UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

 

For the quarterly period ended:

 

June 30, 2004

 

Commission File Number:  2-95114

 

 

 

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

 

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

 

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

 

Class Outstanding at August 18, 2004

 

Common Stock ($1.67 Par Value)

703,991 Shares

 

 

LOGAN COUNTY BANCSHARES, INC.

 

Table of Contents

 

EXPLANATORY NOTE			Page
PART I – FINANCIAL INFORMATION
	ITEM 1.	FINANCIAL STATEMENTS:	1
		Consolidated Statement of Condition as of June 30, 2004 (unaudited) and December 31, 2003	2
		Consolidated Statement of Income For the Six Month Period Ended June 30, 2004 and 2003 (unaudited)	3
		Consolidated Statement of Income For the Three Month Period Ended June 30, 2004 and 2003 (unaudited)	4
		Consolidated Statement of Changes in Stockholders’ Equity for the Six Month Period Ended June 30, 2004 (unaudited)	5
		Consolidated Statement of Cash Flows for the Six Month Period Ended June 30, 2004 and 2003 (unaudited)	6
		Notes to Unaudited Consolidated Financial Statements	7
	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	9
	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	13
	ITEM 4.	CONTROLS AND PROCEDURES	14
PART II – OTHER INFORMATION
	ITEM 1.	LEGAL PROCEEDINGS	15
	ITEM 2.	CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES	15
	ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	15
	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	15
	ITEM 5.	OTHER INFORMATION	15

 

i

 

	ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K		16
	EXHIBITS
	Exhibit 14		Code of Ethics
	Exhibit 31.1		Sarbanes-Oxley Act, Section 302 Certification of Chief Executive Officer
	Exhibit 31.2		Sarbanes-Oxley Act, Section 302 Certification of Chief Financial Officer
	Exhibit 32.1		Sarbanes-Oxley Act, Section 906 Certification of Chief Executive Officer
	Exhibit 32.2		Sarbanes-Oxley Act, Section 906 Certification of Chief Financial Officer
	Reports on Form 8-K			16
	Signatures			17

 

ii

 

EXPLANATORY NOTE

 

As disclosed on Form 8-K filed with the Securities and Exchange Commission (the “Commission”) on July 23, 2004, Logan County BancShares, Inc. (the “Company”), working with its outside auditors and specially retained securities counsel, determined that it was subject to the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”).  In addition, and as disclosed on Form 8-K filed with the Commission on August 4, 2004, the Company was informed by its independent auditor, McNeal, Williamson & Co. (“McNeal Williamson”) that McNeal Williamson was no longer permitted to issue audit reports for the Company and was no longer permitted to perform interim reviews in accordance with SAS 100 for the Company as a result of McNeal Williamson’s not being registered with the Public Company Accounting Oversight Board (“PCAOB”).  McNeal Williamson advised the Company that it should obtain new certifying independent accountants.  Accordingly, the Company retained S.R. Snodgrass, A.C. on August 10, 2004 to:  (i) review all interim reports that were reviewed by McNeal Williamson after the adoption of Sarbanes-Oxley; (ii) re-audit the financial statements included in the Form 10-K for the period ended December 31, 2003; and (iii) review the audit report for the period ended December 31, 2002.  All information contained in this report could be subject to update, amendment, and supplementation based on S. R. Snodgrass’s re-audit of the financial statements included in the Form 10-K for the period ending December 31, 2003, and its review of all interim reports after the adoption of Sarbanes-Oxley.  The Company does not believe there will be material changes to its audited and unaudited financial statements at this time.

 

PART I

 

ITEM 1. - FINANCIAL INFORMATION

 

1

 

LOGAN COUNTY BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statement Of Condition

June 30, 2004 (unaudited) and December 31, 2003

(In Thousands)

 

		June 30, 2004			December 31, 2003
ASSETS
CASH AND DUE FROM BANKS		$	7,645		$	7,240
FEDERAL FUNDS SOLD		13,140			13,385
INVESTMENT SECURITIES:
AVAILABLE FOR SALE		59,103			47,973
LOANS:
TOTAL LOANS		99,077			101,615
ALLOWANCE FOR LOAN LOSSES		(1,556		)	(1,582		)
NET LOANS		97,521			100,033
BANK PREMISES AND EQUIPMENT, NET		3,227			3,103
ACCRUED INTEREST AND OTHER ASSETS		3,870			3,755
TOTAL ASSETS		$	184,506		$	175,489
LIABILITIES AND STOCKHOLDERS EQUITY
DEPOSITS:
DEMAND DEPOSITS:
NON-INTEREST		$	34,317		$	30,098
INTEREST BEARING		24,159			23,256
SAVINGS DEPOSITS		48,187			43,203
TIME DEPOSITS		57,479			57,595
TOTAL DEPOSITS		164,142			154,152
SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE		2,000			3,000
ACCRUED INTEREST AND OTHER LIABILITIES		477			582
INCOME TAXES PAYABLE:
CURRENT		38			(35		)
TOTAL LIABILITIES		166,657			157,699
STOCKHOLDERS’ EQUITY:
COMMON STOCK–$1.67 PAR VALUE; AUTHORIZED – 780,000 SHARES OUTSTANDING – 703,991		1,300			1,300
SURPLUS		2,408			2,408
RETAINED EARNINGS		15,804			15,426
ACCUMULATED OTHER COMP. INCOME(LOSS)		(257		)	62
TREASURY STOCK – 76,000 SHARES		(1,406		)	(1,406		)
TOTAL STOCKHOLDERS’ EQUITY		17,849			17,790
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	184,506		$	175,489

 

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

 

2

 

LOGAN COUNTY BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statement of Income (unaudited)

For the Six Month Periods Ended June 30, 2004 and 2003

(In Thousands)

 

		Six Months Ending June 30
		2004			2003
INTEREST AND DIVIDEND INCOME:
INTEREST ON LOANS		$	3,486		$	3,837
INTEREST AND DIVIDENDS ON INVESTMENTS		472			504
INTEREST ON FEDERAL FUNDS SOLD		99			108
TOTAL INTEREST & DIVIDEND INCOME		4,057			4,449
INTEREST EXPENSE:
INTEREST ON DEPOSITS		841			1,037
INTEREST OTHER		51			46
TOTAL INTEREST EXPENSE		892			1,083
NET INTEREST INCOME		3,165			3,366
PROVISION FOR LOAN LOSSES		0			3
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		3,165			3,363
NON-INTEREST INCOME:
SERVICE FEES		418			430
OTHER OPERATING INCOME		110			85
TOTAL NON-INTEREST INCOME		528			515
NON-INTEREST EXPENSES:
SALARIES AND BENEFITS		1,163			1,160
EXPENSE OF BANK PREMISES AND EQUIPMENT		280			310
DATA PROCESSING		309			273
SUPPLIES		84			67
FEDERAL RESERVE CHARGES		50			54
DIRECTOR FEES		47			38
POSTAGE		43			61
OTHER OPERATING EXPENSES		344			301
TOTAL NON-INTEREST EXPENSES		2,320			2,264
INCOME BEFORE INCOME TAXES		1,373			1,614
INCOME TAXES		488			585
NET INCOME		$	885		$	1,029
Earnings per common share:
Basic		$	1.26		$	1.46
Diluted		$	1.26		$	1.46
Dividends per common share:		$	0.72		$	0.70
Average outstanding shares:
Basic		703,991			703,991
Diluted		703,991			703,991

 

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

 

3

 

LOGAN COUNTY BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statement of Income (unaudited)

For the Three Month Periods Ended June 30, 2004 and 2003

(In Thousands)

 

		Three Months Ending June 30,
		2004			2003
INTEREST AND DIVIDEND INCOME:
INTEREST ON LOANS		$	1,729		$	1,910
INTEREST AND DIVIDENDS ON INVESTMENTS		259			231
INTEREST ON FEDERAL FUNDS SOLD		45			59
TOTAL INTEREST & DIVIDEND INCOME		2,033			2,200
INTEREST EXPENSE:
INTEREST ON DEPOSITS		415			506
INTEREST OTHER		24			27
TOTAL INTEREST EXPENSE		439			533
NET INTEREST INCOME		1,594			1,667
PROVISION FOR LOAN LOSSES		0			1
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		1,594			1,666
NON-INTEREST INCOME:
SERVICE FEES		221			236
OTHER OPERATING INCOME		47			26
TOTAL NON-INTEREST INCOME		268			262
NON-INTEREST EXPENSES:
SALARIES AND BENEFITS		573			576
EXPENSE OF BANK PREMISES AND EQUIPMENT		146			161
DATA PROCESSING		178			137
SUPPLIES		48			38
FEDERAL RESERVE CHARGE		23			27
DIRECTOR FEES		23			18
POSTAGE		11			27
OTHER OPERATING EXPENSES		185			161
TOTAL NON-INTEREST EXPENSES		1,187			1,145
INCOME BEFORE INCOME TAXES		675			783
INCOME TAXES		240			285
NET INCOME		$	435		$	498
Earnings per common share:
Basic		$	0.62		$	0.71
Diluted		$	0.62		$	0.71
Dividends per common share:		$	0.36		$	0.35
Average outstanding shares:
Basic		703,991			703,991
Diluted		703,991			703,991

 

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

 

4

 

LOGAN COUNTY BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statement of Changes in Stockholders’ Equity (unaudited)

For the Six Month Period Ended June 30, 2004

(In Thousands)

 

		Common Stock			Surplus			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Comprehensive Income			Total
BALANCE –  DECEMBER 31, 2003		$	1,300		$	2,408		$	15,426		$	(1,406	)	$	62					$	17,790
COMPREHENSIVE INCOME
NET INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2004		0			0			885			0			0			$	885		885
OTHER COMPREHENSIVE INCOME
NET OF TAX:
UNREALIZED LOSSES ON AVAILABLE-FOR-SALE SECURITIES		0			0			0			0			(319		)	(319		)	(319		)
COMPREHENSIVE INCOME																	$	566
DIVIDENDS ON 703,991 SHARES COMMON STOCK @ $.72								(507		)										(507		)
BALANCE –JUNE 30, 2004		$	1,300		$	2,408		$	15,804		$	(1,406	)	$	(257	)				$	17,849

 

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

 

5

 

LOGAN COUNTY BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statement of Cash Flows (unaudited)

For the Six Month Periods Ended June 30, 2004 and 2003

(In Thousands)

 

		2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME		$	885		$	1,029
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION		124			132
SECURITY AMORTIZATION AND ACCRETION		102			55
PROVISION FOR LOAN LOSSES		0			3
(INCREASE) DECREASE IN OTHER ASSETS		(92		)	(436		)
INCREASE (DECREASE) IN OTHER LIABILITIES		(465		)	(607		)
NET CASH PROVIDED BY OPERATING ACTIVITIES		554			176
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALE OF SECURITIES AVAILABLE SALE		38,083			31,977
PROCEEDS FROM MATURITIES OF SECURITIES AVAILABLE FOR SALE		0			0
PURCHASE OF SECURITIES AVAILABLE FOR SALE		(49,250		)	(37,255		)
NET (INCREASE) DECREASE IN FEDERAL FUNDS SOLD		245			(820		)
NET (INCREASE) DECREASE IN LOANS		2,538			3,969
PURCHASE OF BANK PREMISES AND EQUIPMENT		(248		)	(45		)
NET CASH USES FOR INVESTING ACTIVITIES		(8,632		)	(2,174		)
CASH FLOWS FROM FINANCING ACTIVITIES:
NET INCREASE (DECREASE) IN DEMAND DEPOSITS		5,122			3,848
NET INCREASE (DECREASE) IN SAVINGS DEPOSITS		4,984			(1,837		)
NET INCREASE (DECREASE) IN TIME DEPOSITS		(116		)	(526		)
NET INCREASE (DECREASE) IN REPURCHASE AGREEMENTS		(1,000		)	2,000
DIVIDENDS PAID		(507		)	(493		)
NET CASH PROVIDED BY FINANCING ACTIVITIES		8,483			2,992
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		405			994
CASH AND CASH EQUIVALENT AT BEGINNING OF PERIOD		7,240			5,967
CASH AND CASH EQUIVALENT AT END OF PERIOD		$	7,645		$	6,961
Supplemental Disclosures of Cash Flow Information Cash Paid For:
Interest		$	857		$	1,088
Income Taxes		$	580		$	506

 

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

 

6

 

LOGAN COUNTY BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

 

1.                                       Financial Statements

 

The foregoing statements are unaudited; however, in the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of the financial statements have been included.

 

2.                                       Basis of Consolidation

 

The Consolidated Statement of Condition and Consolidated Statement of Income of Logan County BancShares, Inc. include the activity of Logan Bank and Trust Company, a wholly owned subsidiary. All significant intercompany balances and transactions have been eliminated.

 

3.                                       Critical Accounting Policies

 

The accounting and reporting policies of Logan County BancShares, Inc. ( the “Company”) and its subsidiary were prepared in accordance with accounting principles generally accepted in the United States of America, (“US GAAP”), with the instructions for Form 10-Q and Article 10 of Regulations S-X, and to general practices within the financial services industry.  Accordingly, the financial statements do not contain all of the financial information and footnotes required by US GAAP.  The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.  Management has identified the accounting policies described below as those that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company’s consolidated financial statements and management’s discussion and analysis.

 

4.                                       Income Recognition

 

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

 

In the event management believes collection of all or a portion of contractual interest on a loan has become doubtful, which generally occurs after the loan is 90 days past due, the accrual of interest is discontinued.  In addition, previously accrued interest deemed uncollectible that was recognized in income is reversed.  Interest received on nonaccrual loans is included in income only if principal recovery is reasonably assured.  A nonaccrual loan is restored to accrual status when it is brought current or has performed in accordance with contractual terms for a reasonable period of time, and the collectibility of the total contractual principal and interest is no longer doubtful.

 

5.                                       Allowance for Loan Losses

 

In general, determining the amount of the allowance for loan losses requires significant judgment and the use of estimates by management.  The Company maintains an allowance for loan losses to absorb probable losses in the loan portfolio based on a quarterly analysis of the portfolio.  This formal analysis determines an appropriate level and allocation of the allowance for loan losses among loan types and resulting provision for loan losses by considering factors affecting loan losses, including specific losses, levels and trends in impaired and nonperforming loans, historical loan loss experience, current national and local economic conditions, volume, growth and composition of the portfolio, regulatory guidance and

 

7

 

other relevant factors.  Management continually monitors the loan portfolio through reviews of past due loans and all significant loans which are considered to be potential problem loans on a monthly basis.  The internal loan review function provides for an independent review to evaluate the adequacy of the allowance.  The provision could increase or decrease each quarter based upon the results of management’s formal analysis.

 

The amount of the allowance for loan losses for the various loan types represents management’s estimate of expected losses from existing loans based upon specific allocations for individual lending relationships and historical loss experience for each category of homogeneous loans.  Impaired loans are commercial and commercial real estate loans for which it is probable the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement.  The Company individually evaluates such loans for impairment and does not aggregate loans by major risk classifications.  The definition of “impaired loans” is not the same as the definition of “nonaccrual loans,” although the two categories overlap.  The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility while not classifying the loan as impaired, provided the loan is not a commercial or commercial real estate classification.  Factors considered by management in determining impairment include payment status and collateral value.  The amount of impairment for these types of loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans.  When foreclosure is probable, impairment is measured based on the fair value of the collateral.  While allocations are made to specific loans and pools of loans, the allowance is available for all loan losses.

 

6.                                       Comprehensive Income

 

The Company is required to present comprehensive income in a full set of general-purpose financial statements for all periods presented.  The following represents comprehensive income for the three months ended June 30, 2004, and 2003.

 

		For the three Months ended June 30, 2004			For the three Months ended June 30, 2003
Net income		$	435		$	498
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities net of reclassification adjustment		(306		)	(34		)
Comprehensive Income (Loss)		$	129		$	464

 

8

 

LOGAN COUNTY BANCSHARES, INC.

 

ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

 

EARNINGS PER SHARE

 

Earnings per weighted-average common share, for the six-month periods ended June 30, 2004 and 2003 were $1.26 and $1.46, respectively.  Year-to-date earnings through June 30, 2004 reflect an annualized return on average assets (ROAA) of 1.00% compared to 1.20% for the same period ended June 30, 2003.  Also, these earnings reflect an annualized return on average equity (ROAE) of 9.93% and 11.82% respectively, for the periods ending June 30, 2004 and 2003.  Dividends for the second quarter of 2004 increased to $0.36 per share, or 2.9% from $0.35 per share paid for the second quarter of 2003.

 

COMPARISION OF THE RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003

 

The Company reported net income of $885,000 for the six months ended June 30, 2004 compared to $1,029,000 for the six months ended June 30, 2003, representing a 14% decrease or $144,000.  Net interest income, the primary component of interest income, for the six months period ended June 30, 2004, was $3,165,000, a decrease of $201,000 or 5.97% as compared to $3,363,000 for the same period.  The decrease points out the decline in interest rates over the two periods in 2004.  Management continues to actively monitor interest rate risk using asset and liability matching techniques.  Net interest margins for the six months ended June 30, 2004 and 2003 were 3.54% and 3.94%, respectively.

 

Interest income amounted to $4,057,000 at June 30, 2004, a decrease of $392,000 or 8.81%, from $4,449,000 for the same six-month period of 2003.  Interest income reflected a weighted-average yield of 4.55% for the quarter ended June 30, 2004, compared to 4.96% for the same six-month period in 2003.  Average interest earning assets were $167,146,000 and $161,683,000 during the six months ended June 30, 2004 and 2003, respectively.

 

Interest expense decreased to $439,000 for the quarter ended June 30, 2004, which was down $94,000 or 17.64% from $533,000 for the second quarter of 2003.  For the six months ended June 30, 2004, interest expense totaled $892,000, which was down $191,000 or 17.64% compared to $1,083,000 for the six-month period ended June 30, 2003.  This reflected an average cost of funds of 1.01% and 1.30%, respectively, for the six-month periods ended June 30, 2004 and 2003, and .98% and 1.23% for the second quarters of 2004 and 2003, respectively.  Average interest bearing liabilities were $126,939,000 and $125,315,000 during the six months ended June 30, 2004 and 2003, respectively, and $128,342,000 and $125,478,000 for the second quarters of 2004 and 2003, respectively.

 

There was no provision for loan losses for the six-month period ended June 30, 2004, compared to $3,000 for the comparable period in 2003.  Also, there was no provision for the second quarter of 2004 compared to $1,000 for the second quarter of 2003.  The decreased provision resulted primarily from an increase in recoveries and slower loan growth.

 

NON-INTEREST INCOME

 

Non-interest income includes revenues from service charges on deposit accounts, fees from the sale of checks, fees from automated teller machines, safe deposit box rent and insurance investment. For the three-month period ended June 30, 2004, non-interest income totaled $268,000, representing an increase of $6,000 or 0.02% from the $262,000 recorded during the same period in 2003.  For the six months ended June 30, 2004, non-interest income was $528,000, which was $13,000 or 2.52% more than the first half of 2003.

 

9

 

NON-INTEREST EXPENSE

 

Non-interest expense includes overhead costs which are not related to interest expense or to losses from loans or securities or income tax expense.  During the six months ending June 30, 2004, the Company’s non-interest expense totaled $2,362,000, increasing $48,000 or 2.07% over the non-interest expense for the six months ended June 30, 2004.  For the second quarter non-interest expense was $1,187,000 or 3.67% more than the $1,145,000 for the same period in 2003.

 

Salaries and employee benefits are the Company’s largest non-interest cost, representing approximately 50% of total non-interest expense for the first half of 2004 which was virtually the same as the first half of 2003.  For the second quarter of 2004, this percentage was 48%, and it was down compared to 50% for the second quarter of 2003. Management was effective in controlling this category of expense for both periods in 2004. Expressed as a percentage of assets, annualized non-interest expense was 2.51% for the first half of 2004 compared to 2.61% for the comparable period for 2003.  Comparing the second quarter of 2004 to 2003, these ratios were 2.57% and 2.64%, respectively.

 

INCOME TAXES

 

Logan County BancShares’ income tax expense, for the six month period ended June 30, 2004, reflected a $97,000 or 16.58% decrease compared to 2003.  For the second quarter of 2004, income tax expense was down $45,000 or 15.79%.  Income tax expenses equaled 35.54% and 36.25% of income before taxes for the first half of 2004 and 2003, respectively.  For the second quarter of 2004 and 2003 these percentages were 35.56% and 36.40%, respectively.  For the three month and six month periods the decrease in income tax expense was directly attributable to the decrease in pre-tax income.

 

FINANCIAL CONDITION AND ASSET QUALITY

 

Total assets at June 30, 2004 were approximately $184,506,000 as compared to approximately $175,489,000 at December 31, 2003, or an increase of $8,810,000 or 5.1%.  The loan portfolio decreased by $2,538,000 at June or 2.50%, during this six-month period, from $101,615,000 at December 31, 2003.  As the economy began to show signs of improvement during the first half, loan demand began to improve.  By investing short-term, management believes it is better positioned to manage the interest margin as interest rates begin to increase.  The investment portfolio increased by $11,130,000 or 23.2% during this same period; at the same time federal funds sold decreased by $245,000 or 1.8%.  Total deposits increased by $9,990,000 to $164,142,000 at June 30, 2004 from $154,152,000 at December 31, 2003.  Although deposits increased by 6.5%, pricing for deposits is very competitive in the Company’s primary trade areas among banks and other nontraditional financial service providers.

 

The continuing stagnation in the local and national economies places ongoing emphasis on the Company’s methodology in determining the adequacy of the allowance for loan losses.  The Company periodically evaluates the adequacy of the allowance for loan losses in order to maintain the allowance at a level that is sufficient to absorb probable credit losses.  This evaluation is based on a review of the Company’s historical loss experience, known and inherent risks in the loan portfolio, including adverse circumstances that may affect the ability of the borrower to repay interest and/or principal, the estimated value of collateral, and an analysis of the levels and trends of delinquencies, charge-offs and the risk ratings of the various loan categories.  Such factors as the level and trend of interest rates and the condition of the national and local economies are also considered.  At June 30, 2004, and December 31, 2003, the allowance for loan losses was $1,556,000 and $1,582,000, respectively.  This resulted in the ratio of the allowance for loan losses to total period-end loans increasing slightly from 1.56% at December 31, 2003, to 1.57% at June 30, 2004.

 

Financial instruments include commitments to extend and standby letters of credit.  These commitments include standby letters of credit of approximately $987,000 at June 30, 2004 and $1,027,000 at

 

10

 

December 31, 2003.  These instruments contain various elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition.  Additionally, certain off-balance sheet items of approximately $12,203,000 at June 30, 2004 and $11,670,000 at December 31, 2003, were comprised primarily of unfunded loan commitments.

 

LIQUIDITY AND CAPITAL RESOURCES

 

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

 

Liquidity management involves the ability to meet the cash flow requirements of depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs.  Liquidity can best be demonstrated by an analysis of the Company’s cash flows.  The primary source of cash flows for the Company is operating activities.  Operating activities provided $554,000 of liquidity for the six-month period ended June 30, 2004, compared to $176,000 for the same six months in 2003.  The principal elements of these operating flows are net income, increased for significant non-cash expenses and depreciation and amortization.  A secondary source of liquidity for the Company comes from investing activities, principally the maturities of investment securities.  For the six-month periods ended June 30, 2004 and 2003, due to the low interest rate environment, maturities and calls of investment securities amounted to $38,083,000 and $31,977,000, respectively.  As of June 30, 2004, the Company had approximately $4,257,000 of investment securities that mature within 12 months.  Interest rates are beginning to stabilize and the rapidity of calls in investment securities is expected to decline.  Relatively flat loan demand resulted in a net decrease in loans of $2,538,000 for the first six months of 2004 following a decline of $3,969,000 the same period in 2003.

 

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Risk Elements

 

The table below presents information concerning non-performing assets including non-accrual loans, renegotiated loans, loans 90 days or more past due, other real estate loans, and repossessed assets. A loan is classified as non-accrual when, in the opinion of management, there are serious doubts about the collectibility of interest and principal. At the time the accrual of interest is discontinued, future income is recognized only when cash is received. Renegotiated loans are those loans for which terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deterioration of the borrower’s ability to pay.

 

		June 30, 2004			December 31, 2003
		(dollars in thousands)
Loans on non-accrual basis		$	972		$	1,059
Loans past due 90 days or more		209			149
Renegotiated loans		0			0
Total non-performing loans		1,181			1208
Other real estate		171			202
Repossessed assets		3			3
Total non-performing assets		$	1,355		$	1,413
Non-performing loans as a percent of total loans		1.19		%	1.19		%
Non-performing assets as a percent of total assets		.73		%	.81		%
Allowance for loan losses to non-performing loans		131.75		%	130.96		%

 

Management monitors impaired loans on a continual basis. As of June 30, 2004, the Company had impaired loans with a principal balance of $1,384,688. During the six months ended June 30, 2004, loans decreased $2,538,000 and non-performing loans decreased $27,000, while the allowance for loan losses decreased $26,000. The percentage of allowance for loan losses to loans outstanding remained at 1.57 % during this time period. The collateral requirements on such loans reduce the risk of potential losses to an acceptable level in management’s opinion.

 

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

 

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ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

The negative gap position as presented in the following table for maturities of one year or less is offset by the substantial positive gap position for maturities greater than one year.  The earnings of the Company are sufficient to withstand the short-term negative gap position.  Should a large fluctuation occur, increasing the costs of funds, management would consider increasing service charges and non-interest fees which management determines the market would bear in order to negate increased rate costs.  An additional response, at the option of management, would be liquidation of certain long-term investments, and conversion of those funds into short-term securities.

 

The Company’s management recognized the concentration of large certificates of deposit.  The Company’s policy of asset-liability management matches both rates and maturities so the Company will not have a liquidity problem or allow income to be materially affected by a change in rates.

 

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

 

INTEREST RATE SENSITIVE ANALYSIS TABLE

 

(In Thousands of Dollars)

 

As of June 30, 2004		0-90			91-180			181-365			Total One Year			Over One Year			Total
Earning Assets
Loans		$	15,371		$	2,529		$	6,321		$	24,221		$	74,856		$	99,077
Investments		0			251			2,241			2,492			56,692			59,184
Federal Funds Sold		13,140			0			0			13,140			0			13,140
Total Earning Assets		28,511			2,780			8,562			39,853			131,548			171,401
Interest Bearing Liabilities
Demand Deposits		24,159			0			0			24,159			0			24,159
Savings		210			449			0			659			47,528			48,187
CD’s of $100,000 and Over		2,532			2,972			1,850			7,354			11,909			19,263
Other Time		7,309			5,853			5,887			19,049			19,167			38,216
Total Interest Bearing Liability		34,210			9,274			7,737			51,221			78,604			129,825
Interest Sensitivity Gap		$	(5,699	)	$	(6,494	)	$	825		$	(11,368	)	$	52,944		$	41,576
Cumulative Gap		$	(5,699	)	$	(12,193	)	$	(11,368	)	$	(11,368	)	$	52,944		$	41,576
Rate Sensitive Assets/Rate Sensitive Liabilities (Cumulative Percentage)		83.34		%	71.96		%	77.81		%	77.81		%	132.02		%	132.02		%

 

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ITEM 4. – CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures:

 

As of June 30, 2004, the Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange act Rule 13a-15(e)).  Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (i) enable the Company to record, process, summarize and report in a timely manner the information that the Company is required to disclose in its Exchange Act reports, and (ii) are designed with the objective of ensuring that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.

 

Changes in internal controls:

 

There were no changes in the Company’s internal controls over financial reporting or in other factors that could significantly affect these controls identified in connection with the evaluation performed by the Chief Executive Officer and Chief Financial Officer that occurred during the quarter ended June 30, 2004, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II

 

ITEM 1. – NONE

 

ITEM 2. – NONE

 

ITEM 3. – NONE

 

ITEM 4. – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

Logan County BancShares held its annual meeting on May 25, 2004. At this meeting, the shareholders approved the election of the following directors to serve until the 2005 Annual Meeting.

 

		For		Against		Withheld
Eddie Canterbury		418,325		0		1,377
David McCormick		418,325		0		1,377
Harvey Oakley		418,325		0		1,377
Clell Peyton		418,325		0		1,377
Earle B. Queen		418,325		0		1,377
LeVeta Jean Ray		418,325		0		1,377
Walter D. Vance		418,325		0		1,377
William W. Wagner		418,325		0		1,377
Michael Winter		418,325		0		1,377
Glenn T. Yost		418,325		0		1,377

 

ITEM 5. – NONE

 

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ITEM 6. – EXHIBITS AND REPORTS ON FORM 8-K

 

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

 

(14)                            Code of Ethics

 

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

 

Certification as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer

 

Certification as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer

 

(32)                            Section 1350 Certifications

 

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

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer

 

(b)                                 Reports on Form 8-K

 

1.                                       On July 23, 2004, the Company filed a current report on Form 8-K disclosing that it will amend its filings on Form 10-K for the years ending December 31, 2002, and December 31, 2003, and its filings on Form 10-Q for the quarters ending September 30, 2002, March 31, 2003, June 30, 2003, September 30, 2003, and March 31, 2004, as a result of learning that it is subject to the Sarbanes-Oxley Act of 2002.

 

2.                                       On August 4, 2004, the Company filed a current report on Form 8-K announcing changes to the Company's certifying accountant.

 

3.                                       On August 17, 2004, the Company filed a current report on Form 8-K disclosing its retention of a new certifying accountant.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

		LOGAN COUNTY BANCSHARES, INC.
		(Registrant)
Date: August 18, 2004		/s/   Eddie Canterbury
		Eddie Canterbury
		Chief Executive Officer
Date: August 18, 2004		/s/   Mark Mareske
		Mark Mareske
		Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit Number		Description
14		Code of Ethics
31.1		Certification as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer
31.2		Certification as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer
32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer
32.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer

 

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