KILLBUCK BANCSHARES INC - FORM 10-Q

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EX-31.2 - SECTION 302 CFO CERTIFICATION - KILLBUCK BANCSHARES INC	dex312.htm
EX-99.1 - REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - KILLBUCK BANCSHARES INC	dex991.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - KILLBUCK BANCSHARES INC	dex321.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - KILLBUCK BANCSHARES INC	dex322.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - KILLBUCK BANCSHARES INC	dex311.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended March 31, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-24147

KILLBUCK BANCSHARES, INC.

(Exact name of registrant as specified in its Charter)

OHIO

34-1700284

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

165 N. Main Street, Killbuck, OH 44637

(Address of principal executive offices and zip code)

(330) 276-2771

(Registrant’s telephone number, including area code)

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 x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

State the number of shares outstanding for each of the issuer’s classes of common equity as of the latest practicable date:

Class: Common Stock, no par value

Outstanding at May 9, 2011: 615,782

KILLBUCK BANCSHARES, INC.

Index


		Page Number

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements:

	Consolidated Balance Sheet as of March 31, 2011 and December 31, 2010		3

	Consolidated Statements of Income for the three months ended March 31, 2011 and 2010		4

	Consolidated Statements of Changes In Shareholders’ Equity for the three months ended March 31, 2011		5

	Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010		6

	Notes to Unaudited Consolidated Financial Statements		7-22

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23-31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		32

Item 4.	Controls and Procedures		32

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		33

Item 1A.	Risk Factors		33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		33

Item 3.	Default Upon Senior Securities		33

Item 4.	(Removed and Reserved)		33

Item 5.	Other Information		34

Item 6.	Exhibits		34

SIGNATURES			35

-2-

Killbuck Bancshares, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEET


	March 31, 2011 (unaudited)			December 31, 2010
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions	$	59,558,597		$	61,711,145
Federal funds sold		6,240,000			4,713,000

Total cash and cash equivalents		65,798,597			66,424,145


Investment securities:
Securities available for sale		77,176,208			76,044,672
Securities held to maturity (fair value of $43,340,712 and $40,482,091)		42,078,487			39,332,164

Total investment securities		119,254,695			115,376,836


Loans (net of allowance for loan losses of $2,668,580 and $2,665,607)		209,534,275			205,074,687

Loans held for sale, at lower of cost or market		—			320,000
Premises and equipment, net		5,683,205			5,751,540
Accrued interest receivable		1,554,589			1,165,298
Goodwill, net		1,329,249			1,329,249
Other assets		9,597,302			9,628,598

Total assets	$	412,751,912		$	405,070,353

LIABILITIES
Deposits:
Noninterest bearing demand	$	57,722,606		$	63,108,035
Interest bearing demand		29,127,529			28,812,536
Money market		52,761,040			43,906,637
Savings		53,488,132			51,094,094
Time		170,554,223			169,267,955

Total deposits		363,653,530			356,189,257
Short-term borrowings		3,310,000			3,585,000
Federal Home Loan Bank advances		579,293			643,735
Accrued interest and other liabilities		866,733			972,671

Total liabilities		368,409,556			361,390,663

SHAREHOLDERS’ EQUITY

Common stock – No par value: 1,000,000 shares authorized, 718,431 issued		8,846,670			8,846,670
Retained earnings		45,409,107			44,841,370
Accumulated other comprehensive income		(271,303	)		(383,669	)
Treasury shares, at cost (102,649 and 102,486 shares at March 31, 2011 and December 31, 2010, respectively)		(9,642,118	)		(9,624,681	)

Total shareholders’ equity		44,342,356			43,679,690


Total liabilities and shareholders’ equity	$	412,751,912		$	405,070,353

See accompanying notes to the unaudited consolidated financial statements.

-3-

Killbuck Bancshares, Inc. and Subsidiary

CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)


	Three Months Ended March 31,
	2011		2010

INTEREST INCOME
Interest and fees on loans	$	2,700,449	$	2,906,917
Federal funds sold and other		31,939		19,856
Investment securities:
Taxable		444,666		439,593
Exempt from federal income tax		372,649		355,013

Total interest income		3,549,703		3,721,379


INTEREST EXPENSE
Deposits		972,964		974,182
Federal Home Loan Bank advances		9,926		17,108
Short-term borrowings		1,803		2,623

Total interest expense		984,693		993,913


NET INTEREST INCOME		2,565,010		2,727,466

Provision for loan losses		—		—


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		2,565,010		2,727,466


NONINTEREST INCOME
Service charges on deposit accounts		30,687		33,163
ATM and interchange fees		74,460		65,960
Fees on deposit accounts		136,129		175,664
Gain on sale of loans, net		12,934		16,048
Bank-owned life insurance		56,988		58,970
Recovery on bank-owned life insurance		—		244,000
Other income		42,048		34,642

Total noninterest income		353,246		628,447


NONINTEREST EXPENSE
Salaries and employee benefits		1,309,534		1,253,184
Occupancy and equipment expense		251,329		251,581
Professional fees		59,636		104,869
Franchise tax		135,050		135,050
Insurance and bond expense		122,692		113,739
Stationery, supplies and printing		33,527		42,814
Postage, express and freight		61,955		59,530
Data processing		69,633		51,472
Advertising expense		40,910		40,086
Other expenses		216,991		196,537

Total noninterest expense		2,301,257		2,248,862


INCOME BEFORE INCOME TAXES		616,999		1,107,051
Income taxes		49,262		165,034


NET INCOME	$	567,737	$	942,017

Earnings per common share	$	0.92	$	1.53


Weighted average shares outstanding		615,897		616,706

See accompanying notes to the unaudited consolidated financial statements.

-4-

Killbuck Bancshares, Inc. and Subsidiary

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2011


	Common Stock		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Shareholders’ Equity			Comprehensive Income

Balance, December 31, 2010	$	8,846,670	$	44,841,370	$	(383,669	)	$	(9,624,681	)	$	43,679,690

Net income				567,737								567,737		$	567,737
Other comprehensive income:
Net unrealized gain on securities, net of tax $57,886						112,366						112,366			112,366

Comprehensive income														$	680,103

Purchase of treasury shares, at cost (163 shares)									(17,437	)		(17,437	)


Balance, March 31, 2011 (Unaudited)	$	8,846,670	$	45,409,107	$	(271,303	)	$	(9,642,118	)	$	44,342,356

See accompanying notes to the unaudited consolidated financial statements.

-5-

Killbuck Bancshares, Inc. and Subsidiary

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)


	Three Months Ended March 31,
	2011			2010
OPERATING ACTIVITIES
Net income	$	567,737		$	942,017
Adjustments to reconcile net income to net cash provided by Operating activities:
Gain on sale of loans		(12,934	)		(16,048	)
Provision for depreciation and amortization		119,632			209,157
Origination of loans held for sale		(1,151,100	)		(1,146,295	)
Proceeds from the sale of loans		1,484,034			1,053,743
Bank-owned life insurance income		(52,038	)		(244,662	)
Net change in:
Accrued interest and other assets		(363,843	)		(97,821	)
Accrued expenses and other liabilities		(105,937	)		(1,928	)

Net cash provided by operating activities		485,551			698,163


INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from maturities and repayments		15,298,166			27,902,877
Purchases		(16,259,451	)		(22,023,742	)
Investment securities held to maturity:
Proceeds from maturities and repayments		485,620			702,255
Purchases		(3,273,717	)		(2,754,568	)
Net increase in loans		(4,459,588	)		(1,150,753	)
Proceeds from sale of foreclosed assets		—			22,500
Purchase of premises and equipment		(9,524	)		(44,487	)
Proceeds from bank-owned life insurance		—			390,111

Net cash provided by (used in) investing activities		(8,218,494	)		3,044,193


FINANCING ACTIVITIES
Net increase in demand, money market and savings deposits		6,178,005			15,245
Net increase in time deposits		1,286,269			4,272,834
Net decrease in short-term borrowings		(275,000	)		(1,675,000	)
Repayment of Federal Home Loan Bank advances		(64,442	)		(164,657	)
Purchase of treasury stock		(17,437	)		—

Net cash provided by financing activities		7,107,395			2,448,422


Net increase (decrease) in cash and cash equivalents		(625,548	)		6,190,778
Cash and cash equivalents at beginning of period		66,424,145			45,513,944

Cash and cash equivalents at end of period	$	65,798,597		$	51,704,722


Supplemental Disclosures of Cash Flows Information
Cash Paid During the Period For:
Interest on deposits and borrowings	$	991,062		$	994,885


Income taxes	$	—		$	—

See accompanying notes to the unaudited consolidated financial statements.

-6-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Killbuck Bancshares, Inc. (the “Company”) and its wholly owned subsidiary Killbuck Savings Bank Company (the “Bank”). All significant intercompany balances and transactions have been eliminated in the consolidation.

The accompanying reviewed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information that would be included in audited financial statements. The information furnished reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of financial condition and results of operations. All such adjustments are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

These statements should be read in conjunction with the consolidated statements of and for the year ended December 31, 2010 and related notes which are included on the Form 10-K (file no. 000-24147)

NOTE 2 - EARNINGS PER SHARE

The Company currently maintains a simple capital structure; therefore, there are no potential dilutive effects on earnings per share. As such, earnings per share are calculated using the weighted number of shares for the period.

NOTE 3 - COMPREHENSIVE INCOME

The Company is required to present comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is comprised of the following:


	Three Months Ended March 31, 2011			Three Months Ended March 31, 2010

Net income	$	567,737		$	942,017
Other comprehensive income:
Net unrealized gains (losses) on securities		170,252			(196,121	)
Tax effect		(57,886	)		66,681

Total comprehensive income	$	680,103		$	812,577

-7-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 4 - FAIR VALUE MEASUREMENTS

The Company utilizes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined under the literature are as follows:


Level I:		Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II:		Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level III:		Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The following table presents the assets reported on the consolidated statements of financial condition at fair value as of March 31, 2011 and December 31, 2010 by level within the fair value hierarchy. As required by the authoritative accounting guidance, financial assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.


	March 31, 2011
	Level I		Level II		Level III		Total
	(In thousands)

Assets measured on a recurring basis:
Securities available for sale:
U.S. Government and Agency Obligations	$	—	$	76,510	$	—	$	76,510
Mutual Funds		—		666		—		666

Assets measured on a nonrecurring basis:
Impaired loans		—		—	$	1,199	$	1,199

	December 31, 2010
	Level I		Level II		Level III		Total
	(In thousands)

Assets measured on a recurring basis:
Securities available for sale:
U.S. Government and Agency Obligations	$	—	$	75,486	$	—	$	75,486
Mutual Funds		—		559		—		559

Assets measured on a nonrecurring basis:
Impaired loans		—		—	$	1,234	$	1,234

-8-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 5 - FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values at March 31, 2011 and December 31, 2010 are as follows:


	2011				2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In thousands)
Financial assets:
Cash and due from depository institutions	$	59,559	$	59,559	$	61,711	$	61,711
Federal funds sold		6,240		6,240		4,713		4,713
Securities available for sale		77,176		77,176		76,045		76,045
Securities held to maturity		42,078		43,341		39,332		40,482
Loans		209,534		215,812		205,075		213,729
Loans held for sale		—		—		320		320
Accrued interest receivable		1,555		1,555		1,165		1,165
Regulatory stock		1,884		1,884		1,884		1,884
Bank-owned life insurance (“BOLI”)		5,779		5,779		5,727		5,727

Financial liabilities:
Deposits	$	363,654	$	366,489	$	356,189	$	359,687
Short term borrowings		3,310		3,310		3,585		3,585
Federal Home Loan Bank advances		579		671		644		755
Accrued interest payable		179		179		185		185

Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.

Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument.

If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or simulation modeling. As many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in assumptions on which the estimated fair values are based may have a significant impact on the resulting estimated fair values.

As certain assets and liabilities such as deferred tax assets and liabilities, premises and equipment and many other operational elements of the Company, are not considered financial instruments, but have value, this estimated fair value of financial instruments would not represent the full market value of the Company.

The Company employed simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices were not available based upon the following assumptions:

Cash and Due from Depository Institutions, Federal Funds Sold, Accrued Interest Receivable, Regulatory Stock, BOLI, Short Term Borrowings, and Accrued Interest Payable

The fair value approximates the current carrying value.

-9-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 5 - FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS - CONTINUED

Investment Securities and Loans Held for Sale

The fair value of investment securities and loans held for sale are equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities.

Loans, Deposits, and Federal Home Loan Bank Advances

The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value. Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of year end. The fair values of certificates of deposit and other borrowed funds are based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities.

Commitments to Extend Credit and Standby Letters of Credit

These financial instruments are generally not subject to sale, and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure.

-10-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 6 - INVESTMENT SECURITIES

The amortized cost of securities and their estimated fair values are as follows:

Securities Available for Sale


	March 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

Obligations of U.S. Government Agencies and Corporations	$	77,043,858	$	342,884	$	876,502	$	76,510,240

Mutual funds		543,415		122,553		—		665,968


Total	$	77,587,273	$	465,437	$	876,502	$	77,176,208


	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

Obligations of U.S. Government Agencies and Corporations	$	76,082,573	$	414,509	$	1,011,398	$	75,485,684

Mutual funds		543,415		15,573		—		558,988


Total	$	76,625,988	$	430,082	$	1,011,398	$	76,044,672

Securities Held to Maturity


	March 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Obligations of States and Political Subdivisions	$	42,078,487	$	1,413,207	$	150,982	$	43,340,712


Total	$	42,078,487	$	1,413,207	$	150,982	$	43,340,712


	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

Obligations of States and Political Subdivisions	$	39,332,164	$	1,368,278	$	218,351	$	40,482,091


Total	$	39,332,164	$	1,368,278	$	218,351	$	40,482,091

-11-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 6 - INVESTMENT SECURITIES - CONTINUED

The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at March 31, 2011 and December 31, 2010. As of March 31, 2011, there were a total of 40 securities in an unrealized loss position.


	March 31, 2011
	12 Months or Less						12 Months or Greater
	Fair Value		Gross Unrealized Loss		Number of Impaired Securities		Fair Value		Gross Unrealized Loss		Number of Impaired Securities		Fair Value		Gross Unrealized Loss

U. S. Government Agencies and Corporations	$	36,063,397	$	876,502		19		—		—		—	$	36,063,397	$	876,502

Obligations of States and Political Subdivisions		5,499,653		150,982		21		—		—		—		5,499,653		150,982


Total temporarily impaired debt securities		41,563,050		1,027,484		40		—		—		—		41,563,050		1,027,484


Total of all securities	$	41,563,050	$	1,027,484		40		—		—		—	$	41,563,050	$	1,027,484


	December 31, 2010
	12 Months or Less						12 Months or Greater
	Fair Value		Gross Unrealized Loss		Number of Impaired Securities		Fair Value		Gross Unrealized Loss		Number of Impaired Securities		Fair Value		Gross Unrealized Loss

U. S. Government Agencies and Corporations	$	33,935,490	$	1,011,398		18		—		—		—	$	33,935,490	$	1,011,398

Obligations of States and Political Subdivisions		6,388,398		218,351		26		—		—		—		6,388,398		218,351


Total temporarily impaired debt securities		40,323,888		1,229,749		44		—		—		—		40,323,888		1,229,749


Total of all securities	$	40,323,888	$	1,229,749		44		—		—		—	$	40,323,888	$	1,229,749

-12-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 6 - INVESTMENT SECURITIES - CONTINUED

The amortized cost and fair values of debt securities at March 31, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.


	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value

Due in one year or less	$	1,809,303	$	1,933,666	$	3,601,721	$	3,644,779

Due after one year through five years		40,096,191		40,248,974		13,631,409		14,187,474

Due after five through ten years		31,983,694		31,261,266		23,540,479		24,154,478

Due after ten years		3,698,085		3,732,302		1,304,878		1,353,981


	$	77,587,273	$	77,176,208	$	42,078,487	$	43,340,712

At least quarterly the corporation conducts a comprehensive security level impairment assessment on all securities in an unrealized loss position to determine if other than temporary impairment (OTTI) exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Under the current OTTI accounting model for debt securities, an OTTI loss must be recognized for a debt security in an unrealized loss position if the Corporation intends to sell the security or it is more likely than not that the corporation will be required to sell the security before recovery of its amortized cost basis. In this situation, the amount of loss recognized in income is equal to the difference between fair value and the amortized cost basis of the security. Even if the Corporation does not expect to sell the security, the Corporation must evaluate the expected cash flows to be received to determine if a credit loss has occurred. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized in income. The portion of the unrealized loss relating to other factors, such as liquidity conditions in the market or changes in the market interest rates, is recorded in other comprehensive income. Equity securities are also evaluated to determine whether the unrealized loss is expected to be recoverable based on whether evidence exists to support a realizable value equal to or greater than the amortized cost basis. If it is probable that the Corporation will not recover the amortized cost basis, taking into consideration the estimated recovery period and its ability to hold the equity security until recovery, OTTI is recognized. The security level assessment is performed on each security, regardless of the classification of the security as available for sale or held to maturity. The assessments are based on the nature of the securities, the financial condition of the issuer, the extent and duration of the securities, the extent and duration of the loss and whether Management intends to sell or it is more likely than not that it will be required to sell a security before recovery of its amortized cost basis, which may be maturity. For those securities for which the assessment shows the Corporation will recover the entire cost basis, Management does not intend to sell these securities and it is more likely than not that the Corporation will not be required to sell them before the anticipated recovery of the amortized cost basis, the gross unrealized losses are recognized in other comprehensive income, net of tax.

-13-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 7 - LOANS

Major classifications of loans are summarized as follows:


	March 31, 2011			December 31, 2010

Real estate – residential	$	89,094,546		$	87,505,717
Real estate – farm		9,551,865			9,925,340
Real estate – commercial		55,492,425			51,310,626
Real estate – construction		11,222,268			10,406,156
Commercial and other loans		40,536,565			41,931,142
Consumer and credit card loans		6,508,620			6,866,408

		212,406,289			207,945,389
Less allowance for loan losses		(2,668,580	)		(2,665,607	)
Less net deferred loan origination fees		(203,434	)		(205,095	)

Loans, net	$	209,534,275		$	205,074,687


	March 31, 2011
	Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total

Real estate - residential and farm	$	—	$	98,646,411	$	98,646,411
Real estate - commercial and construction		953,179		65,761,514		66,714,693
Commercial and other loans		630,614		39,905,951		40,536,565
Consumer and credit card loans		—		6,508,620		6,508,620

Total	$	1,583,793	$	210,822,496	$	212,406,289


	December 31, 2010
	Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total

Real estate - residential and farm	$	—	$	97,431,057	$	97,431,057
Real estate - commercial and construction		957,590		60,759,192		61,716,782
Commercial and other loans		639,218		41,291,924		41,931,142
Consumer and credit card loans		—		6,866,408		6,866,408

Total	$	1,596,808	$	206,348,581	$	207,945,389

Loans held for sale at March 31, 2011 and December 31, 2010 were $0 and $320,000, respectively and were carried at cost. Real estate loans serviced for the Federal Home Loan Mortgage Corporation (FHLMC), which are not included in the consolidated balance sheet, totaled $47.3 million and $47.8 million at March 31, 2011 and December 31, 2010, respectively. The Bank is currently collecting a fee of .25% for servicing these loans.

The Company’s primary business activity is with customers located within its local trade area. Residential, commercial, personal, and agricultural loans are granted. The Company also selectively funds loans originated outside of its trade area provided such loans meet its credit policy guidelines. Although the Company has a diversified loan portfolio at March 31, 2011 and December 31, 2010, loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate trade area.

-14-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 7 - LOANS - CONTINUED

The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The residential real estate loan segment is further disaggregated into two classes: amortizing term loans, which are primarily first liens, and home equity lines of credit, which are generally second liens. The commercial real estate (“CRE”) loan segment is further disaggregated into two classes. Non-owner occupied CRE loans, which include loans secured by non-owner occupied nonfarm nonresidential properties, generally have a greater risk profile than all other CRE loans, which include loans secured by multifamily structures and owner-occupied commercial structures. The commercial and other loans segment consists of loans made for the purpose of financing the activities of commercial customers. The consumer loan segment consists primarily of installment loans (direct and indirect) and credit card loans.

Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than $250,000 or is part of a relationship that is greater than $500,000, and if the loan either is in nonaccrual status, or is risk rated Substandard and is greater than 60 days past due. Loans are considered to be impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Corporation does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of larger relationship that is impaired, or are classified as a troubled debt restructuring agreement.

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by loan basis, with management primarily utilizing the fair value of collateral method. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Corporation’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

-15-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 7 - LOANS - CONTINUED

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of March 31, 2011 and December 31, 2010:


March 31, 2011	Impaired Loans with Specific Allowance				Impaired Loans with No Specific Allowance		Total Impaired Loans
	Recorded Investment		Related Allowance		Recorded Investment		Recorded Investment		Unpaid Principal Balance

Real estate - commercial and construction	$	953,179	$	127,354		—	$	953,179	$	953,179
Commercial and other loans		630,614		257,218		—		630,614		630,614

Total Impaired Loans	$	1,583,793	$	384,572		—	$	1,583,793	$	1,583,793


December 31, 2010	Impaired Loans with Specific Allowance				Impaired Loans with No Specific Allowance		Total Impaired Loans
	Recorded Investment		Related Allowance		Recorded Investment		Recorded Investment		Unpaid Principal Balance

Real estate - commercial and construction	$	957,590	$	131,765		—	$	957,590	$	957,590
Commercial and other loans		639,218		231,491		—		639,218		639,218

Total Impaired Loans	$	1,596,808	$	363,256		—	$	1,596,808	$	1,596,808

The following table presents the average recorded investment in impaired loans and related interest income recognized for the three months ended March 31, 2011 and for the year 2010:


	March 31, 2011		December 31, 2010

Average Investment in impaired loans:
Real estate - commercial	$	955,385	$	969,209
Commercial loans		634,916		543,367
Interest income recognized on an accrual basis on impaired loans:
Real estate - commercial	$	12,753	$	71,163
Commercial loans		9,960		33,389
Interest income recognized on a cash basis on impaired loans		—		—

-16-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 7 - LOANS - CONTINUED

Total nonaccrual loans and the related interest for the three months ended March 31, 2011 and for the year ended December 31, 2010 are as follows.


	2011		2010

Principal outstanding	$	103,673	$	107,402
Contractual interest due	$	4,740	$	3,524
Interest income recognized	$	—	$	—

The following table presents loans that are troubled debt restructurings as of March 31, 2011 and December 31, 2010:


	Troubled Debt Restructurings at Period End				New Troubled Debt Restructurings in YTD Period				Troubled Debt Restructurings that Subsequently Defaulted during Prior Twelve Months
March 31, 2011	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment

Real estate - residential and farm		—		—		—		—		—		—
Real estate - commercial and construction		—		—		—		—		—		—
Commercial and other loans		3	$	268,504		—		—		—		—
Consumer and credit card loans		1		2,107		1	$	2,107		—		—

Total		4	$	270,611		1	$	2,107		—		—


	Troubled Debt Restructurings at Period End				New Troubled Debt Restructurings in YTD Period				Troubled Debt Restructurings that Subsequently Defaulted during Prior Twelve Months
December 31, 2010	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment

Real estate - residential and farm		—		—		—		—		—		—
Real estate - commercial and construction		—		—		—		—		—		—
Commercial and other loans		3	$	283,205		3	$	292,482		—		—
Consumer and credit card loans		—		—		—		—		—		—

Total		3	$	283,205		3	$	292,482		—		—

Management uses an eight point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first four categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.

-17-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 7 - LOANS - CONTINUED

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, delinquency, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Credit Department performs an annual review of all commercial relationships $250,000 or greater. Confirmation of the appropriate risk grade is included in the review on an ongoing basis. The Bank has an experienced Loan Review Department that continually reviews and assesses loans within the portfolio. The Bank engages an external consultant to conduct loan reviews on at least an annual basis. Generally, the external consultant reviews commercial relationships greater than $250,000 and all criticized relationships. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of March 31, 2011 and December 31, 2010:


March 31, 2011	Pass		Special Mention		Substandard		Doubtful		Total

Real estate - residential and farm	$	95,493,652	$	1,590,140	$	1,562,619		—	$	98,646,411
Real estate - commercial and construction		55,654,333		6,670,403		4,389,957		—		66,714,693
Commercial and other loans		38,069,168		864,942		1,469,898	$	132,557		40,536,565
Consumer and credit card loans		6,442,579		45,688		20,353		—		6,508,620

Total	$	195,659,732	$	9,171,173	$	7,442,827	$	132,557	$	212,406,289


December 31, 2010	Pass		Special Mention		Substandard		Doubtful		Total

Real estate - residential and farm	$	94,542,356	$	1,392,351	$	1,496,350		—	$	97,431,057
Real estate - commercial and construction		50,610,705		6,559,073		4,547,004		—		61,716,782
Commercial and other loans		39,304,012		688,352		1,803,409	$	135,369		41,931,142
Consumer and credit card loans		6,808,388		42,215		15,805		—		6,866,408

Total	$	191,265,461	$	8,681,991	$	7,862,568	$	135,369	$	207,945,389

-18-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 7 - LOANS - CONTINUED

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of March 31, 2011 and December 31, 2010:


March 31, 2011	Current		30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Non- Accrual		Total Loans

Real estate – residential and farm	$	97,693,245	$	667,099	$	36,254	$	146,140	$	849,493	$	103,673	$	98,646,411
Real estate – commercial and construction		65,687,390		74,124		953,179		—		1,027,303		—		66,714,693
Commercial and other loans		40,323,957		153,301		59,307		—		212,608		—		40,536,565
Consumer and credit card loans		6,496,720		8,393		751		2,756		11,900		—		6,508,620

Total	$	210,201,312	$	902,917	$	1,049,491	$	148,896	$	2,101,304	$	103,673	$	212,406,289


December 31, 2010	Current		30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Non- Accrual		Total Loans

Real estate – residential and farm	$	97,253,887	$	53,829	$	15,939		—	$	69,768	$	107,402	$	97,431,057
Real estate – commercial and construction		60,618,420		1,098,362		—		—		1,098,362		—		61,716,782
Commercial and other loans		41,734,675		178,788		17,679		—		196,467		—		41,931,142
Consumer and credit card loans		6,858,090		5,585		1,055	$	1,678		8,318		—		6,866,408

Total	$	206,465,072	$	1,336,564	$	34,673	$	1,678	$	1,372,915	$	107,402	$	207,945,389

NOTE 8 - ALLOWANCE FOR LOAN LOSSES

An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.

The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the Bank’s ALL.

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors.

The classes described above provide the starting point for the ALL analysis. Management tracks the historical net charge-off activity for each class. A historical charge-off factor is calculated for each class utilizing a rolling 12 quarters.

-19-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 8 - ALLOWANCE FOR LOAN LOSSES - CONTINUED

“Pass” rated credits are segregated from “Criticized” credits for the application of qualitative factors. Management has identified a number of qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

An analysis of the change in the allowance for loan losses for the three months ended March 31, 2011 and the year ended December 31, 2010 follows:


	2011			2010
Balance, Beginning of the period	$	2,665,607		$	2,441,169
Add:
Provision charged to operations		—			215,182
Loan recoveries		5,933			69,651
Less: Loans charged off		(2,960	)		(60,395	)

Balance, End of the period	$	2,668,580		$	2,665,607

The following table summarizes the primary segments of the ALL, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of March 31, 2011. Activity in the allowance is presented for the three months ended March 31, 2011:


March 31, 2011	Real Estate Residential and Farm		Real Estate Commercial and Construction			Commercial and Other Loans			Consumer and Credit Cards			Total

Allowance for Loan Losses:
Beginning Balance	$	671,646	$	985,042		$	954,526		$	54,393		$	2,665,607
Charge-offs		—		—			—			(2,960	)		(2,960	)
Recoveries		—		900			4,200			833			5,933
Provision		15,017		(930	)		(13,846	)		(241	)		—

Ending Balance	$	686,663	$	985,012		$	944,880		$	52,025		$	2,668,580


Ending Balance: individually evaluated for impairment	$	0	$	127,354		$	257,218		$	0		$	384,572


Ending Balance: collectively evaluated for impairment	$	686,663	$	857,658		$	687,662		$	52,025		$	2,284,008

The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the breakdown of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.

-20-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of this guidance is not expected to have a significant impact on the Company’s financial statements.

In July 2010, FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The amendments in ASU 2010-20 encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption. However, an entity should provide comparative disclosures for those reporting periods ending after initial adoption. The adoption of this guidance is not expected to have a significant impact on the Company’s financial position or results of operations. The Company has included the required disclosures in footnote 7 and 8.

In October, 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. This ASU addresses the diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral, The amendments are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2011 and are not expected to have a significant impact on the Company’s financial statements.

In December, 2010, the FASB issued ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. This ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating an impairment may exist. The qualitative factors are consistent with the existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this Update are effective for fiscal year, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities may early adopt the amendments using the effective date for public entities. This ASU is not expected to have a significant impact on the Company’s financial statements.

-21-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS - CONTINUED

In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this Update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.

In January 2011, the FASB issued ASU 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in this Update temporarily delay the effective date of the disclosures about troubled debt restructurings in Update 2010-20, enabling public-entity creditors to provide those disclosures after the FASB clarifies the guidance for determining what constitutes a troubled debt restructuring. The deferral in this Update will result in more consistent disclosures about troubled debt restructurings. This amendment does not defer the effective date of the other disclosure requirements in Update 2010-20. In the proposed Update for determining what constitutes a troubled debt restructuring, the FASB proposed that the clarifications would be effective for interim and annual periods ending after June 15, 2011. For the new disclosures about troubled debt restructurings in Update 2010-20, those clarifications would be applied retrospectively to the beginning of the fiscal year in which the proposal is adopted. The adoption of this guidance in not expected to have a significant impact on the Company’s financial statements.

In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments in this Update provide additional guidance or clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The amendments in this Update are effective for the first interim or annual reporting period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. This ASU is not expected to have a significant impact on the Company’s financial statements.

-22-

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words “believes”, “anticipates”, “contemplates”, “expects”, and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected. Those risks and uncertainties include changes in interest rates, risks associated with the ability to control costs and expenses, and general economic conditions. Killbuck Bancshares, Inc. undertakes no obligation to publicly release the results of any revisions to those forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

The Company conducts no significant business or operations of its own other than holding all of the outstanding stock of the Killbuck Savings Bank Company. As a result, references to the Company generally refer to the Bank unless the context indicates otherwise.

Critical Accounting Policies

The Company’s accounting policies are integral to understanding the results reported. The accounting policies are described in detail in Note 1 of the Consolidated Financial Statements filed with the Commission as part of the Company’s Annual Report on Form 10-K for its calendar year ended December 31, 2010. Our most complex accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. We have 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 our current accounting policies involving significant management valuation judgments.

Allowance for Loan Losses - Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The Company’s allowance for loan losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio.

Management uses historical information to assess the adequacy of the allowance for loan losses as well as the prevailing business environment as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off. For a full discussion of the Company’s methodology of assessing the adequacy of the reserve for loan losses, refer to Note 1 of the Consolidated Financial Statements filed with the Commission as part of the Company’s Annual Report on Form 10-K for its calendar year ended December 31, 2010.

Goodwill and Other Intangible Assets - As discussed in Note 6 of the Consolidated Financial Statements, filed with the Commission as part of the Company’s Annual Report on Form 10-K for its calendar year ended December 31, 2010; the Company must assess goodwill and other intangible assets each year for impairment. This assessment involves estimating cash flows for future periods. If the future cash flows were less than the recorded goodwill and other intangible assets balances, we would be required to take a charge against earnings to write down the assets to the lower value.

Deferred Tax Assets - We use an estimate of future earnings to support our position that the benefit of our 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 our net income will be reduced. Our deferred tax assets are described further in Note 13 of the consolidated financial statements filed with the Commission as part of the Company’s annual report on Form 10-K for its fiscal year ended December 31, 2010.

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Financial Condition

The Company’s assets at March 31, 2011 totaled $412.8 million, an increase of $7.7 million, or 1.9% over 2010 totals.

The asset growth during the first quarter of 2011 generally reflects a $7.5 million, or 2.1% increase in total deposits. The deposit growth is generally reflective of the Company’s continuing marketing efforts directed at profitable organic growth.

Cash and cash equivalents decreased by $0.6 million, or 0.9% to $65.8 million at March 31, 2011. The Company has maintained above normal levels of cash and cash equivalents due to the economic uncertainty in the environment.

Investment securities available for sale increased by $1.1 million or 1.5% from December 31, 2010, to March 31, 2011 due to an increase in suitable securities available to purchase for the portfolio. Investments held to maturity increased $2.7 million or 7.0% due to some attractive municipal securities available for the portfolio.

Net loans increased during the first quarter of 2011 by $4.5 million, or 2.2%, totaling $209.5 million at quarter end. An increase of $6.2 million occurred in the real estate loan category, which is attributable primarily to increases in residential real estate lending, commercial real estate lending and construction lending of $1.6 million, $4.2 million and $0.8 million, respectively. The Company experienced modest declines in farm lending, commercial lending and consumer lending of $0.4 million, $1.4 million and $0.4 million, respectively, due to lower demand in those sectors.

The Company’s allowance for loan losses at March 31, 2011 totaled $2.7 million, or 1.26% of total loans, as compared to $2.7 million, or 1.28% of total loans at December 31, 2010.

The allowance for loan losses is management’s estimate of the amount of probable credit losses in the portfolio. The Company determines the allowance for loan losses based upon an ongoing evaluation. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of cash flows expected to be received on impaired loans that may be susceptible to significant change. Increases to the allowance for loan losses are made by charges to the provision for loan losses. Loans deemed uncollectible are charged against the allowance for loan losses. Recoveries of previously charged-off amounts are credited to the allowance for loan losses.

The Company’s allowance for loan losses is the accumulation of various components calculated based upon independent methodologies. All components of the allowance for loan losses represent an estimation performed according to either Financial Accounting Standards Board Accounting Standards Codification Topic 450-Contingencies, or Topic 310-Receivables. Management’s estimate of each allowance component is based on certain observable data that management believes is the most reflective of the underlying loan losses being estimated. Changes in the amount of each component of the allowance for loan losses are directionally consistent with changes in the observable data and corresponding analyses. Some of the components that management factors in are current economic conditions, loan growth assumptions, credit concentrations, and levels of nonperforming loans.

A key element of the methodology for determining the allowance for loan losses is the Company’s credit-risk-evaluation process, which includes credit-risk grading of individual commercial loans. Loans are assigned credit-risk grades based on an internal assessment of conditions that affect a borrower’s ability to meet its contractual obligation under the loan agreement. The assessment process includes reviewing a borrower’s current financial information, historical payment experience, credit documentation, public information, and other information specific to each individual borrower. Certain commercial loans are reviewed on an annual or rotational basis or as management becomes aware of information affecting a borrower’s ability to fulfill its obligation.

-24-

Total deposits at March 31, 2011 were $363.7 million compared to $356.2 million at December 31, 2010. Demand accounts decreased $5.1 million, while money market accounts, savings accounts and time deposits accounts increased $8.9 million, $2.4 million and $1.3 million respectively. Management attributes these changes to the changes in interest rates. A Money Market account is a short term investment that customers use while waiting until the interest rates meet their expectations for longer term time deposits. Management believes the demand account decreases are attributable to normal fluctuations due to customer usage.

Federal Home Loan Bank advances decreased $64,000 due to maturities and scheduled repayments, and short-term borrowings decreased $275,000 at March 31, 2011 from December 31, 2010.

Shareholders’ equity increased by approximately $663,000 during the quarter ended March 31, 2011, totaling $44.3 million at quarter-end, as compared to $43.7 million at December 31, 2010. The growth in shareholders’ equity during the first quarter of 2011 was comprised of period earnings of $568,000 and an increase of $112,000 in accumulated other comprehensive income, which were offset by $17,000 in treasury share purchases. Management monitors risk-based capital and leveraged capital ratios in order to assess compliance of the regulatory guidelines. At March 31, 2011, the total capital ratio was 19.46%; the Tier I capital ratio was 18.33%, and the leverage ratio was 10.67%, compared to regulatory capital requirements of 8.00%, 4.00% and 4.00% respectively. These ratios are well in excess of regulatory capital requirements.

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RESULTS OF OPERATIONS

Comparison of the Quarters Ended March 31, 2011 and 2010

Net income for the three-month period ended March 31, 2011, was $568,000, a decrease of $374,000 or 39.7% from the $942,000 reported at March 31, 2010.

Total interest income of approximately $3,550,000 for the three-month period ended March 31, 2011, compares to $3,721,000 for the same period in 2010, a decrease of $171,000 or 4.6%. The decrease in total interest income is primarily attributable to a decrease in interest and fees on loans due primarily to a decrease in the average yield on the underlying balances. See “Average Balance Sheet” for the three-month periods ended March 31, 2011 and 2010. The yield on loans decreased to 5.16% for the first three months of 2011 compared to 5.53% for the first three months of 2010. Average loan balances were $209,486,000 for the first three months of 2011 compared to $210,435,000 for the first three months of 2010. The interest on tax exempt investment securities of $373,000 for 2011 compares to $355,000 for 2010. The decrease in tax exempt investment income is primarily attributable to a decrease in yield. Average nontaxable investment balances were $40,423,000 compared to $36,190,000 and the yields were 3.69% compared to 3.92% for the first three months of 2011 and 2010 respectively. The interest on Federal Funds Sold and other increased $12,000 due to an increase in balances Due from Federal Reserve Bank. The average balance outstanding in Due from Federal Reserve Bank was $52,059,000 compared to $31,959,000 for the first three months of 2011 and 2010, respectively. The yield on the balances in Due from Federal Reserve Bank remained the same for both periods at 0.23%.

Total interest expense of $985,000 for the three-month period ending March 31, 2011 represents a decrease of $9,000 from the $994,000 reported for the same three-month period in 2010. The decrease in interest expense on deposits of $1,000 is due mainly to a decrease in interest rates. The decrease in interest expense on Federal Home Loan Bank advances of $7,000 is due to maturities and principal payments on the advances. The cost on interest bearing liabilities was 1.30%, compared to 1.49% for the three-month periods of 2011 and 2010, respectively. Average interest-bearing liabilities were $302,472,000 for the first three months of 2011 compared to $265,987,000 for the first three months of 2010. See “Average Balance Sheet” for the three-month periods ended March 31, 2011 and 2010.

Net interest income of $2,565,000 for the three months ended March 31, 2011, compares to $2,727,000 for the same three-month period in 2010, a decrease of $162,000 or 6.0%. The foregoing factors culminated in the Company’s attainment of an interest rate spread of 2.40% and a net yield on earning assets of 2.67% in 2011, compared to 2.84% and 3.17% respectively, in 2010. Management believes the Company’s reduction in spread and margin in 2011 primarily stems from the need to carry higher levels of liquidity in the current environment, and does not represent a material adverse trend. The net interest margin is expected to stabilize but remain low.

There was no provision for loan losses for the first quarter of 2011 or 2011. This is principally attributable to the continuing low levels of nonperforming assets in the loan portfolio. As stated previously, the Company maintains the allowance at a level commensurate with the credit risks inherent in the portfolio.

Total non-interest income for the three-month period ended March 31, 2011, of $353,000 compares to $628,000 for the same three-month period in 2010, a decrease of $275,000 or 43.8%. ATM and interchange fees increased $8,000 due to increased usage of ATM machines. The Fees on deposit accounts decreased $40,000 due to a decrease in non-sufficient funds activity. Recovery on bank owned life insurance (BOLI) income decreased $244,000 due to a recovery (death benefit payment) on BOLI in 2010.

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Total non-interest expense of $2,301,000 for the three months ended March 31, 2011, compares to $2,249,000 for the same three-month period in 2010. This represents an increase of $52,000 or 2.3%. Salary and employee benefits increased approximately $56,000 due to normal salary increases, offset by a decrease in employee benefits. Professional fees decreased approximately $45,000 due mainly to decreased legal, audit and consulting fees. The changes in the remaining expense accounts were attributable to increases/decreases in items that are normal and recurring in nature.

Income tax expense declined to $49,000 in 2011, representing a $116,000, or 70.1%, reduction from the $165,000 of income tax expense recorded in 2010. The quarter over quarter decline is primarily attributable to lower pretax income and higher levels of tax-exempt income in the 2011 quarter. The Company’s effective tax rate was 8.0% in 2011, as compared to 14.9% in 2010. The principal difference between the Company’s effective tax rate in 2011 and 2010 and the 34% statutory tax rate in effect for both quarters resulted from the beneficial effects of tax-exempt income.

-27-

Liquidity

Management monitors projected liquidity needs and determines the level desirable based in part on the Company’s commitments to make loans and management’s assessment of the Company’s ability to generate funds.

The primary sources of funds are deposits, repayment of loans, maturities of investments, funds provided from operations and advances from the FHLB of Cincinnati. While scheduled repayments of loans and maturities of investment securities are predictable sources of funds, deposit flows and loan repayments are greatly influenced by the general level of interest rates, economic conditions and competition. The Company uses its sources of funds to fund existing and future loan commitments, to fund maturing time deposits and demand deposit withdrawals, to invest in other interest-earning assets, to maintain liquidity, and to meet operating expenses.

Cash and amounts due from depository institutions and federal funds sold totaled $65.8 million at March 31, 2011. These assets provide the primary source of liquidity for the Company. In addition, management has designated a portion of the investment portfolio, $77.2 million as available for sale and has an available unused line of credit of $40.5 million with the Federal Home Loan Bank of Cincinnati to provide additional sources of liquidity at March 31, 2011. As of March 31, 2011, the Company had commitments to fund loans of approximately $5.2 million and unused lines of credit totaling $45.6 million.

Cash was provided during the three month period ended March 31, 2011, mainly from operating activities of $0.5 million, the net increase in deposits of $7.5 million, and the maturities and repayments of investment securities of $15.8 million. Cash was used during the three month period ended March 31, 2011, mainly for the purchase of investment securities of $19.5 million. Cash and cash equivalents totaled $65.8 million at March 31, 2011, a decrease of $0.6 million from $66.4 million at December 31, 2010.

Management is not aware of any conditions, including any regulatory recommendations or requirements, which would adversely affect its liquidity or ability to meet its funding needs in the normal course of business.

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Risk Elements

The table below presents information concerning nonperforming assets including nonaccrual loans, renegotiated loans, loans 90 days or more past due, other real estate loans and repossessed assets at March 31, 2011, and December 31, 2010. The Company ceases accruing interest on residential mortgages secured by real estate and consumer loans when principal or interest payments are delinquent 90 days or more. Commercial loans, that are 90 days or more past due, are reviewed by the Executive Vice President and the loan officer to determine whether they will be classified as nonperforming. These officers review various factors, which include, but are not limited to, the timing of the maturity of the loan in relation to the ability to collect, whether the loan is deemed to be well secured, whether the loan is in the process of collection, and the favorable results of the analysis of customer financial data. A nonperforming loan will only be reclassified as a performing loan when stringent criteria have been met. At the time the accrual of interest is discontinued, future income is recognized only when cash is received or the loan has been returned to performing loan status. Renegotiated loans are those loans which terms have been renegotiated to provide a reduction or deferral of principal or interest as of result of the deterioration of the borrower.


	March 31, 2011			December 31, 2010
	(dollars in thousands)

Loans on nonaccrual basis	$	104		$	107
Loans past due 90 days or more		149			2
Renegotiated loans		128			283

Total nonperforming loans		381			392

Other real estate		—			—
Repossessed assets		—			—

Total nonperforming assets	$	381		$	392


Nonperforming loans as a percent of total loans		.18	%		.19	%

Nonperforming loans as a percent of total assets		.09	%		.10	%

Nonperforming assets as a percent of total assets		.09	%		.10	%

The allowance for loan losses at March 31, 2011, totaled $2.7 million or 1.26% of total loans as compared to $2.7 million or 1.28% at December 31, 2010. There was no provision for the three months ended March 31, 2011 and 2010.

The level of funding for the provision is a reflection of the overall loan portfolio. Nonaccrual loans and loans past due 90 days or more consist primarily of one to four family residential mortgages. The collateral requirements on such loans reduce the risk of potential losses to an acceptable level in management’s opinion. Renegotiated loans consist primarily of commercial loans.

Management performs a quarterly evaluation of the allowance for loan losses. The evaluation incorporates internal loan review, actual historical losses, as well as any negative economic trends in the local market. The evaluation is presented to and approved by the Board of Directors. Although the Company maintains its allowance for loan losses at a level that it considers to be adequate to provide for the inherent risk of loss in its portfolio, there can be no assurance that future losses will not exceed estimated amounts or that additional provisions for loan losses will not be required in future periods.

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AVERAGE BALANCE SHEET

Average Balance Sheet for the Three-Month Period Ended March 31

The following table sets forth certain information relating to the Company’s average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from month-end balances. Management does not believe that the use of month-end balances instead of daily average balances has caused any material differences in the information presented.


	March 31, 2011								March 31, 2010
	Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate
Assets
Interest-earning assets:
Loans (1)(2)(3)	$	209,485,639		$	2,700,449		5.16	%	$	210,435,096		$	2,906,917		5.53	%
Securities - taxable (4)		73,953,861			425,246		2.30	%		58,017,935			420,173		2.90	%
Securities – nontaxable (4)		40,423,387			372,649		3.69	%		36,189,917			355,013		3.92	%
Securities Equity (4,5)		1,884,560			19,420		4.12	%		1,884,560			19,420		4.12	%
Federal funds sold		6,407,947			1,827		0.11	%		5,613,564			1,455		0.10	%
Due from Federal Reserve Bank		52,059,270			30,112		0.23	%		31,959,226			18,401		0.23	%

Total interest earnings assets		384,214,664			3,549,703		3.70	%		344,100,298			3,721,379		4.33	%

Noninterest earning assets
Cash and due from other institutions		9,313,671								9,183,048
Premises and equipment, net		5,723,485								5,973,416
Accrued interest		1,045,052								1,110,311
Other assets		9,160,242								9,334,513
Less allowance for loan losses		(2,669,088	)							(2,455,166	)

Total noninterest earnings assets		22,573,362								23,146,122

Total assets	$	406,788,026							$	367,246,420


Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest bearing demand	$	28,539,261			9,713		0.14	%	$	26,532,870			9,885		0.15	%
Money market accounts		47,510,755			68,982		0.58	%		34,996,271			73,452		0.84	%
Savings Deposits		52,397,515			44,846		0.34	%		43,886,367			42,616		0.39	%
Time deposits		170,239,650			849,423		2.00	%		154,814,907			848,229		2.19	%
Short-term borrowings		3,184,019			1,803		0.23	%		4,653,498			2,623		0.23	%
Federal Home Loan Bank advances		601,230			9,926		6.60	%		1,103,427			17,108		6.20	%

Total interest-bearing liabilities		302,472,430			984,693		1.30	%		265,987,340			993,913		1.49	%

Noninterest bearing liabilities:
Demand deposits		60,314,103								57,188,397
Accrued expenses and other liabilities		1,118,026								1,645,509

Total noninterest bearing liabilities		61,432,129								58,833,906

Shareholders’ equity		42,883,467								42,425,174

Total liabilities and shareholders’ equity	$	406,788,026							$	367,246,420


Net interest income				$	2,565,010							$	2,727,466


Interest rate spread (6)							2.40	%							2.84	%

Net yield on interest-earning assets (7)							2.67	%							3.17	%

(1)	For purposes of these computations, the daily average loan amounts outstanding are net of deferred loan fees.

(2)	Included in loan interest income are loan related fees of $78,000 and $84,000 in 2011 and 2010, respectively.

(3)	Nonaccrual loans are included in loan totals and do not have a material impact on the information presented.

(4)	Average balance is computed using the carrying value of securities. The average yield has been computed using the historical amortized cost average balance for available for sale securities.

(5)	Equity securities are comprised of common stock of the Federal Home Loan Bank, Federal Reserve Bank and Great Lakes Bankers Bank.

(6)	Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(7)	Net yield on interest-earning assets represents net interest income as a percentage of average interest earning assets.

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Rate/Volume Analysis

The table below sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in average volume multiplied by old rate) and (ii) changes in rates (changes in rate multiplied by old average volume). Changes, which are not solely attributable to rate, or volume are allocated to changes in rate due to rate sensitivity of interest-earning assets and interest-bearing liabilities (dollars in thousands).


	Three-Month Period Ended March
	2011 Compared to 2010
	Increase (Decrease) Due To
	Volume			Rate			Net
Interest income
Loans	$	(13	)	$	(194	)	$	(207	)
Securities-taxable		116			(111	)		5
Securities-nontaxable		41			(23	)		18
Securities-equities		—			—			—
Federal funds sold		—			—			—
Due from Federal Reserve Bank		12			—			12

Total interest earning
Assets		156			(328	)		(172	)


Interest expense
Interest bearing demand		1			(1	)		—
Money market accounts		26			(30	)		(4	)
Savings deposits		8			(6	)		2
Time deposits		84			(83	)		1
Short-term borrowing		(1	)		—			(1	)
Federal Home Loan Bank
Advances		(8	)		1			(7	)

Total interest bearing
Liabilities		110			(119	)		(9	)


Net change in net interest income	$	46		$	(209	)	$	(163	)

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Item 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

Not Applicable to Smaller Reporting Companies.

Item 4 – CONTROLS AND PROCEDURES

The Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Senior Vice President/Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Senior Vice President/Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective, as of the end of the period covered by this report, in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

Disclosure controls and procedures are the control and other procedures of the Company that are designed to ensure that the information required to be disclosed by the Company in its reports or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchanges Commission’s rules and forms.

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II – OTHER INFORMATION

Item 1 - Legal Proceedings

None

Item 1A - Risk Factors

Not applicable to Smaller Reporting Companies.

Item 2 - Unregistered sales of equity securities and use of proceeds

The Company did not engage in any unregistered sales of its securities during the quarter ended March 31, 2011.

ISSUER PURCHASES OF EQUITY SECURITIES

Period

(a) Total
Number of
Shares
(or Units)
Purchased

(b)
Average
Price Paid
per Share
(or Unit)

(d) Maximum Number
(or Approximate Dollar Value)
of Shares (or Units) that May
Yet Be Purchased Under the
Plans or Programs

January 1 – 31, 2011

106.37

N/A

February 1 – 28, 2011

—

N/A

March 1 – 31, 2011

110

107.27

N/A

Total (1)

163

106.98

N/A

(1)	163 shares of common stock were purchased by Killbuck Bancshares in open-market transactions.

Item 3 - Default upon senior securities

None

Item 4 - (Removed and Reserved)

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Item 5 - Other Information

None

Item 6 - Exhibits

The following exhibits are included in this report or incorporated herein by reference:


3.1(i)		Articles of Incorporation of Killbuck Bancshares, Inc.*

3.1(ii)		Amendment to the Articles of Incorporation of Killbuck Bancshares, Inc. increasing authorized shares.**

3.2		Code of Regulations of Killbuck Bancshares, Inc.*

31.1		Rule 13a-14(a) Certification

31.2		Rule 13a-14(a) Certification

32.1		Section 1350 Certifications

32.2		Section 1350 Certifications

99.1		Report of Independent Registered Public Accounting Firm.

*	Incorporated by reference to an identically numbered exhibit to the Form 10 (file No. 0-24147) filed with SEC on April 30, 1998 and subsequently amended on July 8, 1998 and July 31, 1998.

**	Incorporated by reference to Registrant’s report on Form 10-Q for the quarter ended March 31, 2004, filed with the Commission on May 13, 2004.

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Signatures

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


	Killbuck Bancshares, Inc.

Date: May 11, 2011	By:	/s/Craig Lawhead
	Craig Lawhead
	President and
	Chief Executive Officer

Date: May 11, 2011	By:	/s/Lawrence Cardinal
	Lawrence Cardinal
	Chief Financial Officer

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Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company