaldiscretionary, actions by regulators that, if undertaken, could have a directmaterial effect on the Bank’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of the Bank’s  assets, liabilities, and certainoff-balance-sheet items as calculated under regulatory accountingpractices.  The Bank’s capital amountsand classifications are also subject to qualitative judgments by the regulatorsabout components, risk, weighting, and other factors.

 

Quantitativemeasures established by regulation to ensure capital adequacy require the banksto maintain minimum amounts and ratios (set forth in the table below and asdefined by regulation) of total and Tier I capital (as defined in theregulations) to risk-weighted assets, and of Tier I capital to averageassets.  Management believes, as ofDecember 31, 2003, that the Bank meets all capital adequacy requirements towhich it is subject.

 

Asof December 31, 2003, the most recent notification from the Federal ReserveBank categorized the Bank as “well capitalized” under the regulatoryframework.  To be categorized as wellcapitalized, the Bank must maintain minimum total risk-based capital, Tier Irisk-based capital, and Tier I capital leverage ratios as set forth in thetable.  There are no conditions or eventssince those notifications that management believes have changed theinstitution’s category.

 
| ** **                            | ** ** | **Actual** | ** ** | **For Capital  Adequacy Purposes** | ** ** | **To Be Well  Capitalized Under  Federal Regulations** | ** ** |
|---------------------------------------|------------|------------|------------|------------------------------------|------------|--------------------------------------------------------|------------|
| **(Amounts Expressed in  Thousands)** | ** ** | **Amount** | ** ** | **Ratio**                          | ** ** | **Amount**                                             | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
|                                  |       |       |       |                               |       |                                                   |       |   |   |   |   |   |   |
| As of December 31, 2003:              |       |       |       |                               |       |                                                   |       |   |   |   |   |   |   |
| Total Capital                         |       | $          | 17,790     |                               | 18.8       | %                                                      | $          | 7,564 |   | 8.0 | % | $ | 9,455 |   | 10.0 | % |
|   (to  Risk Weighted Assets)     |       |       |       |                               |       |                                                   |       |   |   |   |   |   |   |
| Tier I Capital                        |       | $          | 17,755     |                               | 18.8       | %                                                      | $          | 3,782 |   | 4.0 | % | $ | 5,673 |   | 6.0 | % |
|   (to  Risk Weighted Assets)     |       |       |       |                               |       |                                                   |       |   |   |   |   |   |   |
| Tier I Capital                        |       | $          | 18,942     |                               | 10.8       | %                                                      | $          | 7,050 |   | 4.0 | % | $ | 8,812 |   | 5.0 | % |
|   (to  Average Assets)           |       |       |       |                               |       |                                                   |       |   |   |   |   |   |   |
|                                       |            |            |            |                                    |            |                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

52

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**NOTE 16 – REGULATORY MATTERS (CONTINUED)**

 
| ** **                            | ** ** | **Actual** | ** ** | **For Capital  Adequacy Purposes** | ** ** | **To Be Well  Capitalized Under  Federal Regulations** | ** ** |
|---------------------------------------|------------|------------|------------|------------------------------------|------------|--------------------------------------------------------|------------|
| **(Amounts Expressed in  Thousands)** | ** ** | **Amount** | ** ** | **Ratio**                          | ** ** | **Amount**                                             | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
|                                  |       |       |       |                               |       |                                                   |       |   |   |   |   |   |   |
| As of December 31, 2002:              |       |       |       |                               |       |                                                   |       |   |   |   |   |   |   |
| Total Capital                         |       | $          | 17,193     |                               | 17.6       | %                                                      | $          | 7,809 |   | 8.0 | % | $ | 9,761 |   | 10.0 | % |
|   (to  Risk Weighted Assets)     |       |       |       |                               |       |                                                   |       |   |   |   |   |   |   |
| Tier I Capital                        |       | $          | 16,943     |                               | 17.4       | %                                                      | $          | 3,904 |   | 4.0 | % | $ | 5,857 |   | 6.0 | % |
|   (to  Risk Weighted Assets)     |       |       |       |                               |       |                                                   |       |   |   |   |   |   |   |
| Tier I Capital                        |       | $          | 16,948     |                               | 9.8        | %                                                      | $          | 6,924 |   | 4.0 | % | $ | 4,881 |   | 5.0 | % |
|   (to  Average Assets)           |       |       |       |                               |       |                                                   |       |   |   |   |   |   |   |

 

**NOTE 17 - LIMITATIONS ON DIVIDENDS**

 

WestVirginia State Law precludes the Bank from paying dividends without the priorapproval of the Commissioner of Banking, if such dividends exceed the total ofthe Bank’s net profits as defined for the year, combined with its net profitsof the previous 2 years.  Under thisformula, the Bank is limited to paying dividends in 2004 to the amount of its2004 net profit without the approval of the Commissioner of Banking.  The subsidiary Bank is the primary source offunds to pay dividends to the stockholders of Logan County BancShares, Inc.

 

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

 

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

 

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

 

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

 

Investment Securities:  Fair values for investmentsecurities are based on quoted market prices or dealer quotes.

 

53

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**NOTE 18 – DISCLOSURES ABOUT FAIR VALUE OF FINANCIALINSTRUMENTS (CONTINUED)**

 

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

 

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

 

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

 

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

 

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

 
| ** **                  | ** ** | **2003**             | ** ** | **2002**        | ** ** |
|-----------------------------|------------|----------------------|------------|-----------------|------------|
| ** **                  | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
|                        |       |                 |       |            |       |   |   |   |   |
| Financial assets:           |       |                 |       |            |       |   |   |   |   |
| Cash and cash equivalents   |       | $                    | 5,342,353  |            | $          | 5,342,353 |   | $ | 5,597,679 |   | $ | 5,597,679 |   |
| Federal funds sold          |       | 13,385,000           |       | 13,385,000      |       | 11,370,000 |   | 11,370,000 |   |
| Investment securities       |       | 47,891,978           |       | 47,891,978      |       | 41,305,138 |   | 41,305,138 |   |
| Loans                       |       | 100,033,293          |       | 103,913,636     |       | 107,932,591 |   | 109,106,568 |   |
| Accrued interest receivable |       | 843,052              |       | 843,052         |       | 811,373 |   | 811,373 |   |
| Bank-owned life insurance   |       | 2,011,532            |       | 2,011,532       |       | — |   | — |   |
|                        |       |                 |       |            |       |   |   |   |   |
| Financial liabilities:      |       |                 |       |            |       |   |   |   |   |
| Deposits                    |       | 152,254,743          |       | 152,853,045     |       | 150,073,293 |   | 150,823,589 |   |
| Repurchase agreements       |       | 3,000,000            |       | 3,000,000       |       | 1,000,000 |   | 1,000,000 |   |
| Accrued interest payable    |       | 82,050               |       | 82,050          |       | 93,142 |   | 93,142 |   |
|                             |            |                      |            |                 |            |  |  |  |  |  |  |  |  |

 

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

 

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

 

**BALANCE SHEETS**

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|------------------|------------|
| ** **                                      | ** ** | **2003**         | ** ** | **2002** | ** ** |
| **ASSETS**                                      |       |             |       |   |   |
| Cash                                            |       | $                | 1,897,530  |   | $ | 369,744 |   |
| Securities available for sale, at fair  value   |       | 351,287          |       | 332,018 |   |
| Other assets                                    |       | 30,799           |       | 46,868 |   |
| Investment in subsidiary                        |       | 15,894,269       |       | 16,869,078 |   |
|                                            |       |             |       |   |   |
| Total assets                                    |       | $                | 18,173,885 |   | $ | 17,617,708 |   |
|                                            |       |             |       |   |   |
| **LIABILITIES**                                 |       |             |       |   |   |
| Other                                           |       | $                | 384,303    |   | $ | 425,107 |   |
|                                            |       |             |       |   |   |
| **STOCKHOLDERS’ EQUITY**                   |       | 17,789,582       |       | 17,192,601 |   |
|                                            |       |             |       |   |   |
| Total liabilities and stockholders’ equity |       | $                | 18,173,885 |   | $ | 17,617,708 |   |

 

**STATEMENTS OF INCOME**

 
| ** **                                                                       | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                       | ** ** | **2003**                    | ** ** | **2002** | ** ** | **2001** | ** ** |
| **OPERATING INCOME**                                                             |       |                        |       |   |   |   |   |
| Other income                                                                     |       | $                           | 10,440     |   | $ | 67,285 |   | $ | 8,208 |   |
| Dividends from subsidiary                                                        |       | 2,726,471                   |       | 1,706,148 |   | 1,075,486 |   |
| Total operating income                                                           |       | 2,736,911                   |       | 1,773,433 |   | 1,083,694 |   |
|                                                                             |       |                        |       |   |   |   |   |
| **OPERATING EXPENSES**                                                           |       | 109,469                     |       | 121,459 |   | 60,846 |   |
|                                                                             |       |                        |       |   |   |   |   |
| Income before income tax and equity in  undistributed earnings of subsidiary     |       | 2,627,442                   |       | 1,651,974 |   | 1,022,848 |   |
|                                                                             |       |                        |       |   |   |   |   |
| **INCOME TAX BENEFIT**                                                           |       | 38,630                      |       | 43,127 |   | 20,900 |   |
|                                                                             |       |                        |       |   |   |   |   |
| Income before equity in undistributed  earnings of subsidiary                    |       | 2,666,072                   |       | 1,695,101 |   | 1,043,748 |   |
|                                                                             |       |                        |       |   |   |   |   |
| **EQUITY IN UNDISTRIBUTED (DISTRIBUTIONS IN  EXCESS OF) EARNINGS OF SUBSIDIARY** |       | (765,009                    | )          | 146,732 |   | 711,873 |   |
|                                                                             |       |                        |       |   |   |   |   |
| Net income                                                                       |       | $                           | 1,901,063  |   | $ | 1,841,833 |   | $ | 1,755,621 |   |

 

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**NOTE 19 –CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)**

 

**STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                         | ** ** | **2003**                    | ** ** | **2002** | ** ** | **2001** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                           |       |                        |       |   |   |   |   |
| Net income                                                                         |       | $                           | 1,901,063  |   | $ | 1,841,833 |   | $ | 1,755,621 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                        |       |   |   |   |   |
| Equity in undistributed (distribution in  excess of) earnings of subsidiary        |       | 765,009                     |       | (146,732 | ) | (711,873 | ) |
| Net change in other assets                                                         |       | 16,069                      |       | (110,591 | ) | (13,420 | ) |
| Net change in accrued expenses                                                     |       | (49,629                     | )          | 7,343 |   | 105,580 |   |
| Net cash provided by operating activities                                          |       | 2,632,512                   |       | 1,591,853 |   | 1,135,908 |   |
|                                                                               |       |                        |       |   |   |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                           |       |                        |       |   |   |   |   |
| Purchase of Treasury Stock                                                         |       | —                      |       | (546,000 | ) | — |   |
| Dividends paid                                                                     |       | (1,104,726                  | )          | (1,096,996 | ) | (1,075,487 | ) |
| Net cash used in Financing activities                                              |       | (1,104,726                  | )          | (1,642,996 | ) | (1,075,487 | ) |
|                                                                               |       |                        |       |   |   |   |   |
| Change in cash and cash equivalents                                                |       | 1,527,786                   |       | (51,143 | ) | 60,421 |   |
|                                                                               |       |                        |       |   |   |   |   |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF  YEAR**                                  |       | 369,744                     |       | 420,887 |   | 360,466 |   |
|                                                                               |       |                        |       |   |   |   |   |
| **CASH AND CASH EQUIVALENTS, END OF YEAR**                                         |       | $                           | 1,897,530  |   | $ | 369,744 |   | $ | 420,887 |   |

 

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ITEM 9A —CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls andProcedures

 

As of the end of the periodcovered by this report, the Company’s Chief Executive Officer and ChiefFinancial Officer evaluated the effectiveness of the Company’s disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)).  Based on their evaluation,the Chief Executive Officer and Chief Financial Officer concluded that theCompany’s disclosure controls and procedures (i) enable the Company to record,process, summarize and report in a timely manner the information that theCompany is required to disclose in its Exchange Act reports, and (ii) aredesigned with the objective of ensuring that such information is accumulatedand communicated to management, including the Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regardingdisclosure.

 

Changes inInternal Controls

 

There were nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect the Company’s disclosure controls and proceduressubsequent to the date of their evaluation, nor were there any significantdeficiencies or material weaknesses in the Company’s internal controls.  As a result, no corrective actions wererequired or undertaken.

 

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**PART III**

 

ITEM 10 – DIRECTORS ANDEXECUTIVE OFFICERS OF THE REGISTRANT

 

Set forth below isinformation concerning the Company’s Directors, Nominees for Director andExecutive Officers.

 
| **Name**          | ** ** | **Age as of  December 31, 2003** | ** ** | **Positions with the Company  and Logan Bank & Trust  Company (“LB&T”)**                                                                                                         | ** ** | **Business Experience  During Last Five Years  and Directorships**                                                                                                                                        |
|-------------------|------------|----------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Harvey  Oakley    |       | 83                               |       | Director  of the Company since 1985 and Director of LB&T since 1964; President and  Chairman of the Board of Directors of Company since 1985 and Chairman of the  Board of LB&T since 1964 |       | Attorney  at Law; President of the Company                                                                                                                                                                |
| Clell Peyton      |       | 67                               |       | Director of the Company since 1985 and Director of LB&T since  1996                                                                                                                            |       | Retired, Nationwide Insurance Company.                                                                                                                                                                    |
| Earle B. Queen    |       | 76                               |       | Director of the Company since 1985 and Director of LB&T since  1964                                                                                                                            |       | President, James Funeral Home; Director of West Logan Water Co.,  Queen Brothers, Inc. and Funeral Services, Inc.                                                                                         |
| LaVeta Jean Ray   |       | 72                               |       | Director of the Company since 1985                                                                                                                                                                 |       | Retired; Counselor, Chapmanville High School.                                                                                                                                                             |
| William W. Wagner |       | 71                               |       | Director of the Company since 1985 and Director of LB&T since  1976                                                                                                                            |       | Retired; Former Director and Executive Comm. Of United Bankshares,  Inc.; Former Chairman of Eagle Bancorp. Inc.                                                                                          |
| Eddie Canterbury  |       | 55                               |       | Director and Executive Vice-President and CEO of the Company since  1985; Director of LB&T since 1980; CEO of LB&T since 1982 and  President of LB&T since 2000                        |       | Executive Vice President and CEO of the Company and President and CEO  of LB&T; Director of KY/WV Cable, Inc., Greentree Cable of KY, Inc.,  Louisa Cable & TV, Inc. and Logan County Cable, Inc. |

 

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| **Name**        | ** ** | **Age as of  December 31, 2003** | ** ** | **Positions with the Company  and Logan Bank & Trust  Company (“LB&T”)** | ** ** | **Business Experience  During Last Five Years  and Directorships**                                         |
|-----------------|------------|----------------------------------|------------|--------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|
| Walter D. Vance |       | 53                               |       | Director and Vice President of the Company since 1985                                      |       | Vice President of the Company; Pharmacist; and Vice President and  Director of Aracoma Drug Company.       |
| Glenn T. Yost   |       | 46                               |       | Director of the Company and LB&T since 1994                                            |       | President, W.W. McDonald Land Co.; President, Triadelphia Land Co.;  President, Bruce McDonald Holding Co. |
| David McCormick |       | 56                               |       | Director of the Company and LB&T since 1994                                            |       | President, McCormick’s, Inc.; President, Bodaco, Co.                                                  |
| Michael Winter  |       | 27                               |       | Director of the Company and LB&T since May, 2004                                       |       | Insurance agent; Director and Vice-President of Bray & Oakley  Insurance Agency, Inc.                  |

 

FAMILYRELATIONSHIPS

 

HarveyOakley is William W. Wagner’s uncle and Michael Winter’s great uncle.

 

AUDITCOMMITTEE

 

The Company has a standingAudit Committee established in accordance with Section 3(a)(58)(A) of theExchange Act.  The members of thestanding Audit Committee are: Glenn T. Yost, Chairman, Earle B. Queen, andClell Peyton.

 

Pursuant to the provisionsof the Sarbanes-Oxley Act, which was enacted in 2002, the SEC adopted rulesrequiring companies to disclose whether at least one member of the auditcommittee is an “audit committee financial expert” as defined in such rules.

 

No current member of theCompany’s Audit Committee meets the criteria set forth in the rules which wouldqualify them as a financial expert.  Thecurrent Audit Committee members have been selected by the Board of Directorsbased on the Board’s determination that they are fully qualified to monitor theperformance of management and the Company’s financial condition, and to overseeits internal accounting operations and its independent auditors.  In addition, the Audit Committee has beenauthorized to retain independent accounting, legal or other consultants toassist it in performing these functions as it deems appropriate.  The Board is conducting further analysis ofthe backgrounds of its current members to determine if any member not currentlyon the Audit Committee may qualify as a financial expert.

 

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CODEOF ETHICS

 

In January, 2003, the SECadopted final rules under the Sarbanes-Oxley Act of 2002 (the “Act”), regardingdisclosure of whether companies have a Code of Ethics for their chief executiveofficers and chief financial officers. As of December 31, 2003, the Company had not adopted a Code of Ethicsapplicable to its Executive Vice-President and Chief Executive Officer and itsVice-President and Chief Financial Officer because the Company was not awarethat it was subject to the requirements of the Act until the second quarter of2004.  Promptly upon becoming aware thatit was subject to the requirements of the Act, the Company adopted a Code ofEthics applicable to its Executive Vice President and Chief Executive Officerand its Vice-President and Chief Financial Officer.  A copy of the Code of Ethics is attached asExhibit 14 to this annual report.

 

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ITEM 11 – EXECUTIVE COMPENSATION

 

**EXECUTIVE COMPENSATION**

 

**Cash Compensation**

 

The table below sets forththe cash compensation of the Company’s CEO. No other executive officer of the Company earned $100,000 or more insalary and bonus for the years ended December 31, 2003, 2002, and 2001.

 
| **Summary Compensation Table**                                                                                                                                                             | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                                 | ** ** | **Annual Compensation** | ** ** | **Long Term Compensation** | ** ** | ** ** | ** ** |
| **Name  and  Principal Position**                                                                                                                                                          | ** ** | **Year** | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Other  Compensation  (1)** | ** ** | **Securities  Underlying  Options** | ** ** | **All  Other(2)** | ** ** |
| ** **                                                                                                                                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Eddie  Canterbury Executive Vice President and Chief Executive Officer of the  Company and President and Chief Executive Officer of Logan Bank & Trust  Company (“LB&T”) |       | 2003  |   | $ | 120,000  |   | $ | 20,000 |   | — |   | 0 |   | $ | 11,200  |   |
|                                                                                                                                                                                       |       |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                       | 2002       |   | $ | 120,000 |   | $ | 20,000 |   | — |   | 0 |   | $ | 11,200 |   |
|                                                                                                                                                                                       |       |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                       | 2001       |   | $ | 115,000 |   | $ | 20,000 |   | — |   | 0 |   | $ | 10,800 |   |

 

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(1)       The CEO did not receive perquisites or otherpersonal benefits, securities or property during 2003 which, in the aggregatecost the Company an amount that equaled or exceeded the lesser of $50,000 or10% of the CEO’s salary and bonus earned during the year.

 

(2)       Includes payments made to the Company’s401(K) Profit Sharing Plan.

 

**EMPLOYMENT AGREEMENT ANDSUPPLEMENTAL EXECUTIVE RETIREMENT PLAN**

 

EmploymentAgreement

 

Effective October 1, 1998,Logan County BancShares, Inc. and Logan Bank & Trust Company (collectivelyreferred to as the “Employers”) entered into an employment agreement with EddieCanterbury (the “Agreement”).  Pursuantto the Agreement, the Employers agreed to employ Mr. Canterbury as theExecutive Vice President and Chief Executive Officer and Mr. Canterbury agreedto perform such executive services for the Employers as consistent with histitle and as may be assigned to him by the Employers’ Boards of Directors.  The Agreement provides for a three (3) yearterm commencing on October 1, 1998.  TheAgreement is automatically renewed for additional one (1) year periods unlessthe Employers’ Boards of Directors or the Employee provides contrary writtennotice to the other not less than forty-five (45) days in advance of eachOctober 1.  The Agreement will not extendbeyond the calendar month in which Mr. Canterbury turns 65 years of age.

 

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The Agreement provides thatMr. Canterbury will receive a base salary, which may be increased from time totime, in such amounts as may be determined by the Employers’ Boards ofDirectors.  Mr. Canterbury’s 2003salary is shown in the salary column of the Summary Compensation Table.  The Agreement also provides Mr. Canterburywith the same fringe benefits that Mr. Canterbury received prior to enteringinto the Agreement.

 

The Agreement restricts Mr.Canterbury from directly or indirectly engaging in or making any financialinvestment in, any firm, corporation, business entity or business enterprisewhich is competitive with or to any business of the Employers.  This restriction does not prohibit Mr.Canterbury from owning passive investments, including investments in thesecurities of other financial institutions of not more than two percent (2.0%)of each financial institution’s outstanding capital stock, as long as suchownership does not require Mr. Canterbury to devote substantial time tomanagement or control of the business or activities in which he has invested.

 

Pursuant to the Agreement,the Employers may terminate Mr. Canterbury upon prior written notice, includingtermination for “just cause” and termination because Mr. Canterbury becomessubject to total and permanent disability. “Just cause” includes: personal dishonesty, incompetence, willfulmisconduct, breach of fiduciary duty, willful failure to perform lawful dutiesassigned and prescribed by the Employers’ Boards of Directors, willfulviolation of any law, rule or regulation (other than traffic violations orsimilar offenses) or final cease-and-desist order, or material breach of anyprovision of the Agreement.

 

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

 

A.            A failure by Employers to comply with anymaterial provision of the Agreement, which failure is not cured within 25 daysafter notice of such noncompliance;

 

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

 

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

 

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

 

(iii)          a reduction in Mr. Canterbury’s base salaryas in effect immediately prior to a “change in control” or as may be increasedfrom time to time;

 

(iv)          a requirement that Mr. Canterbury be relocatedto an office which is more than 100 miles from the current principal executiveoffices of Logan Bank & Trust Company;

 

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

 

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(vi)          any purported termination of Mr. Canterbury’semployment which is not effected pursuant to proper written notice.

 

C.            Any purported termination of Mr. Canterbury’semployment which is not effected pursuant to proper written notice.

 

For purposes of theAgreement a “change in control” means a change in control of a nature thatwould be required to be reported in response to Item 6(e) of Schedule 14A ofRegulation 14A promulgated by the Securities Exchange Act of 1934 (the “ExchangeAct”); provided that, without limitation, such a change in control shall bedeemed to have occurred if: (i) any person other than the Employers is orbecomes the beneficial owner, directly or indirectly, of securities of theEmployers representing 25% or more of the combined voting power of the Company’sor Logan Bank & Trust Company’s then outstanding securities; or (ii) duringany period of two (2) consecutive years during the term of this Agreement,individuals who at the beginning of such period constitute the Boards ofDirectors of the Employers cease for any reason to constitute at least amajority thereof, unless the election of each Director who was not a Directorat the beginning of such period has been approved in advance by Directorsrepresenting at least 2/3 of the Directors then in office who were Directors atthe beginning of the period.  A change incontrol is not deemed to occur if such change of stock ownership results fromthe death of a shareholder or his distributes or legatees succeed to suchownership by way of such shareholder’s Last Will and Testament or by intestatesuccession.

 

If Mr. Canterbury isterminated by Employers for “just cause” or total and permanent disability,then Mr. Canterbury has no right to compensation or other benefits for anyperiod after the date of termination.  IfMr. Canterbury is terminated by Employers for any reason other than “just cause”or total and permanent disability or if Mr. Canterbury terminates thisAgreement for “good reason” as defined in subparagraphs (A) and (C) above, thenin lieu of any further salary payments to Mr. Canterbury for periods subsequentto the date of termination, the Employers must pay Mr. Canterbury severanceequal to the product of:

 

(i)            Mr. Canterbury’s base salary in effect as ofthe date of termination and

 

(ii)           the number of years (including partial years)remaining in the term of employment of the Agreement or 2.99, whichever isgreater.

 

Atthe discretion of the Employers, the severance amount must be paid in a lumpsum within 15 days of the date of termination or in monthly installments duringthe 24 months following termination.

 

If Mr. Canterbury terminatesthe Agreement for “good reason” as defined in subparagraph (B) above, then inlieu of any further salary payments to Mr. Canterbury for periods subsequent tothe date of termination, the Employers must pay Mr. Canterbury severance equalto three (3) times the average annual salary paid to Mr. Canterbury, asreflected in Internal Revenue Service Form W-2, for the three (3) yearsimmediately preceding Mr. Canterbury’s termination.  At the discretion of the Employers, theseverance amount must be paid in a lump sum within 15 days of the date oftermination or in monthly installments during the 24 months followingtermination.

 

SupplementalExecutive Retirement Plan

 

In an effort to reward EddieCanterbury for past services and to encourage Mr. Canterbury to continue in hisdedicated service to the Company, the Company entered into an SupplementalExecutive Retirement Plan Agreement (the Plan”) with Mr. Canterbury effectiveas of October 28, 2003.

 

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Under the Plan, Mr.Canterbury is entitled to certain supplemental retirement benefits upon Mr.Canterbury’s 65th birthday. If Mr. Canterbury becomes disabled prior to his 65th birthdayand is terminated on account of his disability, then he is entitled to apercentage of his supplemental retirement benefits as supplemental disabilitybenefits.  Upon Mr. Canterbury’s death,Mr. Canterbury’s beneficiaries are entitled to the supplemental retirementbenefits

 

The supplemental retirementbenefits equal 58% of Mr. Canterbury’s base salary for the calendar year in whichMr. Canterbury terminates his employment with the Company.  The benefits will be paid each year duringMr. Canterbury’s life on a monthly basis beginning with the month following Mr.Canterbury’s 65th birthday. If Mr. Canterbury dies prior to receiving the supplemental retirementbenefits for 14 full years, then Mr. Canterbury’s beneficiary is entitled toreceive the benefits until 14 years of payments have been made.

 

The supplemental disabilitybenefits equal the annual supplemental retirement benefit multiplied by thepercentage represented by 1.00 minus the product of 0.05 times a whole numberequal to the positive difference between 65 and Mr. Canterbury’s age when he isterminated because of a disability.  Thesupplemental disability benefit will be paid to Mr. Canterbury each year duringMr. Canterbury’s life on a monthly basis as soon as practicable aftertermination of Mr. Canterbury because of a disability.  If Mr. Canterbury dies prior toreceiving the supplemental disability benefits for 14 full years, thenMr. Canterbury’s beneficiary is entitled to receive the benefits until 14years of payments have been made.

 

If Mr. Canterbury dies priorto turning age 65, then the Company will pay Mr. Canterbury’s beneficiarya death benefit equal to the supplemental retirement benefit.  This benefit will commence as soon aspracticable after the date on which Mr. Canterbury would have turned age 65 andwill be paid monthly each year until 14 years of payments have been made.  If Mr. Canterbury dies after age 65, then theCompany will pay Mr. Canterbury’s beneficiary the remaining supplementalretirement benefits until Mr. Canterbury and his beneficiary have received acombined 14 years of annual payments.

 

If Mr. Canterbury’sbeneficiary dies before all payments have been made, then the present-value ofthe remaining benefits will be paid in a lump-sum cash payment to a contingentbeneficiary designated by Mr. Canterbury. Mr. Canterbury’s beneficiary may elect to receive the death benefit inthe form of a lump-sum cash payment determined in accordance with actuarialassumptions and interest based on Moody’s Aa Corporate Bond Yield.

 

The Company’s obligationsfor the retirement benefits under the Plan are fully funded by an insurancepolicy on the life of Mr. Canterbury in the amount of $2,000,000.00.  The cash value of such insurance policy as ofDecember 31, 2003 was $2,010,635 and the value of the death benefit as ofDecember 31, 2003 was $4,380,000.  If Mr.Canterbury dies prior to age 65, then the proceeds of the insurance policy willbe payable to the Company and the Company will use such proceeds to fund theremaining retirement plan obligations. All retirement benefits payable under the Plan will be paid entirelyfrom the insurance policy on the life of Mr. Canterbury, which policy is ownedby the Company.

 

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ITEM 12 – SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT

 

**PRINCIPAL SHAREHOLDERS**

 

The following table listseach shareholder of Logan County BancShares, Inc. who is the beneficial ownerof more than 5% of Logan County BancShares Inc.’s common stock as of August 24,2004.

 
| **Title  of Class** | ** ** | **Name and Address of  Beneficial Owner**                                                | ** ** | **Amount and  Nature of Beneficial  Ownership** | ** ** | **% of Class** | ** ** |
|---------------------|------------|------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|----------------|------------|
| Common Stock        |       | David McCormick  Post Office Box 627  Logan, West Virginia 25601                         |       | 38,058                                          | (1)        | 5.40           | %          |
|                |       |                                                                                     |       |                                            |       |           |       |
| Common Stock        |       | Harvey Oakley  509 Main Street  Logan, West Virginia 25601                               |       | 56,538                                          | (2)        | 8.03           | %          |
|                |       |                                                                                     |       |                                            |       |           |       |
| Common Stock        |       | Sarah Matteson Irrevocable Trust  11125 Harbour Estates Circle  Ft. Myers, Florida 33908 |       | 93,182                                          |       | 13.24          | %          |
|                |       |                                                                                     |       |                                            |       |           |       |
| Common Stock        |       | Paul Clinton Winter  Post Office Box 386  Logan, West Virginia 25601                     |       | 116,619                                         | (3)        | 16.57          | %          |

 

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(1)    Includes 37,908 shares owned by BodacoCompany.

 

(2)    Includes 7,537 shares jointly owned withspouse.

 

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

 

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**SECURITY OWNERSHIP OF MANAGEMENT**

 

As of November 24, 2004 the nominees, Directors of the Company andLogan Bank & Trust Company (“LB&T”) and executive officers of theCompany owned beneficially, directly or indirectly, the number of shares ofcommon stock indicated on the following table. The number of shares shown as beneficially owned by each nominee,director and executive officer is determined under the rules of the Securitiesand Exchange Commission and the information is not necessarily indicative ofbeneficial ownership for any other purposes. All Directors and executive officers of the Company as a group owned194,183 shares or 27.58% of the Company’s common stock as of November 24, 2004.

 
| **Title  of  Class** | ** ** | **Position**                                                                                                                            | ** ** | **Name of  Beneficial Owner** | ** ** | **Amount and  Nature of Beneficial  Ownership** | ** ** | **% of  Class** | ** ** |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------------------------|------------|-----------------|------------|
| Common  Stock        |       | Director of Company and LB&T and President and Chairman of the  Board of Directors of Company and Chairman of the Board of LB&T |       | Harvey Oakley                 |       | 56,538                                          | (1)        | 8.03            | %          |
| Common  Stock        |       | Director of LB&T                                                                                                                    |       | Clell Peyton                  |       | 10,733                                          |       | 1.52            | %          |
| Common  Stock        |       | Director of LB&T                                                                                                                    |       | Earle B. Queen                |       | 19,813                                          | (2)        | 2.81            | %          |
| Common  Stock        |       | Director of Company                                                                                                                     |       | LaVeta Jean Ray               |       | 7,110                                           |       | 1.01            | %          |
| Common  Stock        |       | Director of LB&T                                                                                                                    |       | William W. Wagner             |       | 18,000                                          | (3)        | 2.56            | %          |
| Common  Stock        |       | Director and Executive Vice-President and CEO of the Company;  Director and President and CEO of LB&T                               |       | Eddie Canterbury              |       | 8,200                                           | (4)        | 1.16            | %          |
| Common  Stock        |       | Director of Company; Vice President of the Company                                                                                      |       | Walter D. Vance               |       | 4,569                                           | (5)        | 0.65            | %          |
| Common  Stock        |       | Director of LB&T                                                                                                                    |       | Glenn T. Yost                 |       | 30,762                                          | (6)        | 4.37            | %          |
| Common  Stock        |       | Director of LB&T                                                                                                                    |       | David McCormick               |       | 38,058                                          | (7)        | 5.40            | %          |

 

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| Common Stock |   | Elected as Director of Company and LB&T at Annual Meeting held on  May 25, 2004 |   | Michael Winter |   | 400 |   | .06 | % |
|--------------|--------|-------------------------------------------------------------------------------------|--------|----------------|--------|-----|--------|-----|---|

 

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(1)           Includes 7,537 shares jointly owned withspouse.

 

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

 

(3)           Includes 654 shares jointly owned withspouse.

 

(4)           Includes: 800 shares owned in IRA; and 100shares as custodian for Alexis Jo Canterbury.

 

(5)           Includes 849 shares owned by Aracoma DrugCompany.

 

(6)           Includes: 1,225 shares jointly owned withspouse; 28,762 shares for which voting and investment powers are held by GlennT. Yost; 22,224 shares owned by W.W. McDonald Land Company; 5,863 shares ownedby Bruce McDonald Holding Company; and 675 shares owned by Tridelphia LandCompany.

 

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

 

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ITEM 13 – CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS.

 

Directors and executiveofficers of the Company and its subsidiaries, members of their immediatefamilies, and business organizations and individuals associated with them havebeen customers of, and have had normal banking transactions with Logan Bank& Trust Company, a subsidiary of the Company.  All such transactions were made in theordinary course of business, were made on substantially the same terms,including interest rate and collateral, as those prevailing at the time forcomparable transactions with other persons and did not involve more than thenormal risk of collectibility or present other unfavorable features.

 

ITEM 14 – PRINCIPAL ACCOUNTING FEESAND SERVICES.

 

Auditand Audit-Related Fees.

 

The following table presentsfees for professional services rendered by McNeal, Williamson & Co. toperform an audit of the Corporation’s annual financial statements for the yearsended December 31, 2003, and 2002, and fees for other services rendered byMcNeal, Williamson & Co. during those periods:

 
| ** **             | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Audit Fees(1)          |       | $        | 32,000     |     | $          | 32,000 |   |
| Audit-Related  Fees(2) |       | —   |       | —   |       |
| Tax Fees(3)            |       | 8,450    |       | 8,235    |       |
| All Other  Fees(4)     |       | 2,945    |       | 1,650    |       |
| Total Fees             |       | $        | 43,395     |     | $          | 41,885 |   |

 

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

 

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

 

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

 

(4)           All Other Fees – These are fees for otherpermissible work performed by McNeal, Williamson & Co. that does not meetthe above category descriptions.  Thefees for services incurred in 2002 and 2003 include the filing of theCorporation’s Form 10-Q for the quarters ending September 30, 2002 and2003.  All services rendered by McNeal,Williamson & Co. are permissible under applicable laws and regulations, andpre-approved by the Audit Committee.

 

Pre-Approval Policies andProcedures

 

Prior to July 23, 2004, theAudit Committee did not have formal pre-approval policies and procedures foraudit and non-audit services.  Prior toJuly 23, 2004, the Audit Committee met and 

 

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consideredeach audit and non-audit service to be rendered by McNeal, Williamson &Co.  During 2003 and 2002, all of feespaid to McNeal, Williamson & Co. were approved by the Audit Committee.

 

On July 23, 2004, the AuditCommittee adopted a policy that requires pre-approval of all audit,audit-related, tax services and other services performed by the independentauditor.  The policy provides forpre-approval by the Audit Committee of specifically defined audit and non-auditservices.  Unless the specific servicehas been previously pre-approved with respect to that year, the Audit Committeemust approve the permitted service before the independent auditor is engaged toperform it.  The Audit Committee maydelegate pre-approval authority to one or more of its members who shall reportany pre-approval decisions to the Audit Committee at its next scheduledmeeting.

 

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ITEM 15 – EXHIBITS,FINANCIAL STATEMENT SCHEDULES, ANDREPORTS ON FORM 8-K

 

(a)           1.             Financial Statements.

 

Report of IndependentRegistered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements ofIncome

Consolidated Statements ofChanges in Stockholders’ Equity

Consolidated Statements ofCash Flow

Notes to the ConsolidatedFinancial Statements

 

2.             Financial Statement Schedules.

 

All schedules are omitted,as the required information is inapplicable or the information is presented inthe Consolidated Financial Statements or related notes.

 
| 3.     | Exhibits |                                                                                                                                                                                                                                    |                                                                                            |
|--------|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------|
|   |     |                                                                                                                                                                                                                                    |                                                                                            |
|   | 3.       | Articles of Incorporation and Bylaws                                                                                                                                                                                                    |
|   |     |                                                                                                                                                                                                                                    |                                                                                            |
|   |     | a.                                                                                                                                                                                                                                      | Articles of Incorporation of Logan County Bancshares, Inc. dated October  26, 1984.             |
|   |     |                                                                                                                                                                                                                                    |                                                                                            |
|   |     | b.                                                                                                                                                                                                                                      | Restated Articles of Incorporation of Logan County Bancshares, Inc. dated  December 27, 1984    |
|   |     |                                                                                                                                                                                                                                    |                                                                                            |
|   |     | c.                                                                                                                                                                                                                                      | Amended Articles of Incorporation of Logan County Bancshares, Inc. dated  May 26, 1993          |
|   |     |                                                                                                                                                                                                                                    |                                                                                            |
|   |     | d.                                                                                                                                                                                                                                      | Amended Articles of Incorporation of Logan County Bancshares, Inc. dated  April 27, 1999        |
|   |     |                                                                                                                                                                                                                                    |                                                                                            |
|   |     | e.                                                                                                                                                                                                                                      | Bylaws of Logan County Bancshares, Inc. dated December 3, 1984.                                 |
|   |     |                                                                                                                                                                                                                                    |                                                                                            |
|   | 10.      | Material Contracts                                                                                                                                                                                                                      |
|   |     |                                                                                                                                                                                                                                    |                                                                                            |
|   |     | a.                                                                                                                                                                                                                                      | Employment Agreement between the Company, Logan Bank & Trust Company  and Eddie Canterbury. |
|   |     |                                                                                                                                                                                                                                    |                                                                                            |
|   |     | b.                                                                                                                                                                                                                                      | The Supplemental Executive Retirement Plan between the Company and Eddie  Canterbury.           |
|   |     |                                                                                                                                                                                                                                    |                                                                                            |
|   | 11.      | Statement regarding computation of per share earnings.                                                                                                                                                                                  |
|   |     |                                                                                                                                                                                                                                    |
|   |     | (These statements are included in the notes to the Consolidated  Financial Statements and the Management’s Discussion and Analysis of  Financial Condition and Results of Operation, which are incorporated herein  by reference.) |

 

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|   | 14.    | Senior Financial Officer’s Code of Ethics     |
|--------|--------|----------------------------------------------------|
|   |   |                                               |   |
|   | 21.    | Subsidiaries of the Company                        |
|   |   |                                               |   |
|   | 23.    | Consent of S.R. Snodgrass, A.C.                    |
|   |   |                                               |   |
|   | 31.1   | Certification Pursuant to Rule 13a-14(a)/15d-14(a) |
|   |   |                                               |   |
|   | 31.2   | Certification Pursuant to Rule 13a-14(a)/15d-14(a) |
|   |   |                                               |   |
|   | 32.1   | Certification Pursuant to 18 U.S.C. Section 1350   |
|   |   |                                               |   |
|   | 32.2   | Certification Pursuant to 18 U.S.C. Section 1350   |

 

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SIGNATURES

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|   | LOGAN COUNTY BANCSHARES, INC. |
|--------|-------------------------------|
|   | (Registrant)                  |   |
|   |                          |
|   |                          |
|   | By:                           | /s/ Eddie Canterbury |   |
|   |                          | Eddie Canterbury |
|   | Its:                          | Chief Executive Officer |
|   |                          |   |
|   | November 24, 2004             |
|        |                               |  |  |  |

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacities and onthe dates indicated.

 
| By:    | /s/ Harvey Oakley                                                                 |   | Date: November 23, 2004 |
|--------|-----------------------------------------------------------------------------------|--------|-------------------------|
|   | Harvey Oakley, Director and Chairman of the Board of Directors                    |   |
|   |                                                                              |   |
| By     | /s/ Clell Peyton                                                                  |   | Date: November 23, 2004 |
|   | Clell Peyton, Director                                                            |   |
|   |                                                                              |   |
| By     | /s/ Earle B. Queen                                                                |   | Date: November 23, 2004 |
|   | Earle B. Queen, Director                                                          |   |
|   |                                                                              |   |
| By     | /s/ LaVeta Jean Ray                                                               |   | Date: November 23, 2004 |
|   | LaVeta Jean Ray, Director                                                         |   |
|   |                                                                              |   |
| By:    | /s/ William W. Wagner                                                             |   | Date: November 23, 2004 |
|   | William W. Wagner, Director                                                       |   |
|   |                                                                              |   |
| By     | /s/ Eddie Canterbury                                                              |   | Date: November 23, 2004 |
|   | Eddie Canterbury, Director, Executive Vice-President and Chief  Executive Officer |   |
|   |                                                                              |   |
| By     | /s/ Walter D. Vance                                                               |   | Date: November 23, 2004 |
|   | Walter D. Vance Director                                                          |   |
|   |                                                                              |   |
| By     | /s/ Glenn T. Yost                                                                 |   | Date: November 23, 2004 |
|   | Glenn T. Yost, Director                                                           |   |
|   |                                                                              |   |
| By     | /s/ David McCormick                                                               |   | Date: November 23, 2004 |
|   | David McCormick, Director                                                         |   |

 

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