UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-K

 

 

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

 

For the calendar year ended:

December 31, 2004

 

Commission File Number:  2-95114

 

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

 

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

 

 

NONE

(Title of Class)

 

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.  ý Yes  o No.

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 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 information statements incorporated by reference in Part III of this Form 10-K or any amendment 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’s classes of common stock as of the latest practicable date:

 

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

 

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

 

Documents Incorporated by Reference:  None

 

 

LOGAN COUNTY BANCSHARES, INC.

 

Table of Contents

 

	PART I
ITEM 1	BUSINESS
ITEM 2	PROPERTIES
ITEM 3	LEGAL PROCEEDINGS
ITEM 4	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5	MARKET FOR REGISTRANT’S COMMON STOCK, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
	PART II
ITEM 6	SELECTED FINANCIAL DATA
ITEM 7	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
ITEM 7A	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A	CONTROLS AND PROCEDURES
ITEM 9B	OTHER INFORMATION
	PART III
ITEM 10	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11	EXECUTIVE COMPENSATION
ITEM 12	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
ITEM 13	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14	PRINCIPAL ACCOUNTING FEES AND SERVICES

 

i

 

	PART IV
ITEM 15	EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

ii

 

PART I

 

ITEM 1 – BUSINESS

 

LOGAN COUNTY BANCSHARES, INC.

 

Logan County Bancshares, Inc. (the “Corporation”) is a bank holding company, which was organized under the laws of the State of West Virginia in 1985. On May 17, 1985, the Corporation acquired all the outstanding capital stock of Logan Bank & Trust Company (LB&T) and also all of the outstanding stock of Bank of Chapmanville (BC). Both of these subsidiaries are banking corporations organized under the laws of the State of West Virginia. On May 28, 1996, the subsidiary banks, Logan Bank & Trust Company and Bank of Chapmanville entered into a merger agreement whereby they would be merged into Logan Bank & Trust Company. The merger was completed after proper regulatory approval and was accounted for under the pooling of interest method of accounting.

 

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

 

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

 

Logan Bank & Trust Company provides depository lending and related financial services to commercial, retail, industrial, financial and governmental customers. The lending function includes short and medium-term loans, letters of credit, inventory and accounts receivable financing and real estate construction lending.

 

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

 

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

 

1

 

COMPETITION

 

Vigorous competition exists in the market area of Logan County Bancshares, Inc. In addition to the three other banks located within the market area, the location is in a relatively close proximity to two population centers of the State. There is also competition for deposits and related financial services from non-bank institutions such as savings and loans, insurance companies and brokerage firms, all of which are active in the area. Those institutions, in addition to the finance companies, provide loans. Since the Bank Holding Company Act, passed by the West Virginia Legislature in 1982, local banks have been joining bank holding companies around the State. Of the five banks located in Logan County, only one is a unit bank. The other four are members of various multi-bank holding companies. Logan County BancShares, Inc. has been able to compete effectively within the county by having one institution located in the county seat (Logan Bank & Trust Company), and branches located in the high-growth area of the county. Also, to stimulate growth, Logan County BancShares, Inc. is the only bank holding company owned and controlled from within the county.

 

SUPERVISION AND REGULATION

 

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

 

The Act requires every bank holding company to obtain the prior approval of the Federal Reserve Board before acquiring substantially all the assets of or direct or indirect ownership or control of more than 5% of the voting shares of any bank, which is not already majority-owned. The Act also prohibits a bank holding company, with certain exceptions, from itself engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in non-banking activities. One of the principal exceptions to these prohibitions is for engaging or acquiring shares of a company engaged in activities found by the Federal Reserve Board by order or regulation to be so closely related to banking or managing banks as to be a proper incident thereto. The Act prohibits the acquisition by a bank holding company of more that 5% of the outstanding voting shares of a bank located outside the State in which the operations of its banking subsidiaries are principally conducted, unless such an acquisition is specifically authorized by statute of the State in which the bank acquired is located. The Act and regulations of the Federal Reserve Board also prohibit a bank holding company and its subsidiaries from engaging in certain tie-in arrangements in connection with any extension of credit or provision of any property or services.

 

Logan Bank & Trust Company is an insured bank, organized under the Banking Law of the State of West Virginia and is a member of the Federal Reserve System. Accordingly, its operations are subject to Federal and State laws applicable to commercial banks with trust powers and to regulation by the West Virginia State Banking Commissioner, the Federal Reserve Board and the Federal Deposit Insurance Corporation. Among other restrictions, the West Virginia Banking laws state that banks organized hereunder may pay dividends only out of undivided profits. Under the Federal Reserve Act, the approval of the Federal Reserve Board is required for dividends declared by a state member bank which in any year exceeds the net profits of such bank for that year, as defined, combined with retained net profits for the two preceding years.

 

2

 

GOVERNMENT MONETARY POLICIES AND ECONOMIC CONTROLS

 

The earnings and growth of the banking industry and of Logan Bank & Trust Company is affected by the credit policies of monetary authorities including the Federal Reserve System. An important function of the Federal Reserve System is to regulate the national supply of bank credit in order to control recessionary and inflationary pressures. Among the instruments of monetary policy used by the Federal Reserve to implement these objectives are open market operations in the U. S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth of bank loans, investments and deposits and may also affect interest rates charged on loans or paid for deposits. The monetary policies of the Federal Reserve authorities have had a significant effect on the operating results of commercial banks in the past and are expected to continue to have such an effect in the future.

 

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

 

FOREIGN OPERATIONS

 

The corporation and subsidiary have no foreign operations.

 

EXECUTIVE OFFICERS

 

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

 

EMPLOYEES

 

As of December 31, 2004, the Corporation and its subsidiaries had approximately 64 full-time equivalent employees. None of these employees are represented by a collective bargaining unit and management considers employee relations to be excellent.

 

FINANCIAL INFORMATION

 

The Corporation’s revenue is derived from interest and fees on loans, interest on investment securities, interest on federal funds sold, service charges and other fees, gains on securities and other sources of income.  The breakdown of revenue is set forth in the Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing on pages 12 through 25 herein.

 

AVAILABLE INFORMATION

 

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

 

3

 

The Corporation does not have an Internet website.  Accordingly, you may not access the Corporation’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports filed with the SEC.  The Corporation will provide paper copies of these reports free of charge upon request.

 

ITEM 2 – PROPERTIES

 

The principal offices of the Corporation are shared with those of Logan Bank & Trust Company and are situated in Logan, West Virginia. This building, a two-story bank and office building, is owned by Logan Bank & Trust Company, as is a mini-bank and drive-up facility which is located nearby. In addition, a one-story office and bank building is located on Railroad Avenue in Chapmanville, West Virginia. During 1996 the Bank opened two other branch facilities in West Virginia. Both are one-story office and bank buildings located at Rt. 10, South Man, West Virginia and Rt. 10 North at Harts, West Virginia.  The Fountain Place Branch was opened during December, 1999.

 

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

 

ITEM 3 - LEGAL PROCEEDINGS

 

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

 

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

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

 

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

 

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

 

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

 

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

 

4

 

As of March 29, 2005, there were approximately 376 shareholders of record of Logan County BancShares Inc.’s common stock.

 

No purchases of our equity securities, either as part of a publicly announced plan or otherwise, were made during any month of the fourth quarter 2004.

 

5

 

PART II

 

ITEM 6 - SELECTED FINANCIAL DATA

 

LOGAN COUNTY BANCSHARES, INC. AND SUBSIDIARY

 

(In Thousands of Dollars)

 

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

 

6

 

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

 

INTRODUCTION

 

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

 

It should be read in conjunction with the audited consolidated financial statements and the accompanying notes, along with the selected financial data presented elsewhere in this report.  Management is not aware of any market or institutional trends, events or uncertainties that will have or are reasonably likely to have a material effect on the liquidity, capital resources or operations of the Company, except as discussed herein.  Management is also not aware of any current recommendations by any regulatory authorities, which would have such a material effect if implemented.

 

FORWARD-LOOKING STATEMENTS

 

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 governmental actions and reforms; and rapidly changing technology and evolving financial industry standards.

 

CORPORATE STRUCTURE AND ACQUISITIONS

 

Logan County Bancshares, Inc. is a bank holding company, which was organized under the laws of the State of West Virginia in 1985.  On May 17, 1985, the Company acquired all the outstanding capital stock of Logan Bank & Trust Company (LB&T) and also all of the outstanding stock of Bank of Chapmanville (BC).  Both of these subsidiaries were banking corporations organized under the laws of the State of West Virginia.  The subsidiaries each had one business segment, community banking.  On October 7, 1996, the subsidiary banks combined and Bank of Chapmanville merged into Logan Bank & Trust Company. 

 

CRITICAL ACCOUNTING POLICIES

 

The Company’s accounting and reporting policies are integral to understanding the results reported.  Accounting policies are described in detail in Note 1 to the Consolidated Financial Statements.  The Company’s accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America, and they conform to general practices within the financial services industry.  The Company’s most complex accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and contingencies.  The Company has established detailed policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period.  In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner.  The following is a brief description of the Company’s current accounting policies involving significant management valuation judgments.

 

7

 

Allowance for Loan Losses

 

The Company considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies.  The balance in the allowance for loan losses is determined based on management’s review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions and other pertinent factors, including management’s assumptions as to future delinquencies, recoveries and losses.  All of these factors may be susceptible to significant change.  Among the many factors affecting the allowance for loan losses; some are quantitative while others require qualitative judgment.  Although management believes its process for determining the allowance adequately considers all of the potential factors that could potentially result in credit losses, the process includes subjective elements and may be susceptible to significant change.  To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely impact the Corporation’s financial condition or earnings in future periods.

 

Deferred Tax Assets

 

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

 

ACCOUNTING, LEGISLATIVE AND REGULATORY MATTERS

 

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

 

During the first quarter of 2003, the Securities and Exchange Commission promulgated rules to implement several provisions of The Sarbanes-Oxley Act of 2002.  These rules included conditions for using financial measures that exclude information that would be required under generally accepted accounting principles, (“non-GAAP financial measures”).  Additionally, new rules expand the number of events that require current reporting on Form 8-K.  Furthermore, new rules have been issued pertaining to an audit committee and its need for a financial expert and code of ethics requirements for senior management.  Also, new rules were issued defining audit committee responsibility for external auditor retention and determination of external auditor independence.  Management anticipates additional costs to implement the various provisions of this law; however, it is difficult to determine the full impact of implementation until such time as all rules have been promulgated.

 

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

 

8

 

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

 

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“FAS”) No. 123 (Revised 2004), Share-Based Payment.  The statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements and that this cost be measured based on the fair value of the equity or liability instruments issued.  FAS No. 123 (Revised 2004) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.  The Company will adopt FAS No. 123 (Revised 2004) on July 1, 2005, although the adoption of the standard is not expected to have a material impact on the Company’s results of operations.

 

In October 2003, the American Institute of Certified Public Accountants issued SOP 03-3, Accounting for Loans or Certain Debt Securities Acquired in a Transfer.  SOP 03-3 applies to a loan that is acquired where it is probable, at acquisition, that a transferee will be unable to collect all contractually required payments receivable.  SOP 03-3 requires the recognition, as accretable yield, of the excess of all cash flows expected at acquisition over the investor’s initial investment in the loan as interest income on a level-yield basis over the life of the loan.  The amount by which the loan’s contractually required payments exceed the amount of its expected cash flows at acquisition may not be recognized as an adjustment to yield, a loss accrual, or a valuation allowance for credit risk.  SOP 03-3 is effective for loans acquired in fiscal years beginning after December 31, 2004.  Early adoption is permitted.  The adoption of SOP 03-3 is not expected to have a material impact on the consolidated financial statements. 

 

EARNINGS OVERVIEW

 

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

 

EARNINGS PER SHARE

 

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

 

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

 

9

 

CONDENSED STATEMENTS OF FINANCIAL CONDITION
Statistical Summary 2004 - 2000

 

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

 

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SUMMARY OF OPERATIONS
Statistical Summary 2004 - 2000

 

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

 

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BALANCE SHEET ANALYSIS

 

Loans

 

Loans represent the largest assets on the Company’s balance sheet.    Total loans decreased by $3,318,000 or 3.3% in 2004 and approximately $6,318,000 or 5.9% in 2003, following a 7.7% decrease of $8,975.000 in 2002.  Competition in the Company’s market is very aggressive for originating new loans.  Although loan demand was relatively strong during most of 2004, as interest rates remained at historically low levels, volume declined While other financial institutions offered long-term fixed rate loans, management continued to adhere to its philosophy of not offering such loans in this low interest rate cycle.  This has been a contributing factor in the reduction in loan volume.   At year end 2004, loans accounted for 57.8% of total interest earning assets compared to 62.4% of total interest earning assets at December 31, 2003.  The loan portfolio contributed 83.5% of total interest income in 2004 and 86.5% in 2003 and 84.4% in 2002.  See Note 4 to the Consolidated Financial Statement for additional information on loans.

 

During 2004, the Company’s strong emphasis continued to be on lending to local companies with known local management and excellent financial stability.  Most of the commercial loans in the portfolio were made at variable rates of interest.  Additionally, the Company continued to make loans available in an expanding retail marketplace.  Consistent with management’s philosophy on relationship banking, most borrowers are also depositors and utilize other banking services.  The average yield of the loan portfolio decreased to an average rate of 6.96% in 2004 compared to 7.30% in 2003.  This reflected the historically low interest rate environment during 2004 and 2003, and the continued repricing of loans at lower interest rates.

 

The commercial loan portfolio is generally diversified and geographically dispersed within the Company’s market.  There are no concentrations, lines of business or industry that represent greater than 30% of the Company’s equity.  Within each specific industry, borrowers are diversified as to specialty, service or other unique feature of the overall industry.  A substantial portion of the customer’s ability to honor their contractual commitment is largely dependent upon the economic conditions of the borrowers’ respective industries and overall economic conditions of southern West Virginia, which is somewhat less volatile than many areas of the country.

 

The consumer portion of the loan portfolio consists of both secured and unsecured loans made to individuals and families for various reasons including the purchase of automobiles, home improvements, educational expenses and other purposes.  The Company continues to carefully monitor the consumer sector during this period of economic weakness.  As recessionary pressures result in higher levels of unemployment, the likelihood for increased volatility arises in the consumer sector.

 

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Nonperforming assets, including nonaccrual loans, loans past-due 90 days or more, restructured loans and other real estate owned, decreased $653,000 or approximately 46%, from December 31, 2003 to December 31, 2004.  These decreases reflect management’s ongoing efforts to enhance the quality of the loan portfolio.  This improvement was further enhanced by the Company’s adhering to a stricter set of criteria in the determination of granting renewals and extensions.  The Company’s policy is to discontinue the accrual of interest on loans that are past due more than 90 days, unless such loans are well collateralized and in process of collection.  Loans that are on a current payment status or past due less those 90 days may also be classified as nonaccrual if repayment of principal or interest is in doubt.  The Company’s holdings of other real estate owned decreased approximately $202,000 in 2004 resulting in no balance at December 31 following an increase of 3%, or $6,000 in 2003.  See the following schedule in this discussion 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 absorb probable credit losses inherent in the portfolio.  Management is committed to the early recognition of problem loans, and to an appropriate and adequate level of allowance.  The allowance for loan losses was 1.28% of 2004 year-end loan balances after being 1.50% of year-end loans at December 31, 2003 and December 31, 2002.  The estimation of the adequacy of the allowance for loan losses is the most significant estimate determined by management.  Different amounts could result under different conditions or assumptions.  The allowance for loan losses is also reviewed by banking regulators and the Company’s independent auditors.

 

The Company has instituted an internal loan review function.  This process includes a thorough evaluation of the credit administration systems and personnel. The objective is to have an effective loan review system that provides management with information that will produce a more focused and effective approach in managing credit risk inherent in the loan portfolio.  As a part of this process, a system of loan grades is utilized to further support the adequacy of the loan loss allowance.

 

In addition to the review of credit quality through the credit review process, the Company constructs a comprehensive analysis of the allowance for loan losses for its loan portfolio at least quarterly.  The procedures that are utilized entail preparation of a loan “watch” list and assigning each loan a classification.  For those individually significant loans where it is determined that it is not probable that the borrower will make all payments in accordance with the original loan agreement, management performs an impairment analysis as required by SFAS Nos. 114 and 118.  Specific reserves are recorded on impaired loans of $376,000 and $427,000 at December 31, 2004 and 2003, respectively.  Other classified loans are categorized and allocated appropriate reserves.  Other loans more than 90 days past due that have not been considered in the aforementioned procedures are assigned a classification of Substandard and are reserved for accordingly.  The remaining portfolio is segregated into consumer, commercial, and residential real estate loans, and the historical net charge off percentage of each category 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 existence of any deterioration.  In addition, volume and trends in delinquencies and nonaccural loans, off-balance sheet credit risks, the loan portfolio composition, loan volume and maturity of the portfolio, national and local economic conditions and the experience, ability and depth of lending management and staff are given consideration.  See Notes 4, 5 and 14 to the Consolidated Financial Statements for additional information on loan quality, the allowance for loan losses and concentration of credit risk.

 

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

 

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

 

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

 

The following table presents an analysis of fixed and variable rate loans as of December 31, 2004 and 2003, along with the contractual maturities.

 

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

 

 

Allowance for Loan Losses

 

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

 

The Company has historically maintained the allowance for loan losses at a level greater than actual charge-offs. Although a subjective evaluation is determined by management, the Company believes it has appropriately assessed the risk of loans in the loan portfolio and has provided for an allowance which is adequate based on that assessment. Because the allowance is an estimate, any change in the economic conditions of the Company’s market area could result in new estimates which could affect the Company’s earnings. Management monitors the quality of 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 of commercial, real estate, and installment loans in order to measure the asset quality of the portfolio. Management’s review of the loan

 

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

 

The allowance for loan losses decreased $318,183 or 20.1%, from $1,581,414 at December 31, 2003 to $1,263,231 at December 31, 2004. The allowance for loan losses represented 1.3% and 1.6% of outstanding loans as of December 31, 2004 and 2003, respectively. Net loan charge-offs were $10,183 in 2004, compared to $40,070 in 2003 and $67,963 in 2002. The net loan charge-offs remain within historical ranges.  Because of the improved quality of the loan portfolio management reduced the allowance for loan losses in 2004 by $308,000 through a credit to the provision for loan losses, while an expense of $2,852 and $533,818 was charged to the provision for loan losses for the years ended December 31, 2003 and 2002, respectively. The credit quality of the loan portfolio combined with the recent level of net charge-offs and nonperforming assets continue to be considered in the calculation of the provision for loan losses.

 

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NONPERFORMING ASSETS AND LOAN LOSS ANALYSIS

 

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

 

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