Killbuck Bancshares (KLIB) 10-Q 2003 Q2 Quarterly report

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 June 30, 2003
o	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  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes  o     No  x

The aggregate market value of the voting stock held by nonaffiliates of the registrant, calculated by reference to the stock valuation done on Killbuck Bancshares, Inc. common stock as of December 31, 2002 was $61,536,891 and was $62,190,895 as of June 30, 2003 (Registrant has assumed that all of its executive officers and directors are affiliates. Such assumption shall not be deemed to be conclusive for any other purpose):

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 July 31, 2003: 676,788

KILLBUCK BANCSHARES, INC.
Index

		Page Number
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):
	Consolidated Balance Sheet as of June 30, 2003 and December 31, 2002	3
	Consolidated Statements of Income for the six months ended June 30, 2003 and 2002	4
	Consolidated Statements of Income for the three months ended June 30, 2003 and 2002	5
	Consolidated Statements of Changes In Shareholders’ Equity for the six months ended June 30, 2003	6
	Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002	7
	Notes to Unaudited Consolidated Financial Statements	8-10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11-20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21-22
Item 4.	Controls and Procedures	23
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 2.	Changes in Securities	24
Item 3.	Default Upon Senior Securities	24
Item 4.	Submissions of Matters to a Vote of Security Holders	24
Item 5.	Other Information	24
Item 6.	Exhibits and Reports on Form 8-K	24-25
SIGNATURES		26

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Killbuck Bancshares, Inc.
CONSOLIDATED BALANCE SHEET (UNAUDITED)

	June 30, 2003			December 31, 2002
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions	$	8,357,775		$	8,007,448
Federal funds sold		12,900,000			12,300,000
Total cash and cash equivalents		21,257,775			20,307,448
Investment securities:
Securities available for sale		29,008,619			39,048,024
Securities held to maturity (market value of $45,944,395 and $44,201,169)		42,480,302			41,578,062
Total investment securities		71,488,921			80,626,086
Loans (net of allowance for loan losses of $2,488,995 and $2,325,560)		181,615,267			172,482,506
Loans held for sale		514,400			419,750
Premises and equipment, net		5,064,366			5,203,954
Accrued interest receivable		1,064,274			1,134,183
Goodwill, net		1,329,249			1,329,249
Other assets		2,019,386			1,671,219
Total assets	$	284,353,638		$	283,174,395
LIABILITIES
Deposits:
Noninterest bearing demand	$	37,250,895		$	35,745,364
Interest bearing demand		32,693,434			31,755,668
Money market		18,219,611			16,090,756
Savings		40,872,412			38,819,993
Time		113,244,228			116,626,850
Total deposits		242,280,580			239,038,631
Federal Home Loan Bank advances		3,833,908			4,267,666
Short-term borrowings		3,170,000			4,929,993
Accrued interest and other liabilities		756,368			734,446
Total liabilities		250,040,856			248,970,736
SHAREHOLDERS’ EQUITY
Common stock – No par value: 1,000,000 shares authorized, 718,431 issued		8,846,670			8,846,670
Retained earnings		28,374,843			27,462,762
Accumulated other comprehensive income		378,566			534,990
Treasury stock, at cost (41,643 and 34,771 shares)		(3,287,297	)		(2,640,763	)
Total shareholders’ equity		34,312,782			34,203,659
Total liabilities and shareholders’ equity	$	284,353,638		$	283,174,395

See accompanying notes to the unaudited consolidated financial statements.

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Killbuck Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

	Six Months Ended June 30,
	2003		2002
INTEREST INCOME
Interest and fees on loans	$	5,503,404	$	5,784,539
Federal funds sold		62,172		111,317
Investment securities:
Taxable		783,021		1,429,132
Exempt from federal income tax		908,817		905,869
Total interest income		7,257,414		8,230,857
INTEREST EXPENSE
Deposits		2,031,193		3,025,635
Federal Home Loan Bank advances		135,943		168,607
Short term borrowings		2,575		2,476
Total interest expense		2,169,711		3,196,718
NET INTEREST INCOME		5,087,703		5,034,139
Provision for loan losses		210,000		90,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		4,877,703		4,944,139
OTHER INCOME
Service charges on deposit accounts		345,558		299,135
Gain on sale of loans, net		157,543		29,780
Other income		70,209		54,386
Total other income		573,310		383,301
OTHER EXPENSE
Salaries and employee benefits		1,876,393		1,683,029
Occupancy and equipment expense		522,312		475,744
Professional fees		131,346		142,577
Franchise tax		191,031		196,981
Other expenses		805,234		815,959
Total other expense		3,526,316		3,314,290
INCOME BEFORE INCOME TAXES		1,924,697		2,013,150
Income taxes		403,293		455,046
NET INCOME	$	1,521,404	$	1,558,104
Earning per common share	$	2.24	$	2.26
Weighted Average shares outstanding		679,624		689,912

See accompanying notes to the unaudited consolidated financial statements.

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Killbuck Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

	Three Months Ended June 30,
	2003		2002
INTEREST INCOME
Interest and fees on loans	$	2,749,960	$	2,852,996
Federal funds sold		26,976		49,873
Investment securities:
Taxable		372,355		691,323
Exempt from federal income tax		455,320		461,321
Total interest income		3,604,611		4,055,513
INTEREST EXPENSE
Deposits		977,902		1,437,709
Federal Home Loan Bank advances		66,397		82,583
Short term borrowings		1,133		1,146
Total interest expense		1,045,432		1,521,438
NET INTEREST INCOME		2,559,179		2,534,075
Provision for loan losses		105,000		45,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		2,454,179		2,489,075
OTHER INCOME
Service charges on deposit accounts		196,825		157,007
Gain on sale of loans, net		96,935		8,371
Other income		34,724		27,615
Total other income		328,484		192,993
OTHER EXPENSE
Salaries and employee benefits		996,226		895,570
Occupancy and equipment expense		248,989		231,349
Professional fees		60,457		68,412
Franchise tax		86,769		98,955
Other expenses		413,663		430,657
Total other expense		1,806,104		1,724,943
INCOME BEFORE INCOME TAXES		976,559		957,125
Income taxes		206,886		201,484
NET INCOME	$	769,673	$	755,641
Earning per common share	$	1.14	$	1.09
Weighted Average shares outstanding		677,089		691,251

See accompanying notes to the unaudited consolidated financial statements.

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Killbuck Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2003

	Common Stock		Retained Earnings			Accumulated Other Comprehensive Income			Treasury Stock			Total Shareholders’ Equity			Comprehensive Income
Balance, December 31, 2002	$	8,846,670	$	27,462,762		$	534,990		$	(2,640,763	)	$	34,203,659
Net income				1,521,404									1,521,404		$	1,521,404
Purchase of Treasury stock										(646,534	)		(646,534	)
Other comprehensive income:
Net unrealized loss on securities							(156,424	)					(156,424	)		(156,424	)
Comprehensive income															$	1,364,980
Cash Dividends paid ($.90 per share)				(609,323	)								(609,323	)
Balance, June 30, 2003	$	8,846,670	$	28,374,843		$	378,566		$	(3,287,297	)	$	34,312,782

See accompanying notes to the unaudited consolidated financial statements.

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Killbuck Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

		Six Months Ended June 30,
	2003			2002
OPERATING ACTIVITIES
Net income	$	1,521,404		$	1,558,104
Adjustments to reconcile net income to net cash provided by
Operating activities:
Provision for loan losses		210,000			90,000
Gain on sale of loans		(157,543	)		(29,780	)
Provision for depreciation and amortization		284,660			290,502
Origination of loans held for sale		(13,484,042	)		(6,096,613	)
Proceeds from the sale of loans		13,546,935			6,287,442
Federal Home Loan Bank stock dividend		(23,100	)		(33,958	)
Net change in:
Accrued interest and other assets		(174,576	)		(4,401	)
Accrued expenses and other liabilities		21,923			(195,862	)
Net cash provided by operating activities		1,745,661			1,865,434
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from maturities and repayments		16,866,126			16,033,150
Purchases		(7,054,142	)		(7,987,046	)
Investment securities held to maturity:
Proceeds from maturities and repayments		1,619,361			897,348
Purchases		(2,561,875	)		(4,202,433	)
Net increase in loans		(9,342,761	)		(11,238,557	)
Purchase of premises and equipment		(114,383	)		(99,478	)
Net cash used in investing activities		(587,674	)		(6,597,016	)
FINANCING ACTIVITIES
Net increase in demand, money market and savings deposits		6,624,571			7,700,780
Net decrease in time deposits		(3,382,622	)		(8,583,412	)
Repayment of Federal Home Loan Bank advances		(433,759	)		(473,941	)
Net decrease in short term borrowings		(1,759,993	)		(950,000	)
Purchase of Treasury stock		(646,534	)		(591,415	)
Dividends paid		(609,323	)		(584,627	)
Net cash used in financing activities		(207,660	)		(3,482,615	)
Net increase (decrease) in cash and cash equivalents		950,327			(8,214,197	)
Cash and cash equivalents at beginning of period		20,307,448			30,268,070
Cash and cash equivalents at end of period	$	21,257,775		$	22,053,873
Supplemental Disclosures of Cash Flows Information
Cash Paid During the Period For:
Interest on deposits and borrowings	$	2,212,698		$	3,291,580
Income taxes	$	440,517		$	480,358

See accompanying notes to the unaudited consolidated financial statements.

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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, 2002 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:

	Six Months Ended June 30, 2003			Six Months Ended June 30, 2002
Net income	$	1,521,404		$	1,558,104
Other comprehensive income:
Net unrealized (loss) gain on securities		(237,006	)		3,181
Tax effect		80,582			(1,082	)
Total comprehensive income	$	1,364,980		$	1,560,203

	Three Months Ended June 30, 2003			Three Months Ended June 30, 2002
Net income	$	769,673		$	755,641
Other comprehensive income:
Net unrealized (loss) gain on securities		(34,819	)		551,711
Tax effect		11,838			(187,582	)
Total comprehensive income	$	746,692		$	1,119,770

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NOTE 4 – NEW ACCOUNTING STANDARDS

In August 2001, the Financial Accounting Standards Board (“FASB”) issued FAS No. 143, Accounting for Asset Retirement Obligations, which requires that the fair value of a liability be recognized when incurred for the retirement of a long-lived asset and the value of the asset be increased by that amount. The statement also requires that the liability be maintained at its present value in subsequent periods and outlines certain disclosures for such obligations. The adoption of this statement, which was effective January 1, 2003, did not have a material effect on the Company’s financial position or results of operations.

In April 2002, the FASB issued FAS No. 145, Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. FAS No. 145 rescinds FAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in APB Opinion No. 30 will now be used to classify those gains and losses. This statement also amends FAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. This statement also makes technical corrections to existing pronouncements, which are not substantive but in some cases may change accounting practice. The provisions of this statement related to the rescission of FAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. Any gain or loss on extinguishments of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in APB Opinion No. 30 for classification as an extraordinary item shall be reclassified. Early adoption of the provisions of this statement related to FAS No. 13 shall be effective for transactions occurring after May 15, 2002. All other provisions of this statement shall be effective for financial statements issued on or after May 15, 2002. The adoption of this statement did not have a material effect on the Company’s financial position or results of operations.

In July 2002, the FASB issued FAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement replaces EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). The new statement is effective for exit or disposal activities initiated after December 31, 2002. The adoption of this statement did not have a material effect on the Company’s financial position or results of operations.

On December 31, 2002, the FASB issued FAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, which amends FAS No. 123, Accounting for Stock-Based Compensation. FAS No. 148 amends the disclosure requirements of FAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. Under the provisions of FAS No. 123, companies that adopted the preferable, fair value based method were required to apply that method prospectively for new stock option awards. This contributed to a “ramp-up” effect on stock-based compensation expense in the first few years following adoption, which caused concern for companies and investors because of the lack of consistency in reported results. To address that concern, FAS No. 148 provides two additional methods of transition that reflect an entity’s full complement of stock-based compensation expense immediately upon adoption, thereby eliminating the ramp-up effect. FAS No. 148 also improves the clarity and prominence of disclosures about the pro forma effects of using the fair value based method of accounting for stock-based compensation for all companies—regardless of the accounting method used—by requiring that the data be presented more prominently and in a more user-friendly format in the footnotes to the financial statements. In addition, the statement improves the timeliness of those disclosures by requiring that this information be included in interim as well as annual financial statements. The transition guidance and annual disclosure provisions of FAS No. 148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The adoption of this statement did not have a material effect on the Company’s financial statements.

In April, 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under FAS No. 133. The amendments set forth in FAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, this statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in FAS No. 133.

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NOTE 4 – NEW ACCOUNTING STANDARDS (Continued)

In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. FAS No. 149 amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. This statement is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The provisions of this statement that relate to FAS No. 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to existing contracts as well as new contracts entered into after June 30, 2003.

In May 2003, the FASB issued FAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.   This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Such instruments may have been previously classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement has not and is not expected to have a material effect on the Company’s reported equity.

In November, 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.  This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. This interpretation clarifies that a guarantor is required to disclose (a) the nature of the guarantee, including the approximate term of the guarantee, how the guarantee arose, and the events or circumstances that would require the guarantor to perform under the guarantee; (b) the maximum potential amount of future payments under the guarantee; (c) the carrying amount of the liability, if any, for the guarantor’s obligations under the guarantee; and (d) the nature and extent of any recourse provisions or available collateral that would enable the guarantor to recover the amounts paid under the guarantee. This interpretation also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the obligations it has undertaken in issuing the guarantee, including its ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur. The objective of the initial measurement of that liability is the fair value of the guarantee at its inception. The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The disclosure requirements in this interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of this interpretation did not have a material effect on the Company’s financial position or results of operations.

In January, 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, in an effort to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. The objective of this interpretation is not to restrict the use of variable interest entities but to improve financial reporting by companies involved with variable interest entities. Until now, one company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. This interpretation changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The consolidation requirements of this interpretation apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The adoption of this interpretation has not and is not expected to have a material effect on the Company’s financial position or results of operations.

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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.

Financial Condition

Total assets at June 30, 2003 were $284,354,000 compared to $283,174,000 at December 31, 2002.

Cash and cash equivalents increased by $950,000 or 4.7% from December 31, 2002, to June 30, 2003, with federal funds sold increasing $600,000.

Investment securities available for sale decreased by $10,039,000 or 25.7% from December 31, 2002, due to maturities, calls, and repayments. Investments held to maturity increased $902,000 or 2.2%.

Net loans increased by $9,133,000 or 5.3% from December 31, 2002, to June 30, 2003. An increase of $6,806,000 occurred in the real estate loan category, which is attributable primarily to residential and commercial lending activity. The increases in real estate lending are primarily attributable to the historically low interest rates. Commercial and other loan balances increased by $3,449,000 and consumer loan balances decreased by $967,000. The increase in the commercial category is primarily attributable to normal seasonal draw downs on lines of credit for inventory build ups. Due to the increase in net loans, the provision for loan losses increased $120,000.

Total deposits at June 30, 2003 were $242,281,000 compared to $239,039,000 at December 31, 2002, an increase of $3,242,000 or 1.4%. Time deposits decreased $3,383,000, demand accounts increased $2,443,000 and money market and savings accounts increased $4,181,000. Management attributes these changes to maturing time deposits, the volatility of interest rates, consumer expectations of rising rates, and new products.

Federal Home Loan Bank advances and short-term borrowings decreased $434,000 and $1,760,000 respectively at June 30, 2003 from December 31, 2002.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Financial Condition (Continued)

Shareholders’ Equity increased by $109,000 or .3%, which was mainly due to earnings of $1,521,000 for the first six months of 2003 decreased by a $156,000 unrealized loss on securities included in other comprehensive income, dividends paid totaling $609,000, and by the purchase of Treasury stock for $647,000. Treasury stock purchases are monitored against the Company’s Strategic Plan and the goals set forth in the plan. The Treasury stock purchases have been within the Strategic Plan’s guidelines for the first six months of 2003. Management monitors risk-based capital and leveraged capital ratios in order to assess compliance of the regulatory guidelines. At June 30, 2003, the total capital ratio was 17.20%; the Tier I capital ratio was 15.98%, and the leverage ratio was 11.48%, 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 Six Months Ended June 30, 2003 and 2002

Net income for the six-month period ended June 30, 2003, was $1,521,000, a decrease of $37,000 or 2.4% from the $1,558,000 reported at June 30, 2002.

Total interest income of approximately $7,258,000 for the six-month period ended June 30, 2003, compares to $8,231,000 for the same period in 2002, a decrease of $973,000 or 11.8%. The majority of the overall decrease in total interest income is attributed to a decrease in investment securities – taxable of $646,000 or 66.4% of the overall decrease. Investment income decreased $643,000 or 27.5% for the six-month period ended June 30, 2003 compared to the same period for 2002. The decrease in investment income is due to a decrease in volume. Average investment balances were $77,533,000 compared to $93,961,000 and the yields were 4.4% compared to 5.0% for the first six months of 2003 and 2002 respectively. See “Average Balance Sheet” for the six-month periods ended June 30, 2003 and 2002. Interest and fees on loans decreased $281,000 or 4.9% for the six-month period ended June 30, 2003 compared to the same period for 2002. The decrease in interest and fees on loans is due to a decrease in the yield on loans. Average loan balances were $180,187,000 for the first six months of 2003 compared to $156,898,000 for the first six months of 2002 and the yield on loans decreased to 6.1% for the first six months of 2003 compared to 7.3% for the first six months of 2002.

Total interest expense of $2,170,000 for the six-month period ending June 30, 2003 represents a decrease of $1,027,000 from the $3,197,000 reported for the same six-month period in 2002. The decrease in interest expense on deposits of $995,000 is due mainly to the decreases in the rates of deposit accounts. Average interest bearing deposits were $204,809,000 for the first six months of 2003 compared to $203,609,000 for the first six months of 2002. The cost on interest bearing deposits was 2.0%, compared to 3.0% for the six-month periods of 2003 and 2002 respectively. See “Average Balance Sheet” for the six-month periods ended June 30, 2003 and 2002.

Net interest income of $5,088,000 for the six months ended June 30, 2003, compares to $5,034,000 for the same six-month period in 2002, an increase of $54,000 or 1.1%.

Total other income for the six month period ended June 30, 2003, of $573,000 compares to $383,000 for the same six month period in 2002, an increase of $190,000 or 49.6%. Gains on sale of loans increased $128,000 due to increased activity caused by declining fixed loan rates. The increase of $47,000 in service charges on deposit accounts was attributable to normal activity within the deposit accounts due to an increase in non-time deposit accounts. Also various service charges were increased effective April 1, 2003. Other income increased $16,000 due to the increases in miscellaneous other service charges.

Total other expense of $3,526,000 for the six months ended June 30, 2003, compares to $3,314,000 for the same six-month period in 2002. This represents an increase of $212,000 or 6.4%. Salary and employee benefits increased approximately $193,000 due to normal increases in salaries and employee benefits and additional business development staff being hired. The changes in the remaining expense accounts were attributable to increases in items that are normal and recurring in nature.

According to the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, Management periodically evaluates goodwill for impairment. At this time, no impairment has been recognized.

-13-

RESULTS OF OPERATIONS

Comparison of the Three Months Ended June 30, 2003 and 2002

Net income for the three-month period ended June 30, 2003, was $770,000, an increase of $14,000 or 1.9% from the $756,000 reported at June 30, 2002.

Total interest income of approximately $3,604,000 for the three-month period ended June 30, 2003, compares to $4,056,000 for the same period in 2002, a decrease of $452,000 or 11.1%. The majority of the overall decrease in total interest income is attributed to a decrease in investment securities – taxable of $319,000 or 70.6% of the overall decrease. The decrease in interest on investment securities of $325,000 was due to a decrease in the average balances outstanding of $76,449,000 for 2003 compared to $93,073,000 for 2002 and the yield was 4.3% compared to 5.0% for this three-month period of 2003 and 2002 respectively. See “Average Balance Sheet” for the three-month periods ended June 30, 2003 and 2002. Interest and fees on loans decreased $103,000 or 3.6% for the three-month period ended June 30, 2003 compared to the same period for 2003. The decrease in interest and fees on loans is due to a decrease in the yield on the loan portfolio. Average loan balances were $183,342,000 compared to $160,158,000 and the yield was 6.0% compared to 7.1% for this three-month period of 2003 and 2002 respectively.

Total interest expense of $1,045,000 for the three-month period ending June 30, 2003, represents a decrease of $477,000 from the $1,522,000 reported for the same three-month period in 2002. The decrease in interest expense on deposits of $460,000 is due mainly to a decrease in yield. Average interest bearing deposits were $205,758,000 for this three-month period of 2003 compared to $202,725,000 for the same three months of 2002. The cost of interest bearing deposits was 1.9% compared to 2.8% for this three-month period of 2003 and 2002 respectively. See “Average Balance Sheet” for the three-month periods ended June 30, 2003 and 2002.

Net interest income of $2,559,000 for the three months ended June 30, 2003, compares to $2,534,000 for the same three-month period in 2002, an increase of $25,000 or 1.0%.

Total other income for the three month period ended June 30, 2003, of $328,000 compares to $193,000 for the same three month period in 2002, an increase of $135,000 or 69.9%. Gains on sale of loans increased $89,000 due to the Bank’s increased activity caused by declining fixed loan rates. The service fee income on deposits increased $40,000 due to an increase in the accounts being serviced and various service charges that were increased effective April 1, 2003.

Total other expense of $1,806,000 for the three months ended June 30, 2003, compares to $1,725,000 for the same three-month period in 2002. This represents an increase of $81,000 or 4.7%. Salary and employee benefits increased $100,000 in part to new business development staff being hired and normal recurring employee cost increases for salary and employee benefits.

-14-

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 $21,258,000 at June 30, 2003. These assets provide the primary source of liquidity for the Company. In addition, management has designated a substantial portion of the investment portfolio, $29,009,000 as available for sale and has an available unused line of credit of $30,907,000 with the Federal Home Loan Bank of Cincinnati to provide additional sources of liquidity at June 30, 2003. As of June 30, 2003, the Company had commitments to fund loans of approximately $6,495,000 and unused lines of credit totaling $19,984,000.

Cash was provided during the six month period ended June 30, 2003, mainly from operating activities of $1.7 million, the maturities and repayments of investment securities of $18.5 million, and net increase in deposits of $3.2 million. Cash was used during the six month period ended June 30, 2003, mainly to fund a net increase in loans of $9.4 million, and for the purchase of investment securities of $9.6 million. In addition $2.2 million was also used to reduce Federal Home Loan Bank advances and short-term borrowings during the first six months of 2003 and $.6 million was used to purchase Treasury Stock, and $.6 million was used to pay dividends to shareholders. Cash and cash equivalents totaled $21.3 million at June 30, 2003, an increase of $1.0 million from $20.3 million at December 31, 2002.

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.

-15-

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 June 30, 2003, and December 31, 2002. A loan is classified as nonaccrual when, in the opinion of management, there are doubts about collectibility of interest and principal. At the time the accrual of interest is discontinued, future income is recognized only when cash is received. Renegotiated loans are those loans which terms have been renegotiated to provide a reduction or deferral of principal or interest as of result of the deterioration of the borrower.

	June 30, 2003			December 31, 2002
	(dollars in thousands)
Loans on nonaccrual basis	$	171		$	149
Loans past due 90 days or more		126			—
Renegotiated loans		—			—
Total nonperforming loans		297			149
Other real estate		—			—
Repossessed assets		—			—
Total nonperforming assets	$	297		$	149
Nonperforming loans as a percent of total loans		0.16	%		0.08	%
Nonperforming loans as a percent of total assets		0.10	%		0.05	%
Nonperforming assets as a percent of total assets		0.10	%		0.05	%

Management monitors impaired loans on a continual basis. As of June 2003, impaired loans had no material effect on the Company’s financial position or results from operations.

The allowance for loan losses at June 30, 2003, totaled $2,489,000 or 1.35% of total loans as compared to $2,326,000 or 1.33% at December 31, 2002. Provisions for loan losses were $210,000 for the six months ended June 30, 2003 and $90,000 for the six months ended June 30, 2002. The provisions were increased due to the $9.1 million increase in net loans.

The level of funding for the provision is a reflection of the overall loan portfolio. Nonperforming loans consist of approximately $151,000 in commercial real estate, $20,000 in one to four family residential mortgages, and $126,000 in consumer loans. 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, 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.

-16-

AVERAGE BALANCE SHEET

Average Balance Sheet for the Six-Month Period Ended June 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. 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.

	Period Ended
	2003									2002
	Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate
Assets
Interest Earnings Assets:
Loans (1)(2)(3)	$	180,186,763		$	5,503,404		6.11	%	$	156,897,784		$	5,784,539		7.37	%
Securities-taxable (4)		35,273,285			748,890		4.25	%		52,842,288			1,395,174		5.28	%
Securities-nontaxable (4)		40,801,313			908,817		4.45	%		39,709,104			905,869		4.56	%
Securities-Equity (4,5)		1,458,767			34,131		4.68	%		1,410,127			33,958		4.82	%
Federal funds sold		11,130,352			62,172		1.12	%		13,429,790			111,317		1.66	%
Total interest earnings assets		268,850,480			7,257,414		5.40	%		264,289,093			8,230,857		6.23	%
Noninterest earning assets:
Cash and due from other institutions		8,177,798								8,534,509
Premises and equipment, net		5,119,569								5,099,309
Accrued interest		1,038,991								1,400,137
Other assets		2,337,291								2,307,067
Less allowance for loan losses		(2,435,771	)							(2,277,064	)
Total noninterest earnings assets		14,237,878								15,063,958
Total Assets	$	283,088,358							$	279,353,051
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing demand	$	32,438,775			89,926		.55	%	$	31,367,645		$	164,797		1.05	%
Money market accounts		17,586,300			98,743		1.12	%		16,466,469			164,738		2.00	%
Savings deposits		40,399,803			227,017		1.12	%		34,931,071			295,340		1.69	%
Time deposits		114,383,956			1,615,507		2.82	%		120,843,771			2,400,760		3.97	%
Short term borrowings		3,999,073			2,575		.13	%		3,860,092			2,476		.13	%
Federal Home Loan Advances		4,044,101			135,943		6.72	%		4,979,332			168,607		6.77	%
Total interest bearing liabilities		212,852,008			2,169,711		2.04	%		212,448,380			3,196,718		3.01	%
Noninterest bearing liabilities:
Demand deposits		34,818,065								32,569,889
Accrued expenses and other liabilities		1,949,884								1,985,540
Total noninterest bearing liabilities		36,767,949								34,555,429
Shareholders’ equity		33,468,401								32,349,242
Total Liabilities and Shareholders’ Equity	$	283,088,358							$	279,353,051
Net interest income				$	5,087,703							$	5,034,139
Interest rate spread (6)							3.36	%							3.22	%
Net yield on interest earning assets (7)							3.78	%							3.81	%

(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 $185,413 and $211,056 in 2003 and 2002, 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.

-17-

AVERAGE BALANCE SHEET

Average Balance Sheet for the Three-Month Period Ended June 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. 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.

	Period Ended
	2003									2002
	Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate
Assets
Interest Earnings Assets:
Loans (1)(2)(3)	$	183,342,348		$	2,749,960		6.00	%	$	160,158,176		$	2,852,996		7.13	%
Securities-taxable (4)		33,894,622			353,127		4.17	%		51,021,029			671,716		5.27	%
Securities-nontaxable (4)		41,090,320			455,320		4.43	%		40,636,054			461,321		4.54	%
Securities-Equity (4,5)		1,464,150			19,228		5.25	%		1,416,066			19,607		5.54	%
Federal funds sold		9,790,072			26,976		1.10	%		11,029,915			49,873		1.81	%
Total interest earnings assets		269,581,512			3,604,611		5.35	%		264,261,240			4,055,513		6.14	%
Noninterest earning assets:
Cash and due from other institutions		8,435,794								8,361,875
Premises and equipment, net		5,073,841								5,057,604
Accrued interest		1,115,144								1,506,728
Other assets		2,422,625								2,386,842
Less allowance for loan losses		(2,496,023	)							(2,264,831	)
Total noninterest earnings assets		14,551,381								15,048,218
Total Assets	$	284,132,893							$	279,309,458
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing demand	$	33,692,098			43,874		.52	%	$	31,724,543		$	83,859		1.06	%
Money market accounts		17,671,574			47,479		1.07	%		16,129,221			81,010		2.01	%
Savings deposits		40,957,562			105,556		1.03	%		35,863,658			152,628		1.70	%
Time deposits		113,435,681			780,993		2.75	%		119,007,658			1,120,212		3.77	%
Short term borrowings		3,495,358			1,133		.13	%		3,572,209			1,146		.13	%
Federal Home Loan Advances		3,948,580			66,397		6.73	%		4,871,742			82,583		6.78	%
Total interest bearing liabilities		213,200,853			1,045,432		1.96	%		211,169,031			1,521,438		2.88	%
Noninterest bearing liabilities:
Demand deposits		35,537,012								33,657,391
Accrued expenses and other liabilities		2,296,319								2,397,810
Total noninterest bearing liabilities		37,833,331								36,055,201
Shareholders’ equity		33,098,709								32,085,226
Total Liabilities and Shareholders’ Equity	$	284,132,893							$	279,309,458
Net interest income				$	2,559,179							$	2,534,075
Interest rate spread (6)							3.39	%							3.26	%
Net yield on interest earning assets (7)							3.80	%							3.84	%

(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 $98,203 and $91,180 in 2003 and 2002, respectively.
(3)	Nonaccrual loans are include 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.

-18-

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).

	Six-Month Period Ended June 2003 Compared to 2002
	Increase (Decrease) Due To
	Volume			Rate			Net
Interest income
Loans	$	1,717		$	(1,998	)	$	(281	)
Securities-taxable		(928	)		282			(646	)
Securities-nontaxable		50			(47	)		3
Securities-equities		2			(2	)		—
Federal funds sold		(38	)		(11	)		(49	)
Total interest earning Assets		803			(1,776	)		(973	)
Interest expense
Interest bearing demand		11			(86	)		(75	)
Money market accounts		22			(88	)		(66	)
Savings deposits		92			(160	)		(68	)
Time deposits		(257	)		(529	)		(786	)
Short-term borrowing		—			1			1
Federal Home Loan Bank Advances		(63	)		30			(33	)
Total interest bearing Liabilities		(195	)		(832	)		(1,027	)
Net change in net interest income	$	998		$	(944	)	$	54

-19-

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 June 2003 Compared to 2002
	Increase (Decrease) Due To
	Volume			Rate			Net
Interest income
Loans	$	1,652		$	(1,755	)	$	(103	)
Securities-taxable		(902	)		583			(319	)
Securities-nontaxable		21			(27	)		(6	)
Securities-equities		3			(4	)		(1	)
Federal funds sold		(22	)		(1	)		(23	)
Total interest earning Assets		752			(1,204	)		(452	)
Interest expense
Interest bearing demand		21			(61	)		(40	)
Money market accounts		31			(65	)		(34	)
Savings deposits		87			(134	)		(47	)
Time deposits		(210	)		(129	)		(339	)
Short-term borrowing		—			—			—
Federal Home Loan Bank Advances		(63	)		46			(17	)
Total interest bearing Liabilities		(134	)		(343	)		(477	)
Net change in net interest income	$	886		$	(861	)	$	25

-20-

Item 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk for the Company is comprised primarily from interest rate risk exposure and liquidity risk. Since virtually all of the interest-earning assets and paying liabilities are at the Bank, virtually all of the interest rate risk and liquidity risk lies at the Bank level. The Bank is not subject to any trading risk. In addition, the Bank does not participate in hedging transactions such as interest rate swaps and caps. Changes in interest rates will impact both income and expense recorded and also the market values of long-term interest-earnings assets. Interest rate risk and liquidity risk managements is performed at the Bank level. Although the Bank has a diversified loan portfolio, loans outstanding to individuals and businesses are dependent upon the local economic conditions in the immediate trade area.

One of the principal functions of the Company’s asset/liability management program is to monitor the level to which the balance sheet is subject to interest rate risk. The goal of the asset/liability program is to manage the relationship between interest rate sensitive assets and liabilities, thereby minimizing the fluctuations in the net interest margin, which achieves consistent growth of net interest income during periods of changing interest rates.

Interest rate sensitivity is the result of differences in the amounts and repricing dates of a bank’s rate sensitive assets and rate sensitive liabilities. These differences, or interest rate repricing “gap” provide an indication of the extent that the Company’s net interest income is affected by future changes in interest rates. During a period of rising interest rates, a positive gap, a position of more rate sensitive assets than rate sensitive liabilities, is desired. During a falling interest rate environment, a negative gap is desired, that is, a position in which rate sensitive liabilities exceed rate sensitive assets.

At June 30, 2003, the Company had a cumulative positive gap of $75.1 million or 26.11% at the one-year horizon. The gap analysis indicates that if interest rates were to rise 200 basis points (2.00%), the Company’s net interest income would improve at the one-year horizon because the Company’s rate sensitive assets would reprice faster than rate sensitive liabilities. Conversely, if rates were to fall 200 basis points, the Company’s net interest income would decline.

Management also manages interest rate risk with the use of simulation modeling which measures the sensitivity of future net interest income as a result of changes in interest rates. The analysis is based on repricing opportunities for variable rate assets and liabilities and upon contractual maturities of fixed rate instruments.

The simulation also calculates net interest income based upon rate increases or decrease of + or – 200 basis points (or 2.00%) in 100 basis point (or 1.00%) increments. The analysis reprices the balance sheet and forecasts future cash flows over a one-year horizon at the net interest rate levels. The cash flows are then totaled to calculate net interest income. Assumptions are made for loan and investment pre-payment speeds and are incorporated into the simulation as well. Loan and investment pre-payment speeds will increase as interest rates decrease and slow as interest rates rise. The current analysis indicates that, given a 200 basis point overnight decrease in interest rates, the Company would experience a potential $475,000 or 16.19% decline in net interest income. If rates were to increase 200 basis points, the analysis indicates that the Company’s net interest income would increase $480,000 or 16.04%. It is important to note, however, that this exercise would be a worst-case scenario. It would be more likely to have incremental changes in interest rates, rather than a single significant increase or decrease.

When management believes interest rate movements will occur, it can restructure the balance sheet and thereby the ratio of rate sensitive assets to rate sensitive liabilities which in turn will effect the net interest income. It is important to note; however, that in gap analysis and simulation modeling not all assets and liabilities with similar maturities and repricing opportunities will reprice at the same time or to the same degree and therefore, could effect forecasted results.

-21-

Much of the Bank’s deposits have the ability to reprice immediately, however, deposit rates are not tied to an external index. As a result, although changing market interest rates impact repricing, the Bank retains much of the control over repricing by determining itself the extent and timing of repricing deposit products. In addition, the Bank maintains a significant portion of its investment portfolio as available for sale securities and also has a significant variable rate loan portfolio, which is used to offset rate sensitive liabilities.

Changes in market interest rates can also affect the Bank’s liquidity position through the impact rate change may have on the market value of the available for sale portion of the investment portfolio. Increase in market rates can adversely impact the market values and therefore, make it more difficult for the Bank to sell available for sale securities needed for general liquidity purposes without incurring a loss on the sale. This issue is addressed by the Bank with the use of borrowings from the Federal Home Loan Bank (“FHLB”) and the selling of fixed rate mortgages as a source of liquidity to the Bank.

The Company’s liquidity plan allows for the use of long-term advances or short-term lines of credit with the FHLB as a source of funds. Borrowing from FHLB not only provides a source of liquidity for the Company, but also serves as a tool to reduce interest risk as well. The Company may structure borrowings from FHLB to match those of customers’ credit requests, and therefore, lock in interest rate spreads over the lives of the loans.

In addition to borrowing from the FHLB as a source for liquidity, the Company also participates in the secondary mortgage market. Specifically, the Company sells fixed rate, residential real estate mortgages to the Federal Home Loan Mortgage Corporation (“Freddie Mac”). The sales to Freddie Mac not only provide an opportunity for the Bank to remain competitive in the market place, by allowing it to offer a fixed rate mortgage product, but also provide an additional source of liquidity and an additional tool for management to limit interest rate risk exposure. The Bank continues to service all loans sold to Freddie Mac.

-22-

Item 4 – CONTROLS AND PROCEDURES

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2003, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2003, 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.

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended June 30, 2003, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

-23-

Part II – OTHER INFORMATION

Item 1  -   Legal Proceedings

                None

Item 2  -   Changes in the rights of the Company’s security holders

                None

Item 3  -   Defaults by the Company on its senior securities

                None

Item 4  -   Results of votes of security holders

The following represent the results of matters submitted to a vote of the shareholders at the annual meeting held on April 28, 2003.

                Affixing the number of directors at nine for 2003:

For	538,857
Abstain	0
Absent	179,574

               Election of Directors:

               The following directors were elected with terms to expire 2006:

	For	Withheld
Allan Mast	537,733	180,698
Dean Mullet	537,733	180,698
Luther Proper	537,733	180,698

Item 5  -   Other Information

                None

Item 6  -   Exhibits and Reports on Form 8-K

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

3(i)	Articles of Incorporation of Killbuck Bancshares, Inc.*
3(ii)	Code of Regulations of Killbuck Bancshares, Inc.*
10.1	Employment Contract
10.2	Employment Contract
10.3	Employment Contract
21	Subsidiaries of Registrant*
31.1	Section 302 Certification
31.2	Section 302 Certification
32.1	Certification pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1	Independent Accountant’s Report

b) No reports on Form 8-K were filed during the quarter of the period covered by this report.

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* 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.

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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:  August 12, 2003		By:	/s/  LUTHER E. PROPER
		Luther E. Proper
		President and Chief Executive Officer
Date:  August 12, 2003		By:	/s/  DIANE KNOWLES
		Diane Knowles
		Chief Financial Officer

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