- Quarterly Report (10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting Company

UNITED STATES

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 September 30, 2010

¨	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 November 9, 2010: 616,706

KILLBUCK BANCSHARES, INC.

Index


		Page Number
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):

	Consolidated Balance Sheet as of September 30, 2010 and December 31, 2009		3

	Consolidated Statement of Income for the nine months ended September 30, 2010 and 2009		4

	Consolidated Statement of Income for the three months ended September 30, 2010 and 2009		5

	Consolidated Statement of Changes In Shareholders’ Equity for the nine months ended September 30, 2010		6

	Consolidated Statement of Cash Flows for the nine months ended September 30, 2010 and 2009		7

	Notes to Unaudited Consolidated Financial Statements		8-16

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17-29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		30

Item 4.	Controls and Procedures		30

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		31

Item 1A.	Risk Factors		31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		31

Item 3.	Default Upon Senior Securities		31

Item 4.	(Removed and Reserved)		31

Item 5.	Other Information		32

Item 6.	Exhibits		32

SIGNATURES			33

Killbuck Bancshares, Inc.

CONSOLIDATED BALANCE SHEET (UNAUDITED)


	September 30, 2010			December 31, 2009
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions	$	59,013,282		$	42,575,944
Federal funds sold		7,254,000			2,938,000

Total cash and cash equivalents		66,267,282			45,513,944


Investment securities:
Securities available for sale		62,897,352			65,334,849
Securities held to maturity (fair value of $42,534,286 and $36,373,611)		40,579,895			35,086,821

Total investment securities		103,477,247			100,421,670


Loans (net of allowance for loan losses of $2,662,107 and $2,441,169)		206,872,587			207,575,135

Loans held for sale, at lower of cost or market		1,090,500			271,000
Premises and equipment, net		5,959,719			6,009,442
Accrued interest receivable		1,498,961			1,467,901
Goodwill, net		1,329,249			1,329,249
Other assets		9,273,744			9,391,044

Total assets	$	395,769,289		$	371,979,385


LIABILITIES

Deposits:
Noninterest bearing demand	$	56,901,884		$	63,636,376
Interest bearing demand		27,427,442			32,102,301
Money market		49,633,208			28,669,992
Savings		46,906,167			42,973,020
Time		164,424,230			153,913,387

Total deposits		345,292,931			321,295,076
Short-term borrowings		3,910,000			5,660,000
Federal Home Loan Bank advances		741,518			1,212,000
Accrued interest and other liabilities		1,058,717			748,901

Total liabilities		351,003,166			328,915,977


SHAREHOLDERS’ EQUITY

Common stock – No par value: 1,000,000 shares authorized, 718,431 issued		8,846,670			8,846,670
Retained earnings		44,983,071			43,742,847
Accumulated other comprehensive income		479,096			16,605
Treasury stock, at cost (101,725 shares for both dates presented)		(9,542,714	)		(9,542,714	)

Total shareholders’ equity		44,766,123			43,063,408


Total liabilities and shareholders’ equity	$	395,769,289		$	371,979,385

See accompanying notes to the unaudited consolidated financial statements.

Killbuck Bancshares, Inc.

CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)


	Nine Months Ended September 30,
	2010		2009

INTEREST INCOME
Interest and fees on loans	$	8,601,845	$	9,295,475
Federal funds sold and other		71,989		36,524
Investment securities:
Taxable		1,434,990		1,663,897
Exempt from federal income tax		1,104,528		1,059,279

Total interest income		11,213,352		12,055,175


INTEREST EXPENSE
Deposits		2,983,019		3,354,635
Short term borrowings		7,417		9,198
Federal Home Loan Bank advances		45,094		70,630

Total interest expense		3,035,530		3,434,463


NET INTEREST INCOME		8,177,822		8,620,712

Provision for loan losses		215,182		2,000


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,962,640		8,618,712


NON INTEREST INCOME
Service charges on deposit accounts		98,748		102,416
ATM and interchange fees		221,278		184,901
Fees on deposit accounts		531,130		572,574
Gain on sale of loans, net		136,189		108,430
Earnings on bank owned life insurance		418,304		177,519
Other income		101,170		111,099

Total non interest income		1,506,819		1,256,939


NON INTEREST EXPENSE
Salaries and employee benefits		3,730,454		3,790,555
Occupancy and equipment expense		720,533		768,672
Professional fees		247,403		290,999
Data processing		154,678		151,266
Insurance & bond expense		336,190		334,671
Franchise tax		396,658		390,761
Postage, Express and Freight		157,166		154,810
Impairment loss		456,585		—
Other expenses		848,380		833,615

Total non interest expense		7,048,047		6,715,349


INCOME BEFORE INCOME TAXES		2,421,412		3,160,302
Income taxes		256,129		709,688


NET INCOME	$	2,165,283	$	2,450,614


Earning per common share	$	3.51	$	3.95


Dividend per share	$	1.50	$	1.45


Weighted Average shares outstanding		616,706		619,054

See accompanying notes to the unaudited consolidated financial statements.

Killbuck Bancshares, Inc.

CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)


	Three Months Ended September 30,
	2010			2009

INTEREST INCOME
Interest and fees on loans	$	2,840,300		$	3,023,714
Federal funds sold and other		28,518			12,443
Investment securities:
Taxable		472,459			492,975
Exempt from federal income tax		384,836			363,707

Total interest income		3,726,113			3,892,839


INTEREST EXPENSE
Deposits		1,018,148			1,059,251
Short term borrowings		2,396			2,850
Federal Home Loan Bank advances		12,935			21,283

Total interest expense		1,033,479			1,083,384


NET INTEREST INCOME		2,692,634			2,809,455

Provision for loan losses		60,000			—


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		2,632,634			2,809,455


NON INTEREST INCOME
Service charges on deposit accounts		33,145			34,269
ATM and interchange fees		79,635			68,574
Fees on deposit accounts		172,631			198,827
Gain on sale of loans, net		84,258			17,738
Earnings on bank owned life insurance		57,844			58,960
Other income		27,464			35,881

Total non interest income		454,977			414,249


NON INTEREST EXPENSE
Salaries and employee benefits		1,358,849			1,305,694
Occupancy and equipment expense		234,582			258,193
Professional fees		54,163			94,894
Data processing		52,191			52,846
Insurance & bond expense		111,254			103,829
Franchise tax		129,965			131,826
Postage, Express and Freight		48,564			49,604
Impairment loss		456,585			—
Other expenses		307,227			283,526

Total non interest expense		2,753,380			2,280,412


INCOME BEFORE INCOME TAXES		334,231			943,292
Income taxes, (benefit)		(73,188	)		199,711


NET INCOME	$	407,419		$	743,581


Earning per common share	$	0.66		$	1.20


Dividend per share	$	.00		$	.00


Weighted Average shares outstanding		616,706			617,932

See accompanying notes to the unaudited consolidated financial statements.

Killbuck Bancshares, Inc.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2010


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

Balance, December 31, 2009	$	8,846,670	$	43,742,847		$	16,605	$	(9,542,714	)	$	43,063,408

Net income				2,165,283								2,165,283		$	2,165,283

Cash dividends paid ($1.50 per share)				(925,059	)							(925,059	)
Other comprehensive income:
Net unrealized gain on securities, net of tax $238,253							462,491					462,491			462,491

Comprehensive income														$	2,627,774


Balance, September 30, 2010 (Unaudited)	$	8,846,670	$	44,983,071		$	479,096	$	(9,542,714	)	$	44,766,123

See accompanying notes to the unaudited consolidated financial statements.

Killbuck Bancshares, Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)


	Nine Months Ended September 30,
	2010			2009
OPERATING ACTIVITIES
Net income	$	2,165,283		$	2,450,614
Adjustments to reconcile net income to net cash provided by Operating activities:
Provision for loan losses		215,182			2,000
Gain on sale of loans		(136,189	)		(108,430	)
Provision for depreciation and amortization		351,308			760,713
Origination of loans held for sale		(7,373,245	)		(13,970,350	)
Proceeds from the sale of loans		6,689,934			14,078,780
Impairment loss		456,585			—
Bank Owned Life Insurance income		(418,304	)		—
Net change in:
Accrued interest and other assets		48,253			(333,067	)
Accrued expenses and other liabilities		137,741			(70,486	)

Net cash provided by operating activities		2,136,548			2,809,774


INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from maturities and repayments		56,378,792			26,013,858
Purchases		(53,697,133	)		(34,306,322	)
Bank CDs – Purchases		—			(1,715,000	)
Bank CDs – Proceeds from Maturities		—			735,000
Investment securities held to maturity:
Proceeds from maturities and repayments		822,255			1,564,701
Purchases		(6,404,804	)		(5,529,969	)
Net decrease (increase) in loans		347,366			(4,785,361	)
Proceeds from sale of foreclosed assets		22,500			—
Net Purchase of premises and equipment		(94,610	)		(78,395	)
Proceeds from bank owned life insurance		390,111			—

Net cash (used in) investing activities		(2,235,523	)		(18,101,488	)


FINANCING ACTIVITIES
Net increase in demand, money market and savings deposits		13,487,011			272,467
Net increase in time deposits		10,510,843			7,628,619
Net (decrease) in short term borrowings		(1,750,000	)		(1,405,000	)
Repayments of Federal Home Loan Bank advances		(470,482	)		(487,943	)
Purchase of Treasury stock		—			(470,491	)
Dividends paid		(925,059	)		(897,332	)

Net cash provided by financing activities		20,852,313			4,640,320


Net increase (decrease) in cash and cash equivalents		20,753,338			(10,651,394	)
Cash and cash equivalents at beginning of period		45,513,944			40,316,633

Cash and cash equivalents at end of period	$	66,267,282		$	29,665,239


Supplemental Disclosures of Cash Flows Information
Cash Paid During the Period For:
Interest on deposits and borrowings	$	3,044,219		$	3,499,519


Income taxes	$	436,356		$	606,735

See accompanying notes to the unaudited consolidated financial statements.

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 are, in the opinion of management, necessary for a fair statement of the 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, 2009 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 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:


	Nine Months Ended September 30, 2010			Nine Months Ended September 30, 2009

Net income	$	2,165,283		$	2,450,614
Other comprehensive income:
Net unrealized gain (loss) on securities		700,744			(658,205	)
Tax effect		(238,253	)		223,789

Total comprehensive income	$	2,627,774		$	2,016,198


	Three Months Ended September 30, 2010			Three Months Ended September 30, 2009

Net income	$	407,419		$	743,581
Other comprehensive income:
Net unrealized gain (loss) on securities		275,979			(52,402	)
Tax effect		(93,833	)		17,817

Total comprehensive income	$	589,565		$	708,996

Killbuck Bancshares, Inc.

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

NOTE 4 – FAIR VALUE MEASUREMENTS

The Company accounts for the fair value of its assets, including related disclosures, in accordance with the current authoritative accounting guidance. This accounting guidance establishes 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 in this hierarchy 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 their fair value as of September 30, 2010 and December 31, 2009, 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.


	September 30, 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	$	—	$	62,354	$	—	$	62,354
Mutual Funds				543				543

	December 31, 2009
	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	$	—	$	64,841	$	—	$	64,841
Mutual Funds				494				494

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 September 30, 2010 and December 31, 2009 are as follows:


	2010				2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In thousands)
Financial assets:
Cash and due from depository institutions	$	59,013	$	59,013	$	42,576	$	42,576
Federal funds sold		7,254		7,254		2,938		2,938
Securities available for sale		62,897		62,897		65,335		65,335
Securities held to maturity		40,580		42,534		35,087		36,374
Net loans		206,873		206,745		207,575		215,102
Loans held for sale		1,090		1,090		271		271
Accrued interest receivable		1,499		1,499		1,468		1,468
Regulatory stock		1,884		1,884		1,884		1,884
Bank Owned Life Insurance		5,677		5,677		5,662		5,662

Financial liabilities:
Deposits	$	345,293	$	349,251	$	321,295	$	324,246
Short term borrowings		3,910		3,910		5,660		5,660
Federal Home Loan Bank advances		742		888		1,212		1,027
Accrued interest payable		174		174		183		183

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 Banks, Federal Funds Sold, Accrued Interest Receivable, Regulatory Stock, BOLI, Short-Term Borrowings, and Accrued Interest Payable

The fair value approximates the current carrying value.

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 the period presented. 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.

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


	September 30, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Obligations of U.S. Government Agencies and Corporations	$	61,628,033	$	726,896	$	992	$	62,353,937
Mutual funds		543,415		—		—		543,415

Total	$	62,171,448	$	726,896	$	992	$	62,897,352


	December 31, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Obligations of U.S. Government Agencies and Corporations	$	64,309,692	$	580,166	$	48,906	$	64,840,952
Mutual funds		1,000,000		—		506,103		493,897

Total	$	65,309,692	$	580,166	$	555,009	$	65,334,849

Securities Held to Maturity


	September 30, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Obligations of States and Political Subdivisions	$	40,579,895	$	1,984,314	$	29,923	$	42,534,286

Total	$	40,579,895	$	1,984,314	$	29,923	$	42,534,286


	December 31, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Obligations of States and Political Subdivisions	$	35,086,821	$	1,328,071	$	41,281	$	36,373,611

Total	$	35,086,821	$	1,328,071	$	41,281	$	36,373,611

Killbuck Bancshares, Inc.

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

NOTE 6 – INVESTMENT SECURITIES-CONTINUED

The following table shows 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 September 30, 2010 and December 31, 2009. As of September 30, 2010 there were a total of six securities in an unrealized loss position.


	September 30, 2010
	Less than 12 months						12 months or greater						Total
	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	$	1,997,036	$	992		1							$	1,997,036	$	992
Obligations of States and Political Subdivisions		1,424,855		29,923		5								1,424,855		29,923

Total temporarily Impaired debt securities	$	3,421,891	$	30,915		6		—		—		—	$	3,421,891	$	30,915


	December 31, 2009
	Less than 12 months						12 months or greater						Total
	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	$	5,954,780	$	48,906		4							$	5,954,780	$	48,906
Obligations of States and Political Subdivisions		3,767,311		41,281		17								3,767,311		41,281

Total temporarily Impaired debt securities		9,722,091		90,187		21		—		—		—		9,722,091		90,187
Mutual Funds		—		—			$	493,897	$	506,103		1		493,897		506,103

Total temporarily Impaired equity securities		—		—				493,897		506,103		1		493,897		506,103
Total of all securities	$	9,722,091	$	90,187		21	$	493,897	$	506,103		1	$	10,215,988	$	596,290

Killbuck Bancshares, Inc.

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

NOTE 6 – INVESTMENT SECURITIES-CONTINUED

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, which was amended by FASB and adopted by the Corporation in 2009, 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 it 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 the intent 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.

Killbuck Bancshares, Inc.

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

NOTE 7 – NEW ACCOUNTING PRONOUNCEMENTS

In December 2009, the FASB issued ASU 2009-16, Accounting for Transfer of Financial Assets . ASU 2009-16 provides guidance to improve the relevance, representational faithfulness, and comparability of the information that an entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. ASU 2009-16 is effective for annual periods beginning after November 15, 2009 and for interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operation.

In January 2010, the FASB issued ASU 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash – a consensus of the FASB Emerging Issues Task Force . ASU 2010-01 clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend. ASU 2010-01 is effective for interim and annual periods ending on or after December 15, 2009 and should be applied on a retrospective basis. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operation.

In January 2010, the FASB issued ASU 2010-05, Compensation – Stock Compensation (Topic 718): Escrowed Share Arrangements and the Presumption of Compensation . ASU 2010-05 updates existing guidance to address the SEC staff’s views on overcoming the presumption that for certain shareholders escrowed share arrangements represent compensation. ASU 2010-05 is effective January 15, 2010. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operation.

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 February 2010, the FASB issued ASU 2010-08, Technical Corrections to Various Topics . ASU 2010-08 clarifies guidance on embedded derivatives and hedging. ASU 2010-08 is effective for interim and annual periods beginning after December 15, 2009. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operation.

In March 2010, the FASB issued ASU 2010-11, Derivatives and Hedging . ASU 2010-11 provides clarification and related additional examples to improve financial reporting by resolving potential ambiguity about the breadth of the embedded credit derivative scope exception in ASC 815-15-15-8. ASU 2010-11 is effective at the beginning of the first fiscal quarter beginning after June 15, 2010. The adoption of this guidance is not expected to have a significant impact on the Company’s financial statements.

In April 2010, the FASB issued ASU 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan is a Part of a Pool That is Accounted for as a Single Asset – a consensus of the FASB Emerging Issues Task Force . ASU 2010-18 clarifies the treatment for a modified loan that was acquired as part of a pool of assets. Refinancing or restructuring the loan does not make it eligible for removal from the pool, the FASB said. The amendment will be effective for loans that are part of an asset pool and are modified during financial reporting periods that end July 15, 2010 or later and is not expected to have a significant impact on the Company’s financial statements.

Killbuck Bancshares, Inc.

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

NOTE 7 – NEW ACCOUNTING PRONOUNCEMENTS CONTINUED

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 Company is currently evaluating the impact the adoption of this guidance will have on the Company’s financial position or results of operations.

In August, 2010, the FASB issued ASU 2010-21, Accounting for Technical Amendments to Various SEC Rules and Schedules . This ASU amends various SEC paragraphs pursuant to the issuance of Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules, and Codification of Financial Reporting Policies and is not expected to have a significant impact on the Company’s financial statements.

In August, 2010, the FASB issued ASU 2010-22, Technical Corrections to SEC Paragraphs – An announcement made by the staff of the U.S. Securities and Exchange Commission . This ASU amends various SEC paragraphs based on external comments received and the issuance of SAB 112, which amends or rescinds portions of certain SAB topics and is not expected to have a significant impact on the Company’s financial statements.

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 fiscal year ended December 31, 2009. 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 fiscal year ended December 31, 2009.

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 fiscal year ended December 31, 2009; 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, 2009.

Financial Condition

Total assets at September 30, 2010 were $395.8 million compared to $372.0 million at December 31, 2009.

The asset growth during the first nine months of 2010 generally reflects a $24.0 million, or 7.5% 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 increased by $20.8 million or 45.6% from December 31, 2009, to September 30, 2010, with cash and amounts due from depository institutions increasing $16.4 million. The Company has maintained above normal levels of cash and cash equivalents due to the economic uncertainty in the environment and the less than optimal loan demand during the first nine months of 2010.

Investment securities available for sale decreased by $2.4 million or 3.7% from December 31, 2009, to September 30, 2010 due to a decrease in suitable securities available to purchase for the portfolio. Investments held to maturity increased $5.5 million or 15.7% due to some attractive municipal securities available for the portfolio.

Net loans decreased by $0.7 million or 0.3% from December 31, 2009 to September 30, 2010. An increase of $1.4 million occurred in the real estate loan category, which is attributable primarily to increases in residential real estate lending of $3.4 million plus an increase in farm lending of $0.6 million offset by decreases of $1.7 million in commercial real estate lending and a decrease of $0.9 million in construction loan activity. The Company has seen a modest expansion of loan demand in the residential and farm sector, while decreases in commercial real estate and construction type loan products reflected lessened demand. Commercial and other loan balances decreased by $2.2 million as demand slowed and consumer loan balances increased by $346,000.

The Company’s allowance for loan losses at September 30, 2010 totaled $2.7 million, or 1.26% of total loans, as compared to $2.4 million, or 1.16% of total loans at December 31, 2009.

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.

Total deposits at September 30, 2010 were $345.3 million compared to $321.3 million at December 31, 2009. Demand accounts decreased $11.4 million, while money market accounts, savings accounts and time deposits accounts increased $21.0 million, $3.9 million and $10.5 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 accounts decreases are attributable to normal fluctuations due to customer usage.

Federal Home Loan Bank advances decreased $470,000 due to maturities and scheduled repayments, and short-term borrowings decreased $1.7 million at September 30, 2010 from December 31, 2009.

Shareholders’ Equity increased by $1.7 million or 3.9%, which was mainly due to earnings of $2.2 million plus $462,000 of unrealized gain on securities included in other comprehensive income for the first nine months of 2010, decreased by dividends paid totaling $925,000. The Company did not make any Treasury stock purchases during the first nine months of 2010. Management monitors risk-based capital and leveraged capital ratios in order to assess compliance of the regulatory guidelines. At September 30, 2010, the total capital ratio was 19.65%; the Tier I capital ratio was 18.51%, and the leverage ratio was 11.03%, compared to regulatory capital requirements of 8.00%, 4.00% and 4.00% respectively. These ratios are well in excess of regulatory capital requirements.

RESULTS OF OPERATIONS

Comparison of the Nine Months Ended September 30, 2010 and 2009

Net income for the nine-month period ended September 30, 2010, was $2,165,000, a decrease of $286,000 or 11.6% from the $2,451,000 reported at September 30, 2009.

Total interest income of approximately $11,213,000 for the nine-month period ended September 30, 2010, compares to $12,055,000 for the same period in 2009, a decrease of $842,000 or 7.0%. 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 nine-month periods ended September 30, 2010 and 2009. The yield on loans decreased to 5.45% for the first nine months of 2010 compared to 5.99% for the first nine months of 2009. Average loan balances were $210,465,000 for the first nine months of 2010 compared to $206,906,000 for the first nine months of 2009. The interest on investment securities of $2,540,000 for 2010 compares to $2,723,000 for 2009. The decrease in investment income is primarily attributable to a decrease in yield. Average investment balances were $102,138,000 compared to $97,227,000 and the yields were 3.32% compared to 3.73% for the first nine months of 2010 and 2009 respectively. The interest on Federal Funds decreased slightly due to a decrease in yield from 0.16% to 0.13%. The interest on balances held at the Federal Reserve Bank increased $36,000 due to an increase in average volume. The average balance outstanding in Due from Federal Reserve Bank was $36,340,000 compared to $13,421,000 for the first nine months of 2010 and 2009 respectively. The yield on the excess liquidity in Due from Federal Reserve Bank decreased from 0.29% for 2009 to 0.24% for 2010.

Total interest expense of $3,036,000 for the nine-month period ending September 30, 2010 represents a decrease of $398,000 from the $3,434,000 reported for the same nine-month period in 2009. The decrease in interest expense on deposits of $372,000 is due mainly to a decrease in interest rates. The decreases in the average rate paid on the underlying balances of the interest bearing liabilities are due mainly to the Time deposits. The cost of Time deposits was 2.18% compared to 2.68% for this nine-month period of 2010 and 2009, respectively. The cost on interest bearing liabilities was 1.46%, compared to 1.81% for the nine-month periods of 2010 and 2009 respectively. Average interest-bearing liabilities were $278,111,000 for the first nine months of 2010 compared to $253,157,000 for the first nine months of 2009. See “Average Balance Sheet” for the nine-month periods ended September 30, 2010 and 2009.

Net interest income of $8,178,000 for the nine months ended September 30, 2010, compares to $8,621,000 for the same nine-month period in 2009, a decrease of $443,000 or 5.1%. The foregoing factors culminated in the Company’s attainment of an interest rate spread of 2.75% and a net yield on earning assets of 3.06% in 2010, compared to 3.15% and 3.55% respectively, in 2009. Management believes the Company’s reduction in spread and margin in 2010 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.

The provision for loan losses was $215,000 for the first nine months of 2010, as compared to $2,000 for the same nine-month period in 2009. The increased loss provision is attributable to management’s analysis of the allowance for loan losses. 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 nine-month period ended September 30, 2010, of $1,507,000 compares to $1,257,000 for the same nine-month period in 2009, an increase of $250,000 or 19.9%. ATM and interchange fees increased $36,000 due to increased usage of ATM machines. The Fees on deposit accounts decreased $41,000 due to a decrease in non-sufficient funds activity. Gains on sale of loans increased $28,000 primarily due to an increase in refinancing. Bank Owned Life Insurance (BOLI) income increased $241,000 primarily due to earnings and recoveries on BOLI in the first nine months of 2010.

Total non-interest expense of $7,048,000 for the nine months ended September 30, 2010, compares to $6,715,000 for the same nine-month period in 2009. This represents an increase of $333,000 or 4.9%. Salary and employee benefits decreased approximately $60,000 due to one fewer pay period in 2010 and a slight decrease in employee benefits. This decrease was partially offset by normal increases in salaries and employee benefits. Occupancy and Equipment costs decreased approximately $48,000 due mainly to decreased depreciation expense of $60,000, offset by increases in furniture and equipment expenses of $8,000. An impairment loss of $457,000 was recognized during the third quarter of 2010 on a mutual fund owned by the Company. The non-publicly traded mutual fund is comprised solely of community and regional financial institution stocks. The Company reviews its position in all securities quarterly and determined that, at September 30, 2010, the decline in fair value on the mutual fund should be recognized as other than temporary impairment. 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 $256,000 for the nine months ended September 30, 2010, representing a $454,000, or 63.9%, reduction from the $710,000 of income tax expense recorded in 2009. The decline is primarily attributable to the impairment loss recognized during the third quarter of 2010 and higher levels of tax-exempt income in 2010. The Company’s effective tax rate was 10.6% in 2010, as compared to 22.5% in 2009. The principal difference between the Company’s effective tax rate in 2010 and 2009 and the 34% statutory tax rate in effect for both years resulted from the beneficial effects of tax-exempt income.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended September 30, 2010 and 2009

Net income for the three-month period ended September 30, 2010, was $407,000, a decrease of $337,000 or 45.2% from the $744,000 reported at September 30, 2009.

Total interest income of approximately $3,726,000 for the three-month period ended September 30, 2010, compares to $3,893,000 for the same period in 2009, a decrease of $167,000 or 4.3%. 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 September 30, 2010 and 2009. Interest and fees on loans decreased $183,000 or 6.1% for the three-month period ended September 30, 2010 compared to the same period for 2009. The yield on loans decreased to 5.42% for the three-month period ended September 30, 2010 compared to 5.83% for the three-month period ended September 30, 2009. Average loan balances were $209,613,000 compared to $207,588,000 for this three-month period of 2010 and 2009, respectively. The interest on investment securities of $857,000 remained unchanged for the three-month periods ended September 30, 2010 and 2009. The average balances of investment securities were $106,090,000 for 2010 compared to $97,203,000 for 2009 and the yield was 3.23% compared to 3.53% for this three-month period of 2010 and 2009 respectively. See “Average Balance Sheet” for the three-month periods ended September 30, 2010 and 2009.

Total interest expense of $1,033,000 for the three-month period ending September 30, 2010, represents a decrease of $50,000 from the $1,083,000 reported for the same three-month period in 2009. The decrease in interest expense on deposits of $41,000 is due mainly to the decreases in the average rate paid on the underlying balances of the interest bearing liabilities, specifically the Time deposits. The cost of Time deposits was 2.17% compared to 2.47% for this three-month period of 2010 and 2009, respectively and the cost of interest bearing liabilities was 1.43% compared to 1.70% for this three-month period of 2010 and 2009 respectively. The average time deposits were $161,948,000 for this three-month period of 2010 compared to $152,295,000 for the same three months of 2009. Average interest-bearing liabilities were $289,015,000 for this three-month period of 2010 compared to $255,544,000 for the same three months of 2009. See “Average Balance Sheet” for the three-month periods ended September 30, 2010 and 2009.

Net interest income of $2,693,000 for the three months ended September 30, 2010, compares to $2,809,000 for the same three-month period in 2009, a decrease of $116,000 or 4.2%. The foregoing factors culminated in the Company’s attainment of an interest rate spread of 2.63% and a net yield on earning assets of 2.93% in 2010, compared to 3.05% and 3.43% respectively, in 2009.

The provision for loan losses was $60,000 for the three-month period ended September 30, 2010, as compared to no provision for the same three-month period in 2009. The increased loss provision is attributable to management’s analysis of the allowance for loan losses. 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 September 30, 2010, of $455,000 compares to $414,000 for the same three-month period in 2009, an increase of $41,000 or 9.8%. ATM and interchange fees increased $11,000 due to increased usage of ATM machines. The Fees on deposit accounts decreased $26,000 due to a decrease in non-sufficient funds activity. Gains on sale of loans increased $67,000 primarily due to refinancings. The changes in the remaining income accounts were attributable to increases/decreases in items that are normal and recurring in nature.

Total non-interest expense of $2,753,000 for the three months ended September 30, 2010, compares to $2,280,000 for the same three-month period in 2009. This represents an increase of $473,000 or 20.7%. Salary and employee benefits increased $53,000 or 4.1% due to normal increases in salaries and employee benefits. Professional fees decreased approximately $41,000 due to lower auditing fees for SOX 404 compliance and other regulatory requirements such as Bank Secrecy Act and Gramm-Leach-Bliley Act. An impairment loss of $457,000 was recognized during the third quarter of 2010 on a mutual fund owned by the Company. The non-publicly traded mutual fund is comprised solely of community and regional financial institution stocks. The Company reviews its position in all securities quarterly and determined that, at September 30, 2010, the decline in fair value on the mutual fund should be recognized as other than temporary impairment. The changes in the remaining expense accounts were attributable to increases/decreases in items that are normal and recurring in nature.

Income tax expense (benefit) declined to $(73,000) for the three months ended September 30, 2010, representing a $273,000 reduction from the $200,000 of income tax expense recorded in 2009. The decline is primarily attributable to the $457,000 impairment loss, the $60,000 provision for loan losses and higher levels of tax-exempt income in 2010.

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 $66.3 million at September 30, 2010. These assets provide the primary source of liquidity for the Company. In addition, management has designated a portion of the investment portfolio, $62.9 million as available for sale and has an available unused line of credit of $40.4 million with the Federal Home Loan Bank of Cincinnati to provide additional sources of liquidity at September 30, 2010. As of September 30, 2010, the Company had commitments to fund loans of approximately $2.3 million and unused lines of credit totaling $40.1 million.

Cash was provided during the nine month period ended September 30, 2010, mainly from operating activities of $2.1 million, and the net increase in deposits of $24.0 million, the maturities and repayments of investment securities of $57.2 million. Cash was used during the nine month period ended September 30, 2010, mainly for the purchase of investment securities of $60.1 million and to reduce $2.2 million in Federal Home Loan Bank advances and short-term borrowings. In addition, $925,000 was used to pay dividends to shareholders. Cash and cash equivalents totaled $66.3 million at September 30, 2010, an increase of $20.8 million from $45.5 million at December 31, 2009.

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.

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 September 30, 2010, and December 31, 2009. The Company ceased 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 Bank President and the loan officers 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 re-classified 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.


	September 30, 2010			December 31, 2009
	(dollars in thousands)

Loans on nonaccrual basis	$	52		$	—
Loans past due 90 days or more		—			—
Renegotiated loans		—			—

Total nonperforming loans		52			—

Other real estate		140			23
Repossessed assets		—			—

Total nonperforming assets	$	192		$	23

Nonperforming loans as a percent of total loans		0.02	%		0.00	%

Nonperforming loans as a percent of total assets		0.01	%		0.00	%

Nonperforming assets as a percent of total assets		0.05	%		0.01	%

Management monitors impaired loans on a continual basis. As of September 2010, impaired loans had no material effect on the Company’s financial position or results from operations.

The allowance for loan losses at September 30, 2010, totaled $2,662,000 or 1.26% of total loans as compared to $2,441,000 or 1.16% at December 31, 2009. Provisions for loan losses were $215,000 for the nine months ended September 30, 2010 and $2,000 for the nine months ended September 30, 2009.

The level of funding for the provision is a reflection of the overall loan portfolio. Nonperforming loans consist of approximately $180,000 in residential mortgages and approximately $12,000 in consumer loan balances. The collateral requirements on such loans reduce the risk of potential losses to an acceptable level in management’s opinion.

Management performs a quarterly evaluation of the allowance for loan losses. The evaluation incorporates internal loan review and 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.

AVERAGE BALANCE SHEET

Average Balance Sheet for the Nine-Month Period Ended September 30

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.


	Period Ended
	2010								2009
	Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate
Assets
Interest Earnings Assets:
Loans (1)(2)(3)	$	210,464,679		$	8,601,845		5.45	%	$	206,905,771		$	9,295,475		5.99	%
Securities-taxable (4)		62,347,836			1,373,056		2.94	%		61,740,605			1,585,587		3.42	%
Securities-nontaxable (4)		37,905,681			1,104,528		3.89	%		33,751,864			1,059,279		4.18	%
Securities-Equity (4,5)		1,884,560			61,934		4.38	%		1,734,560			78,310		6.02	%
Federal funds sold		6,976,357			6,675		0.13	%		6,556,359			7,708		0.16	%
Due from Federal Reserve Bank		36,339,715			65,314		0.24	%		13,421,474			28,816		0.29	%

Total interest earnings assets		355,918,828			11,213,352		4.20	%		324,110,633			12,055,175		4.96	%


Noninterest earning assets:
Cash and due from other institutions		9,477,807								10,199,930
Premises and equipment, net		5,913,166								6,192,475
Accrued interest		1,135,298								1,278,820
Other assets		9,434,916								8,190,378
Less allowance for loan losses		(2,530,431	)							(2,518,939	)

Total noninterest earnings assets		23,430,756								23,342,664

Total Assets	$	379,349,584							$	347,453,297


Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing demand	$	26,660,254		$	30,224		0.15	%	$	26,059,089		$	29,723		0.15	%
Money market accounts		43,964,261			256,283		0.78	%		28,670,605			183,558		0.85	%
Savings deposits		44,761,963			127,967		0.38	%		40,928,340			119,871		0.39	%
Time deposits		157,455,902			2,568,545		2.18	%		150,557,793			3,021,483		2.68	%
Short term borrowings		4,321,467			7,417		0.23	%		5,353,424			9,198		0.23	%
Federal Home Loan Advances		947,006			45,094		6.35	%		1,587,346			70,630		5.93	%

Total interest bearing liabilities		278,110,853			3,035,530		1.46	%		253,156,597			3,434,463		1.81	%


Noninterest bearing liabilities:
Demand deposits		56,611,026								50,193,496
Accrued expenses and other liabilities		2,668,115								2,864,614

Total noninterest bearing liabilities		59,279,141								53,058,110

Shareholders’ equity		41,959,590								41,238,590

Total Liabilities and Shareholders’ Equity	$	379,349,584							$	347,453,297


Net interest income				$	8,177,822							$	8,620,712


Interest rate spread (6)							2.75	%							3.15	%


Net yield on interest earning assets (7)							3.06	%							3.55	%

(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 $246,000 and $275,000 in 2010 and 2009, 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 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.

AVERAGE BALANCE SHEET

Average Balance Sheet for the Three-Month Period Ended September 30


	Period Ended
	2010								2009
	Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate
Assets
Interest Earnings Assets:
Loans (1)(2)(3)	$	209,613,124		$	2,840,300		5.42	%	$	207,587,818		$	3,023,714		5.83	%
Securities-taxable (4)		64,301,850			453,209		2.82	%		60,651,342			457,906		3.02	%
Securities-nontaxable (4)		39,904,041			384,836		3.86	%		34,816,800			363,707		4.18	%
Securities-Equity (4,5)		1,884,560			19,250		4.09	%		1,734,560			35,069		8.09	%
Federal funds sold		9,222,546			3,225		0.14	%		6,789,321			2,065		0.12	%
Due from Federal Reserve Bank		42,346,255			25,293		0.24	%		16,229,068			10,378		0.26	%

Total interest earnings assets		367,272,376			3,726,113		4.06	%		327,808,909			3,892,839		4.75	%


Noninterest earning assets:
Cash and due from other institutions	$	9,822,551							$	9,675,153
Premises and equipment, net		5,856,230								6,111,544
Accrued interest		1,060,478								1,178,927
Other assets		9,523,310								8,341,036
Less allowance for loan losses		(2,628,391	)							(2,500,868	)

Total noninterest earnings assets		23,634,178								22,805,792

Total Assets	$	390,906,554							$	350,614,701


Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing demand	$	26,823,225		$	9,574		0.14	%	$	25,236,692		$	9,395		0.15	%
Money market accounts		49,602,647			87,361		0.70	%		30,726,250			67,435		0.88	%
Savings deposits		45,727,631			41,257		0.36	%		40,940,158			40,204		0.39	%
Time deposits		161,948,362			879,956		2.17	%		152,294,778			942,217		2.47	%
Short term borrowings		4,122,934			2,396		0.23	%		4,921,774			2,850		0.23	%
Federal Home Loan Advances		790,521			12,935		6.54	%		1,424,618			21,283		5.98	%

Total interest bearing liabilities		289,015,320			1,033,479		1.43	%		255,544,270			1,083,384		1.70	%


Noninterest bearing liabilities:
Demand deposits		56,638,381								50,828,045
Accrued expenses and other liabilities		3,654,138								3,736,863

Total noninterest bearing liabilities		60,292,519								54,564,908

Shareholders’ equity		41,598,715								40,505,523

Total Liabilities and Shareholders’ Equity	$	390,906,554							$	350,614,701


Net interest income				$	2,692,634							$	2,809,455


Interest rate spread (6)							2.63	%							3.05	%


Net yield on interest earning assets (7)							2.93	%							3.43	%

(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 $90,000 and $102,000 in 2010 and 2009, 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 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.

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).


	Nine-Month Period Ended September
	2010 Compared to 2009
	Increase (Decrease) Due To
	Volume			Rate			Net

Interest income
Loans	$	160		$	(854	)	$	(694	)
Securities-taxable		16			(229	)		(213	)
Securities-nontaxable		130			(84	)		46
Securities-equities		7			(23	)		(16	)
Federal funds sold		1			(2	)		(1	)
Due from Federal Reserve Bank		50			(14	)		36

Total interest earning Assets		364			(1,206	)		(842	)


Interest expense
Interest bearing demand		1			(1	)		—
Money market accounts		98			(25	)		73
Savings deposits		11			(3	)		8
Time deposits		138			(591	)		(453	)
Short-term borrowing		(2	)		1			(1	)
Federal Home Loan Bank Advances		(28	)		2			(26	)

Total interest bearing Liabilities		218			(617	)		(399	)


Net change in net interest income	$	146		$	(589	)	$	(443	)

Rate/Volume Analysis


	Three-Month Period Ended September
	2010 Compared to 2009
	Increase (Decrease) Due To
	Volume			Rate			Net

Interest income
Loans	$	30		$	(213	)	$	(183	)
Securities-taxable		28			(33	)		(5	)
Securities-nontaxable		53			(32	)		21
Securities-equities		3			(19	)		(16	)
Federal funds sold		1			—			1
Due from Federal Reserve Bank		17			(2	)		15

Total interest earning Assets		132			(299	)		(167	)


Interest expense
Interest bearing demand		1			—			1
Money market accounts		42			(23	)		19
Savings deposits		5			(4	)		1
Time deposits		60			(122	)		(62	)
Short-term borrowing		—			(1	)		(1	)
Federal Home Loan Bank Advances		(9	)		1			(8	)

Total interest bearing Liabilities		99			(149	)		(50	)


Net change in net interest income	$	33		$	(150	)	$	(117	)

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 September 30, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 September 30, 2010.

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

July 1 – 31, 2010

—

N/A

August 1 – 31, 2010

—

N/A

September 1 – 30, 2010

—

N/A

Total (1)

—

N/A

(1)	No 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)

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.

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: November 9, 2010	By:	/ S / L UTHER E. P ROPER
		Luther E. Proper
		President and Chief Executive Officer

Date: November 9, 2010	By:	/ S / L AWRENCE C ARDINAL
		Lawrence Cardinal
		Chief Financial Officer