Killbuck Bancshares (KLIB) 10-Q 2007 Q1 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 March 31, 2007

¨ 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 or a non-accelerated filer as defined by Rule 12b-2 of the Exchange Act.

Larger accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x

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

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

Class: Common Stock, no par value

Outstanding at May 5, 2007: 636,278

KILLBUCK BANCSHARES, INC.

Index

		Page Number
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):
	Consolidated Balance Sheet as of March 31, 2007 and December 31, 2006	3
	Consolidated Statements of Income for the three months ended March 31, 2007 and 2006	4
	Consolidated Statements of Changes In Shareholders’ Equity for the three months ended March 31, 2007	5
	Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006	6
	Notes to Unaudited Consolidated Financial Statements	7-8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9-15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	16-17
Item 4.	Controls and Procedures	18
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3.	Default Upon Senior Securities	19
Item 4.	Submissions of Matters to a Vote of Security Holders	19
Item 5.	Other Information	19
Item 6.	Exhibits	20
SIGNATURES		21

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Killbuck Bancshares, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEET (UNAUDITED)

	March 31, 2007			December 31, 2006
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions	$	14,878,005		$	14,732,362
Federal funds sold		18,329,000			27,973,000
Total cash and cash equivalents		33,207,005			42,705,362
Investment securities:
Securities available for sale		36,724,473			34,752,975
Securities held to maturity (fair value of $32,202,687 and $30,684,221)		31,571,156			29,992,583
Total investment securities		68,295,629			64,745,558
Loans (net of allowance for loan losses of $2,390,331 and $2,393,705)		204,016,890			191,932,069
Loans held for sale		—			172,500
Premises and equipment, net		5,803,016			5,713,596
Accrued interest receivable		1,978,778			1,396,267
Goodwill, net		1,329,249			1,329,249
Other assets		5,557,210			5,210,886
Total assets	$	320,187,777		$	313,205,487
LIABILITIES
Deposits:
Noninterest bearing demand	$	43,691,186		$	48,693,192
Interest bearing demand		27,494,986			30,473,620
Money market		22,394,698			15,050,083
Savings		38,461,997			37,744,514
Time		138,721,380			132,339,103
Total deposits		270,764,247			264,300,512
Federal Home Loan Bank advances		3,053,478			3,243,371
Short-term borrowings		4,765,000			5,310,281
Accrued interest and other liabilities		1,440,595			1,217,526
Total liabilities		280,023,320			274,071,690
SHAREHOLDERS’ EQUITY
Common stock – No par value: 1,000,000 shares authorized, 718,431 issued		8,846,670			8,846,670
Retained earnings		38,483,169			37,315,334
Accumulated other comprehensive income		36,303			4,892
Treasury stock, at cost (81,293 and 79,789 shares)		(7,201,685	)		(7,033,099	)
Total shareholders’ equity		40,164,457			39,133,797
Total liabilities and shareholders’ equity	$	320,187,777		$	313,205,487

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 March 31,
	2007		2006
INTEREST INCOME
Interest and fees on loans	$	4,165,457	$	3,972,262
Federal funds sold		291,276		219,266
Investment securities:
Taxable		508,377		179,330
Exempt from federal income tax		334,993		340,293
Total interest income		5,300,103		4,711,151
INTEREST EXPENSE
Deposits		1,789,032		1,166,905
Federal Home Loan Bank advances		44,530		70,271
Short term borrowing		38,469		21,325
Total interest expense		1,872,031		1,258,501
NET INTEREST INCOME		3,428,072		3,452,650
Provision for loan losses		5,220		60,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		3,422,852		3,392,650
NON INTEREST INCOME
Service charges on deposit accounts		263,654		213,498
Gain on sale of loans, net		1,964		11,486
Other income		64,768		84,931
Total non interest income		330,386		309,915
NON INTEREST EXPENSE
Salaries and employee benefits		1,320,480		1,235,402
Occupancy expense		247,531		247,093
Professional fees		68,921		87,948
Franchise tax		117,050		111,000
Postage, Express, & Freight		49,259		56,800
Other expenses		359,803		380,519
Total non interest expense		2,163,044		2,118,762
INCOME BEFORE INCOME TAXES		1,590,194		1,583,803
Income taxes		422,359		421,956
NET INCOME	$	1,167,835	$	1,161,847
Earning per common share	$	1.83	$	1.80
Weighted Average shares outstanding		638,244		645,729

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)

THREE MONTHS ENDED MARCH 31, 2007

	Common Stock		Retained Earnings		Accumulated Other Comprehensive Income		Treasury Stock			Total Shareholders’ Equity			Comprehensive Income
Balance, December 31, 2006	$	8,846,670	$	37,315,334	$	4,892	$	(7,033,099	)	$	39,133,797
Net income				1,167,835							1,167,835		$	1,167,835
Purchase of Treasury stock, at cost (1,504 shares)								(168,586	)		(168,586	)
Other comprehensive income:
Net unrealized gain on securities, net of tax $16,181						31,411					31,411			31,411
Comprehensive income													$	1,199,246
Balance, March 31, 2007	$	8,846,670	$	38,483,169	$	36,303	$	(7,201,685	)	$	40,164,457

See accompanying notes to the unaudited consolidated financial statements.

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Killbuck Bancshares, Inc. and Subsidiary

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

	Three Months Ended March 31,
	2007			2006
OPERATING ACTIVITIES
Net income	$	1,167,835		$	1,161,847
Adjustments to reconcile net income to net cash provided by
Operating activities:
Provision for loan losses		5,220			60,000
Gain on sale of loans		(1,964	)		(11,486	)
Provision for depreciation and amortization		109,509			103,593
Origination of loans held for sale		(561,000	)		(2,041,535	)
Proceeds from the sale of loans		735,464			2,147,621
Federal Home Loan Bank stock dividend		(19,700	)		(17,800	)
Net change in:
Accrued interest and other assets		(899,937	)		(712,755	)
Accrued expenses and other liabilities		197,690			146,811
Net cash provided by operating activities		733,117			836,296
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from maturities and repayments		4,051,624			170,983
Purchases		(5,980,700	)		(2,000,000	)
Investment securities held to maturity:
Proceeds from maturities and repayments		139,315			—
Purchases		(1,725,264	)		(1,185,510	)
Net (increase) decrease in loans		(12,090,041	)		467,370
Proceeds from sale of foreclosed real estate		—			700,000
Purchase of premises and equipment		(186,383	)		(44,931	)
Net cash used in investing activities		(15,791,449	)		(1,892,088	)
FINANCING ACTIVITIES
Net increase (decrease) in demand, money market and savings deposits		81,458			(76,661	)
Net increase in time deposits		6,382,277			1,038,198
Repayment of Federal Home Loan Bank advances		(189,893	)		(192,417	)
Net (decrease) increase in short term borrowings		(545,281	)		445,000
Purchase of Treasury stock		(168,586	)		(555,817	)
Net cash provided by financing activities		5,559,975			658,303
Net decrease in cash and cash equivalents		(9,498,357	)		(397,489	)
Cash and cash equivalents at beginning of period		42,705,362			33,331,294
Cash and cash equivalents at end of period	$	33,207,005		$	32,933,805
Supplemental Disclosures of Cash Flows Information
Cash Paid During the Period For:
Interest on deposits and borrowings	$	1,849,956		$	1,261,369
Income taxes	$	—		$	—

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, 2006 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:

	Three Months Ended March 31, 2007			Three Months Ended March 31, 2006
Net income	$	1,167,835		$	1,161,847
Other comprehensive income:
Net unrealized gain (loss) on securities		47,592			(47,840	)
Tax effect		(16,181	)		16,265
Total comprehensive income	$	1,199,246		$	1,130,272

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NOTE 4 – RECENT ACCOUNTING PRONOUNCEMENTS

In February 2007, the FASB issued FAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115, which provides all entities with an option to report selected financial assets and liabilities at fair value. The objective of the FAS No. 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities differently without having to apply the complex provisions of hedge accounting. FAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007 provided the entity also elects to apply the provisions of FAS No. 157,Fair Value Measurements. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 (“EITF 06-10”),Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements. EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact the adoption of the EITF will have on the Company’s results of operations or financial condition.

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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.

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, 2006. 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 involve 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, 2006.

Goodwill and Other Intangible Assets —As discussed in Note 7 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, 2006; 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 14 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, 2006.

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Financial Condition

Total assets at March 31, 2007 were $320,188,000 compared to $313,205,000 at December 31, 2006.

Cash and cash equivalents decreased by $9,498,000 or 22.2% from December 31, 2006, to March 31, 2007, with federal funds sold decreasing $9,644,000. The federal funds were used to partially fund the increase in loans.

Investment securities available for sale increased by $1,971,000 or 5.7% from December 31, 2006 to March 31, 2007, due to an effort to rebuild the securities portfolio. Investments held to maturity increased $1,578,000 or 5.3% due to the same effort to rebuild the securities portfolio.

Net loans increased by $12,085,000 or 6.3% from December 31, 2006, to March 31, 2007. An increase of $3,449,000 occurred in the real estate loan category, which is attributable primarily to increases in commercial real estate of $5,841,000 with decreases in farm lending and construction loan activity of $715,000 and $1,589,000 respectively. Commercial and other loan balances increased by $8,667,000 due to seasonal changes and inventory growth while consumer loan balances continued to decrease by $31,000.

Total deposits at March 31, 2007 were $270,764,000 compared to $264,301,000 at December 31, 2006. Time deposits increased $6,382,000, demand accounts decreased $7,981,000, and money market and savings accounts increased $8,062,000. Management attributes some of this fluctuation to direct crossover from demand to interest bearing accounts as a result of rising interest rates. Management believes demand account decreases are also attributable to normal fluctuations due to customer usage; business accounts using demand account funds to build up seasonal inventories; the fact that demand deposit accounts at December 31, 2006 included additional funds due to the holiday period; and the disintermediation into other financial markets.

Federal Home Loan Bank advances decreased $190,000 due to scheduled repayments and short-term borrowings decreased $545,000 at March 31, 2007 from December 31, 2006.

Shareholders’ Equity increased by $1,030,000 or 2.6%, which was mainly due to earnings of $1,168,000 for the first three months of 2007 enhanced by a $31,000 unrealized gain on securities included in other comprehensive income and decreased by the purchase of Treasury stock for $169,000. Treasury stock purchases are monitored against the Company’s Strategic Plan and the goals set forth in the plan. The Treasury stock purchases have not exceeded the Strategic Plan’s guidelines for the first three months of 2007. Management monitors risk-based capital and leveraged capital ratios in order to assess compliance with the regulatory guidelines. At March 31, 2007, the total capital ratio was 18.51%; the Tier I capital ratio was 17.43%, and the leverage ratio was 12.47%, 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 Three Months Ended March 31, 2007 and 2006

Net income for the three-month period ended March 31, 2007, was $1,168,000 an increase of $6,000 or .5% from the $1,162,000 reported at March 31, 2006.

Total interest income of approximately $5,300,000 for the three-month period ended March 31, 2007, compares to $4,711,000 for the same period in 2006, an increase of $589,000 or 12.5%. The increase in total interest income is attributable to an increase in interest on taxable investment securities including equities. The increase in interest on taxable investment securities of $329,000 was due to the increase in volume. The average balances outstanding of $39,699,000 for 2007 compared to $15,941,000 for 2006 and the yield was 5.12% compared to 4.50% for this three-month period of 2007 and 2006 respectively. Interest and fees on loans increased $193,000 or 4.9% for the three-month period ended March 31, 2007 compared to the same period for 2006. The increase in interest and fees on loans is due to an increase in the interest rates on the loan portfolio. The yield was 8.33% compared to 7.59% for this three-month period of 2007 and 2006 respectively and average loan balances were $200,125,000 for 2007 compared to $209,211,000 for 2006. See “Average Balance Sheet” for the three-month periods ended March 31, 2007 and 2006.

Total interest expense of $1,872,000 for the three-month period ending March 31, 2007, represents an increase of $614,000 from the $1,258,000 reported for the same three-month period in 2006. The increase in interest expense on deposits is due mainly to an increase in the cost of the time deposits. The cost of time deposits was 4.52% compared to 3.43% for this three-month period of 2007 and 2006 respectively. Average interest-bearing deposits were $219,969,000 for this three-month period of 2007 compared to $201,552,000 for the same three months of 2006. The cost of interest bearing deposits was 3.25% compared to 2.32% for this three-month period of 2007 and 2006 respectively. See “Average Balance Sheet” for the three-month periods ended March 30, 2007 and 2006.

Net interest income of $3,428,000 for the three months ended March 31, 2007, compares to $3,453,000 for the same three-month period in 2006, a decrease of $25,000 or .7%. Management expects the cost on average interest-bearing liabilities to continue increasing while the current competitive loan-pricing environment exerts a downward pressure on the yields on loans. The net interest margin is expected to experience compression in 2007.

Total non-interest income for the three-month period ended March 31, 2007 increased approximately $20,000 or 6.5% to $330,000 from $310,000 for the same three-month period in 2006. Service Charges on deposit accounts increased $51,000 due to an increase of approximately $54,000 or 41.1% on the overdraft program, which began in the fourth quarter of 2006. Gains on sale of loans decreased $9,000 due to decreased activity caused by a slowdown in the housing market. Other income decreased approximately $20,000. Approximately $16,000 of the $20,000 decrease is due to the timing of receipt of fees from the alternative investment program in 2007 compared to the same three-month period ended March 31, 2006.

Total non-interest expense of $2,163,000 for the three months ended March 31, 2007, compares to $2,119,000 for the same three-month period in 2006. This represents an increase of $44,000 or 2.1%. Approximately $23,000 was attributable to higher medical group insurance costs due to the partially self-funded plan. Approximately $62,000 was attributable to normal recurring employee cost increases for annual salary increases, staff additions and employee benefits. Approximately a $15,000 decrease was attributable to legal expenses associated with non-performing loans. The changes in the remaining expense accounts were attributable to increases/decreases in items that are normal and recurring in nature.

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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 $33,207,000 at March 31, 2007. These assets provide the primary source of liquidity for the Company. In addition, management has designated a portion of the investment portfolio, $36,724,000 as available for sale and has an available unused line of credit of $39,723,000 with the Federal Home Loan Bank of Cincinnati to provide additional sources of liquidity at March 31, 2007. As of March 31, 2007, the Company had commitments to fund loans of approximately $1,832,000 and unused lines of credit totaling $34,917,000.

Cash was provided during the three month period ended March 31, 2007, mainly from operating activities of $.7 million, the maturities and repayments of investment securities of $4.2 million, and a net increase in deposits of $6.5 million. Cash was used during the three month period ended March 31, 2007, mainly to fund a net increase in loans of $12.1 million and for the purchase of investment securities of $7.7 million. $.2 million was also used in the purchase of premises and equipment. In addition, $.2 million was used to reduce Federal Home Loan Bank advances during the first three months of 2007, short-term borrowings decreased $.5 million, and $.2 million was used to purchase Treasury Stock. Cash and cash equivalents totaled $33.2 million at March 31, 2007, a decrease of $9.5 million from $42.7 million at December 31, 2006.

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

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Risk Elements

The table below presents information concerning nonperforming assets including nonaccrual loans, renegotiated loans, loans 90 days or more past due, other real estate loans and repossessed assets at March 31, 2007, and December 31, 2006. 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 Executive Vice President and the loan officer to determine whether they will be classified as nonperforming. These officers review various factors, which include, but are not limited to, the timing of the maturity of the loan in relation to the ability to collect, whether the loan is deemed to be well secured, whether the loan is in the process of collection, and the favorable results of the analysis of customer financial data. A nonperforming loan will only be 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.

	March 31, 2007			December 31, 2006
	(dollars in thousands)
Loans on nonaccrual basis	$	848		$	471
Loans past due 90 days or more		—			—
Renegotiated loans		—			—
Total nonperforming loans		848			471
Other real estate		80			80
Repossessed assets		—			—
Total nonperforming assets	$	928		$	551
Nonperforming loans as a percent of total loans		.41	%		.24	%
Nonperforming loans as a percent of total assets		.26	%		.15	%
Nonperforming assets as a percent of total assets		.29	%		.18	%

Management monitors impaired loans on a continual basis. As of March 2007, impaired loans had no material effect on the Company’s financial position or results from operations.

The allowance for loan losses at March 31, 2007, totaled $2,390,000 or 1.16% of total loans as compared to $2,394,000 or 1.23% at December 31, 2006. Provisions for loan losses were $5,220 for the three months ended March 31, 2007 and $60,000 for the three months ended March 31, 2006.

The level of funding for the provision is a reflection of the overall loan portfolio. Nonperforming loans consist of approximately $650,000 in commercial real estate, $197,000 in one to four family residential mortgages, and $1,000 in consumer loans. The collateral requirements on such loans reduce the risk of potential losses to an acceptable level in management’s opinion. The largest of the residential loans, approximately $173,000, was sold at auction in the first quarter of 2007. The Bank purchased it; however, the title was still pending at quarter-end. Subsequent to the auction, the bank had a sales contract with a purchaser to complete the transaction as soon as the Bank received the deed. The Bank received the deed and completed the sale in the second quarter of 2007.

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

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AVERAGE BALANCE SHEET

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

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

	March 31, 2007							March 31, 2006
	Average Balance			Interest		Yield/ Rate		Average Balance			Interest		Yield/ Rate
Assets
Interest Earnings Assets:
Loans (1)(2)(2)(3)	$	200,124,648		$	4,165,457	8.33	%	$	209,211,472		$	3,972,262	7.59	%
Securities-taxable (4)		38,018,794			488,632	5.14			14,336,410			161,454	4.50
Securities-nontaxable		30,462,561			334,993	4.40			31,043,732			340,293	4.38
Securities-equity (4)(5)		1,680,063			19,745	4.70			1,605,087			17,876	4.45
Federal funds sold		21,609,632			291,276	5.39			19,827,228			219,266	4.42
Total interest earnings assets		291,895,698			5,300,103	7.26			276,023,929			4,711,151	6.83
Noninterest earning assets
Cash and due from other institutions	$	10,134,693							10,188,303
Premises and equipment, net		5,698,017							5,105,856
Accrued interest		1,342,351							998,536
Other assets		5,768,370							5,737,291
Less allowance for loan losses		(2,401,604	)						(2,297,424	)
Total noninterest earnings assets		20,541,827							19,732,562
Total Assets	$	312,437,525						$	295,756,491
Liabilities and Shareholders Equity
Interest bearing liabilities:
Interest bearing demand	$	28,283,918		$	40,645	0.57	%	$	31,855,118			43,131	0.54	%
Money market accounts		18,087,816			117,674	2.60			18,412,124			94,471	2.05
Savings deposits		37,482,879			94,184	1.01			41,258,419			84,717	0.82
Time deposits		136,114,490			1,536,529	4.52			110,026,240			944,586	3.43
Short term borrowings		5,098,876			38,469	3.02			3,813,586			21,325	2.24
Federal Home Loan Advances		3,115,996			44,530	5.72			5,858,055			70,271	4.80
Total interest bearing liabilities		228,183,975			1,872,031	3.28			211,223,542			1,258,501	2.38
Noninterest bearing liabilities:
Demand deposits		43,190,330							45,851,459
Accrued expenses and other liabilities		1,913,246							1,732,501
Total noninterest bearing liabilities		45,103,576							47,583,960
Shareholder’s equity		39,149,974							36,948,989
Total Liabilities and Equity	$	312,437,525						$	295,756,491
Net interest income				$	3,428,072						$	3,452,650
Interest rate spread (6)						3.98	%						4.45	%
Net yield on interest earning assets (7)						4.70	%						5.00	%

(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 $84,481 and $79,414 in 2007 and 2006, respectively.

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

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

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

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

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

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Rate/Volume Analysis

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

	Three-Month Period Ended March 2007 Compared to 2006 Increase (Decrease) Due To
	Volume			Rate			Net
Interest income
Loans	$	(690	)	$	883		$	193
Securities-taxable		1,070			(743	)		327
Securities-nontaxable		(25	)		20			(5	)
Securities-equities		3			(1	)		2
Federal funds sold		79			(7	)		72
Total interest earning
Assets		437			152			589
Interest expense
Interest bearing demand		(19	)		17			(2	)
Money market accounts		(6	)		30			24
Savings deposits		(31	)		40			9
Time deposits		896			(305	)		591
Short-term borrowing		28			(11	)		17
Federal Home Loan Bank
Advances		(131	)		106			(25	)
Total interest bearing
Liabilities		737			(123	)		614
Net change in net interest income	$	(300	)	$	275		$	(25	)

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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 March 31, 2007, the Company had a cumulative positive gap of $35.8 million or 11.00% at the one-year horizon. The gap analysis indicates that if interest rates were to rise 200 basis points (2.0%), 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 (2.0%), 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 2.0%) in 100 basis point (or 1.0%) 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 $490,000 or 10.5% 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 $496,000 or 11.6%. 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.

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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 portion of its investment portfolio as available for sale securities and 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 “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.

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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 President and Chief Executive Officer and Vice President and 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 President and Chief Executive Officer and Vice President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective, as of the end of the period covered by this report, in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

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

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended March 31, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II – OTHER INFORMATION

Item 1—Legal Proceedings

None

Item 1A— Risk Factors

There have been no material changes from the risk factors disclosed in the registrant’s form 10K.

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

The Company did not engage in any unregistered sales of its securities during the quarter ended March 31, 2007.

ISSUER PURCHASES OF EQUITY SECURITIES

Period	(a) Total Number of Shares (or Units) Purchased	(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
January 1 – 31, 2007	—		—	N/A	N/A
February 1 – 28, 2007	387	$	110.91	N/A	N/A
March 1 – 31, 2007	1,117	$	112.50	N/A	N/A
Total (1)	1,504	$	112.09	N/A	N/A

(1) 1,504 shares of common stock were purchased by Killbuck Bancshares in an open-market transaction.

Item 3—Default upon senior securities

None

Item 4—Submissions of matters to a vote of security holders

None

Item 5—Other Information

None

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Item 6—Exhibits

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

3.1(i)	Articles of Incorporation of Killbuck Bancshares, Inc.*
3.1(ii)	Amendment to the Articles of Incorporation of Killbuck Bancshares, Inc. increasing authorized shares.**
3.2	Code of Regulations of Killbuck Bancshares, Inc.*
31.1	Rule 13a-14(a) Certification
31.2	Rule 13a-14(a) Certification
32.1	Section 1350 Certifications
32.2	Section 1350 Certifications
99.1	Report of Independent Registered Public Accounting Firm.

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

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

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Signatures

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

	Killbuck Bancshares, Inc.
Date: May 9, 2007		By:	/s/ Luther E. Proper
			Luther E. Proper
			President and Chief Executive Officer
Date: May 9, 2007		By:	/s/ Diane Knowles
			Diane Knowles
			Chief Financial Officer

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