Killbuck Bancshares (KLIB) 10-Q 2008 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For Quarter Ended September 30, 2008

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

Commission File Number 000-24147

KILLBUCK BANCSHARES, INC.

(Exact name of registrant as specified in its Charter)

OHIO	34-1700284
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

165 N. Main Street, Killbuck, OH 44637

(Address of principal executive offices and zip code)

(330) 276-2771

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting Company	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 October 31, 2008: 622,431

KILLBUCK BANCSHARES, INC.

Index

			Page Number
PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements (Unaudited):
		Consolidated Balance Sheet as of September 30, 2008 and December 31, 2007	3
		Consolidated Statement of Income for the nine months ended September 30, 2008 and 2007	4
		Consolidated Statement of Income for the three months ended September 30, 2008 and 2007	5
		Consolidated Statement of Changes In Shareholders’ Equity for the nine months ended September 30, 2008	6
		Consolidated Statement of Cash Flows for the nine months ended September 30, 2008 and 2007	7
		Notes to Unaudited Consolidated Financial Statements	8-13
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14-23
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
	Item 4.	Controls and Procedures	24
PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings	25
	Item 1A.	Risk Factors	25
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
	Item 3.	Default Upon Senior Securities	26
	Item 4.	Submissions of Matters to a Vote of Security Holders	26
	Item 5.	Other Information	27
	Item 6.	Exhibits	27
SIGNATURES			28

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Killbuck Bancshares, Inc.

CONSOLIDATED BALANCE SHEET (UNAUDITED)

	September 30, 2008			December 31, 2007
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions	$	11,554,131		$	11,794,750
Federal funds sold		22,609,000			29,378,000
Total cash and cash equivalents		34,163,131			41,172,750
Investment securities:
Securities available for sale		57,049,616			54,115,975
Securities held to maturity (fair value of $33,244,494 and $30,247,416)		32,651,359			29,552,217
Total investment securities		89,700,975			83,668,192
Loans (net of allowance for loan losses of $2,483,212 and $2,510,011)		198,294,151			196,519,881
Loans held for sale		—			170,000
Premises and equipment, net		6,417,240			6,537,553
Accrued interest receivable		1,928,561			1,589,899
Goodwill, net		1,329,249			1,329,249
Other assets		7,635,310			5,349,524
Total assets	$	339,468,617		$	336,337,048
LIABILITIES
Deposits:
Noninterest bearing demand	$	50,305,215		$	51,195,017
Interest bearing demand		27,321,470			27,475,379
Money market		24,435,876			16,306,095
Savings		39,579,502			37,467,917
Time		146,563,724			153,006,933
Total deposits		288,205,787			285,451,341
Short-term borrowings		5,400,000			5,745,000
Federal Home Loan Bank advances		2,031,792			2,536,851
Accrued interest and other liabilities		1,025,317			1,486,215
Total liabilities		296,662,896			295,219,407
SHAREHOLDERS’ EQUITY
Common stock – No par value: 1,000,000 shares authorized, 718,431 issued		8,846,670			8,846,670
Retained earnings		42,350,281			39,848,570
Accumulated other comprehensive income		171,224			498,651
Treasury stock, at cost (93,043 and 88,849 shares)		(8,562,454	)		(8,076,250	)
Total shareholders’ equity		42,805,721			41,117,641
Total liabilities and shareholders’ equity	$	339,468,617		$	336,337,048

See accompanying notes to the unaudited consolidated financial statements.

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Killbuck Bancshares, Inc. and Subsidiary

CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

	Nine Months Ended September 30,
	2008		2007
INTEREST INCOME
Interest and fees on loans	$	10,862,950	$	12,740,769
Federal funds sold		454,919		913,114
Investment securities:
Taxable		2,118,229		1,574,074
Exempt from federal income tax		996,637		1,050,831
Total interest income		14,432,735		16,278,788
INTEREST EXPENSE
Deposits		5,033,074		5,737,833
Short term borrowings		14,410		108,132
Federal Home Loan Bank advances		97,533		126,123
Total interest expense		5,145,017		5,972,088
NET INTEREST INCOME		9,287,718		10,306,700
Provision for loan losses		—		127,119
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		9,287,718		10,179,581
NON INTEREST INCOME
Service charges on deposit accounts		277,336		259,021
NSF & OD fees, net		622,529		588,788
Gain on sale of loans, net		27,227		8,019
BOLI		396,405		106,591
Other income		117,875		113,891
Total non interest income		1,441,372		1,076,310
NON INTEREST EXPENSE
Salaries and employee benefits		3,823,922		3,652,358
Occupancy and equipment expense		798,565		730,533
Professional fees		253,912		201,126
Franchise tax		375,274		355,279
Other expenses		1,224,998		1,242,039
Total non interest expense		6,476,671		6,181,335
INCOME BEFORE INCOME TAXES		4,252,419		5,074,556
Income taxes		841,244		1,420,300
NET INCOME	$	3,411,175	$	3,654,256
Earning per common share	$	5.43	$	5.74
Dividend per share	$	1.45		1.35
Weighted Average shares outstanding		628,356		636,361

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 September 30,
	2008		2007
INTEREST INCOME
Interest and fees on loans	$	3,447,195	$	4,235,981
Federal funds sold		122,908		333,295
Investment securities:
Taxable		704,782		563,266
Exempt from federal income tax		342,897		363,217
Total interest income		4,617,782		5,495,759
INTEREST EXPENSE
Deposits		1,493,831		2,015,293
Short term borrowings		3,120		33,163
Federal Home Loan Bank advances		30,119		39,453
Total interest expense		1,527,070		2,087,909
NET INTEREST INCOME		3,090,712		3,407,850
Provision for loan losses		—		60,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		3,090,712		3,347,850
NON INTEREST INCOME
Service charges on deposit accounts		96,842		92,069
NSF & OD fees, net		197,751		205,625
Gain on sale of loans, net		3,390		3,649
BOLI		55,891		36,594
Other income		39,493		38,912
Total non interest income		393,367		376,849
NON INTEREST EXPENSE
Salaries and employee benefits		1,314,133		1,244,488
Occupancy and equipment expense		255,327		242,200
Professional fees		70,652		59,187
Franchise tax		126,734		133,109
Other expenses		419,356		433,801
Total non interest expense		2,186,202		2,112,785
INCOME BEFORE INCOME TAXES		1,297,877		1,611,914
Income taxes		199,624		438,234
NET INCOME	$	1,098,253	$	1,173,680
Earning per common share	$	1.75	$	1.85
Dividend per share	$	.00	$	.00
Weighted Average shares outstanding		627,404		634,383

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)

NINE MONTHS ENDED September 30, 2008

	Common Stock		Retained Earnings			Accumulated Other Comprehensive Income			Treasury Stock			Total Shareholders’ Equity			Comprehensive Income (Loss)
Balance, December 31, 2007	$	8,846,670	$	39,848,570		$	498,651		$	(8,076,250	)	$	41,117,641
Net income				3,411,175									3,411,175		$	3,411,175
Purchase of Treasury stock, at cost (4,194 shares)										(486,204	)		(486,204	)
Cash dividends paid ($1.45 per share)				(909,464	)								(909,464	)
Other comprehensive income:
Net unrealized (loss) on securities, net of tax $51,342							(327,427	)					(327,427	)		(327,427	)
Comprehensive income															$	3,083,748
Balance, September 30, 2008	$	8,846,670	$	42,350,281		$	171,224		$	(8,562,454	)	$	42,805,721

See accompanying notes to the unaudited consolidated financial statements.

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Killbuck Bancshares, Inc. and Subsidiary

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

	Nine Months Ended September 30,
	2008			2007
OPERATING ACTIVITIES
Net income	$	3,411,175		$	3,654,256
Adjustments to reconcile net income to net cash provided by
Operating activities:
Provision for loan losses		—			127,119
Gain on sale of loans		(27,227	)		(8,019	)
Provision for depreciation and amortization		356,888			272,195
Origination of loans held for sale		(2,922,600	)		(4,061,980	)
Proceeds from the sale of loans		3,119,827			3,852,599
Federal Home Loan Bank stock dividend		(35,300	)		(19,700	)
Bank Owned Life Insurance (BOLI) benefit income		(234,396	)		—
Net change in:
Accrued interest and other assets		(1,002,683	)		(932,170	)
Accrued expenses and other liabilities		(157,540	)		17,871
Net cash provided by operating activities		2,508,144			2,902,171
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from maturities and repayments		14,179,846			8,236,561
Purchases		(17,487,043	)		(18,930,305	)
Investment securities held to maturity:
Proceeds from maturities and repayments		544,851			495,913
Purchases		(3,659,588	)		(3,670,842	)
Net increase in loans		(1,774,270	)		(7,800,251	)
Net Purchase of premises and equipment		(226,193	)		(768,026
Decrease in Other Real Estate Owned		—			80,000
Bank Owned Life Insurance (BOLI)
Proceeds		395,915			—
Purchases		(2,000,000	)		—
Net cash used in investing activities		(10,026,482	)		(22,356,950	)
FINANCING ACTIVITIES
Net increase (decrease) in demand, money market and savings deposits		9,197,655			(2,137,137	)
Net (decrease) increase in time deposits		(6,443,209	)		17,895,830
Net (decrease) increase in short term borrowings		(345,000	)		820,091
Repayments of Federal Home Loan Bank advances		(505,059	)		(529,550	)
Purchase of Treasury stock		(486,204	)		(801,154	)
Dividends paid		(909,464	)		(858,975	)
Net cash provided by financing activities		508,719			14,389,105
Net decrease in cash and cash equivalents		(7,009,619	)		(5,065,674	)
Cash and cash equivalents at beginning of period		41,172,750			42,705,362
Cash and cash equivalents at end of period	$	34,163,131		$	37,639,688
Supplemental Disclosures of Cash Flows Information
Cash Paid During the Period For:
Interest on deposits and borrowings	$	5,298,928		$	5,939,936
Income taxes	$	1,019,193		$	1,421,760

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, 2007 and related notes which are included on the Form 10-K (file no. 000-24147).

NOTE 2 - EARNINGS PER SHARE

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

NOTE 3 - COMPREHENSIVE INCOME

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

	Nine Months Ended September 30, 2008			Nine Months Ended September 30, 2007
Net income	$	3,411,175		$	3,654,256
Other comprehensive income:
Net unrealized (loss) gain on securities		(378,769	)		293,838
Tax effect		51,342			(99,905	)
Total comprehensive income	$	3,083,748		$	3,848,189
	Three Months Ended September 30, 2008			Three Months Ended September 30, 2007
Net income	$	1,098,253		$	1,173,680
Other comprehensive income:
Net unrealized (loss) gain on securities		(968	)		483,689
Tax effect		(60,335	)		(164,454	)
Total comprehensive income	$	1,036,950		$	1,492,915

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NOTE 4 - FAIR VALUE MEASUREMENTS (SFAS No. 157)

Effective January 1, 2008, the Company adopted SFAS No. 157, which, among other things, requires enhanced disclosures about assets and liabilities carried at fair value. SFAS No. 157 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by SFAS No. 157 hierarchy are as follows:

Level I:	Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level II:	Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level III:	Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The following table presents the assets reported on the consolidated statements of financial condition at their fair value as of September 30, 2008 by level within the fair value hierarchy. As required by SFAS No. 157, financial assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	September 30, 2008
	Level I		Level II		Level III		Total
	(In thousands)
Assets:
Securities available for sale	$	—	$	57,049,616	$	—	$	57,049,616
Loans held for sale		—		—		—		—

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NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued FAS No. 141 (revised 2007),Business Combinations (“FAS 141(R)”), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. FAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In September 2006, the FASB issued FAS No. 157,Fair Value Measurements, which provides enhanced guidance for using fair value to measure assets and liabilities. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The Standard does not expand the use of fair value in any new circumstances. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, the FASB issued Staff Position No. 157-1,Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13, which removed leasing transactions accounted for under FAS No. 13 and related guidance from the scope of FAS No. 157. Also in February 2008, the FASB issued Staff Position No.157-2,Partial Deferral of the Effective Date of Statement 157, which deferred the effective date of FAS No. 157 for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. The adoption of this standard did not have a material effect on the Company’s results of operations or financial position.

In September 2006, the FASB issued FAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R). This Statement requires that employers measure plan assets and obligations as of the balance sheet date. This requirement is effective for fiscal years ending after December 15, 2008. The other provisions of the Statement were effective as of the end of the fiscal year ending after December 15, 2006, for public companies. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

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 did not have a material effect on the Company’s results of operations or financial position.

In December 2007, the FASB issued FAS No. 160,Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. FAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Among other requirements, this statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. FAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

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NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS CONTINUED

In September 2006, the FASB reached consensus on the guidance provided by Emerging Issues Task Force Issue 06-4 (“EITF 06-4”),Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. The guidance is applicable to endorsement split-dollar life insurance arrangements, whereby the employer owns and controls the insurance policy, that are associated with a postretirement benefit. EITF 06-4 requires that for a split-dollar life insurance arrangement within the scope of the Issue, an employer should recognize a liability for future benefits in accordance with FAS No. 106 (if, in substance, a postretirement benefit plan exists) or Accounting Principles Board Opinion No. 12 (if the arrangement is, in substance, an individual deferred compensation contract) based on the substantive agreement with the employee. EITF 06-4 is effective for fiscal years beginning after December 15, 2007. The adoption of this EITF did not 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 adoption of this EITF did not have a material effect on the Company’s results of operations or financial position.

In June 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-11 (“EITF 06-11”),Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. EITF 06-11 applies to share-based payment arrangements with dividend protection features that entitle employees to receive (a) dividends on equity-classified nonvested shares, (b) dividend equivalents on equity-classified nonvested share units, or (c) payments equal to the dividends paid on the underlying shares while an equity-classified share option is outstanding, when those dividends or dividend equivalents are charged to retained earnings under FAS No. 123R,Share-Based Payment, and result in an income tax deduction for the employer. A consensus was reached that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity-classified nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase in additional paid-in capital. EITF 06-11 is effective for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. The adoption of this EITF did not have a material effect on the Company’s results of operations or financial position.

In May 2008, the FASB issued FAS No. 162,The Hierarchy of Generally Accepted Accounting Principles. FAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). FAS No. 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411,The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company does not expect the adoption of FAS No. 162 to have a material effect on its results of operations and financial position.

In April 2008, the FASB issued FASB Staff Position No. 142-3,Determination of the Useful Life of Intangible Assets(“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing assumptions about renewal or extension used in estimating the useful life of a recognized intangible asset under FAS No. 142, Goodwill and Other Intangible Assets. This standard is intended to improve the consistency between the useful life of a recognized intangible asset under FAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under FAS No. 141R and other GAAP. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The measurement provisions of this standard will apply only to intangible assets of the Company acquired after the effective date.

In June 2008, the FASB issued FASB Staff Position (FSP) No. EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, to clarify that instruments granted in share-based payment transactions can be participating securities prior to the requisite service having been rendered. A basic principle of the FSP is that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of EPS pursuant to the two-class method. The provisions of this FSP

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NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS CONTINUED

are effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented (including interim financial statements, summaries of earnings, and selected financial data) are required to be adjusted retrospectively to conform with the provisions of the FSP. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

In March 2008, the FASB issued FAS No. 161,Disclosures about Derivative Instruments and Hedging Activities, to require enhanced disclosures about derivative instruments and hedging activities. The new standard has revised financial reporting for derivative instruments and hedging activities by requiring more transparency about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under FAS No. 133,Accounting for Derivative Instruments and Hedging Activities; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. FAS No. 161 requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also requires entities to provide more information about their liquidity by requiring disclosure of derivative features that are credit risk-related. Further, it requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. FAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encourage. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In June 2008, the FASB ratified EITF Issue No. 08-4,Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjusted Conversion Ratios. This Issue provides transition guidance for conforming changes made to EITF Issue No. 98-5,Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjusted Conversion Ratios, that resulted from EITF Issue No. 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments,and FAS No. 150,Accounting for Certain Financial Instruments with Characteristics of both Liability and Equity. The conforming changes are effective for financial statements issued for fiscal years ending after December 15, 2008, with earlier application permitted. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

In May 2008, the FASB issued FSP No. APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement. This FSP provides guidance on the accounting for certain types of convertible debt instruments that may be settled in cash upon conversion. Additionally, this FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

In February 2008, the FASB issued FSP No. FAS 140-3,Accounting for Transfers of Financial Assets and Repurchase Financing Transactions. This FSP concludes that a transferor and transferee should not separately account for a transfer of a financial asset and a related repurchase financing unless (a) the two transactions have a valid and distinct business or economic purpose for being entered into separately and (b) the repurchase financing does not result in the initial transferor regaining control over the financial asset. The FSP is effective for financial statements issued for fiscal years beginning on or after November 15, 2008, and interim periods within those fiscal years. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

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NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS CONTINUED

In February 2007, the FASB issued FSP No. FAS 158-1,Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88, and No. 106 and to the Related Staff Implementation Guides. This FSP provides conforming amendments to the illustrations in FAS Statements No. 87, 88, and 106 and to related staff implementation guides as a result of the issuance of FAS Statement No. 158. The conforming amendments made by this FSP are effective as of the effective dates of Statement No. 158. The unaffected guidance that this FSP codifies into Statements No. 87, 88, and 106 does not contain new requirements and therefore does not require a separate effective date or transition method. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

In October 2008, the FASB issued FSP No. 157-3,Determining the Fair Value of a Financial Asset When the Market for That Asset. This FSP clarifies the application of FAS Statement No. 157,Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP shall be effective upon issuance, including prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application shall be accounted for as a change in accounting estimate (FAS Statement No. 154,Accounting Changes and Error Corrections. The disclosure provisions of Statement 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

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Item 2 – 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, 2007. 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, 2007.

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, 2007; 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, 2007.

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Financial Condition

Total assets at September 30, 2008 were $339,469,000 compared to $336,337,000 at December 31, 2007.

Cash and cash equivalents decreased by $7,010,000 or 17.0% from December 31, 2007, to September 30, 2008, with federal funds sold decreasing $6,770,000. The decrease was used to fund the increase in the Bank’s investment portfolio.

The Investment securities available for sale category increased by $2,934,000 or 5.4%, from December 31, 2007, to September 30, 2008, due to excess cash and cash equivalents and the availability of some suitable securities for purchase. Investments held to maturity increased $3,099,000 or 10.5% due to some attractive municipal securities available for the portfolio.

Net loans increased by $1,774,000 or .9% from December 31, 2007 to September 30, 2008. A decrease of $1,527,000 occurred in the real estate loan category, which is attributable primarily to a reduction in residential real estate of $2,230,000 with additional decreases in both farm and commercial lending of $206,000 and $79,000 respectively, and an increase of $988,000 in construction loan activity. Management believes the residential loan activities have slowed significantly in the Bank’s lending area. Commercial and other loan balances increased by $3,231,000 due to additional draws on existing lines of credit. Consumer loan balances increased by $70,000.

Total deposits at September 30, 2008 were $288,206,000 compared to $285,451,000 at December 31, 2007. Money market accounts and savings accounts increased $8,130,000 and $2,112,000, respectively, while demand accounts and time deposits accounts decreased $1,044,000 and $6,443,000 respectively. Management attributes these changes to the changes in interest rates. The Money Market account is a short term investment that customers use while waiting until the interest rates meet their expectations for longer term Time deposits. Management believes the demand accounts decreases are attributable to normal fluctuations due to customer usage. Management has allowed the Time deposits to decrease. Other financial institutions were paying interest rates well above market conditions, due to their severe liquidity needs, and Management chose not to match those rates. The Bank expects to remain competitive with interest rates without paying above local market rates.

Federal Home Loan Bank advances decreased $505,000 due to maturities and scheduled repayments, and short-term borrowings decreased $345,000 at September 30, 2008 from December 31, 2007.

Shareholders’ Equity increased by $1,688,000 or 4.1%, which was mainly due to earnings of $3,411,000 for the first nine months of 2008 decreased by a $327,000 unrealized loss on securities included in other comprehensive income, dividends paid totaling $910,000 and by the purchase of Treasury stock for $486,000. 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 nine months of 2008. Management monitors risk-based capital and leveraged capital ratios in order to assess compliance of the regulatory guidelines. At September 30, 2008, the total capital ratio was 19.06%; the Tier I capital ratio was 17.98%, and the leverage ratio was 12.19%, 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 Nine Months Ended September 30, 2008 and 2007

Net income for the nine-month period ended September 30, 2008, was $3,411,000, a decrease of $243,000 or 6.7% from the $3,654,000 reported at September 30, 2007.

Total interest income of approximately $14,433,000 for the nine-month period ended September 30, 2008, compares to $16,279,000 for the same period in 2007, a decrease of $1,846,000 or 11.3%. The decrease in total interest income is primarily attributable to a decrease in interest and fees on loans due primarily to a decrease in the average yield on the underlying balances. See “Average Balance Sheet” for the nine-month periods ended September 30, 2008 and 2007. The yield on loans decreased to 7.20% for the first nine months of 2008 compared to 8.36% for the first nine months of 2007. Average loan balances were $201,277,000 for the first nine months of 2008 compared to $203,298,000 for the first nine months of 2007. The increase in interest on taxable investment securities partially offsets the interest decrease from loans. The interest on taxable investment securities of $2,118,000 for 2008 compares to $1,574,000 for 2007. The increase in investment income is primarily attributable to an increase in volume. The Average investment balances on taxable securities were $54,080,000 compared to $38,842,000 and the yields were 5.05% compared to 5.15% for the first nine months of 2008 and 2007 respectively.

Total interest expense of $5,145,000 for the nine-month period ending September 30, 2008 represents a decrease of $827,000 from the $5,972,000 reported for the same nine-month period in 2007. The decrease in interest expense on deposits of $705,000 is due mainly to a decrease in interest rates. The decreases in the average rate paid on the underlying balances of the interest bearing liabilities are due mainly to the Time deposits. The cost of Time deposits was 3.92% compared to 4.64% for this nine-month period of 2008 and 2007, respectively. The cost on interest bearing deposits was 2.11%, compared to 2.54% for the nine-month periods of 2008 and 2007 respectively. Average interest-bearing deposits were $238,909,000 for the first nine months of 2008 compared to $225,842,000 for the first nine months of 2007. See “Average Balance Sheet” for the nine-month periods ended September 30, 2008 and 2007.

Net interest income of $9,288,000 for the nine months ended September 30, 2008, compares to $10,307,000 for the same nine-month period in 2007, a decrease of $1,019,000 or 9.9%. The net interest margin is expected to continue decreasing in 2008.

Total non-interest income for the nine-month period ended September 30, 2008, of $1,441,000 compares to $1,076,000 for the same nine-month period in 2007, an increase of $365,000 or 33.9%. The net Non-sufficient funds fees and overdraft fees increased $34,000 due to an increase in Non-sufficient funds activity. Gains on sale of loans increased $19,000. Bank Owned Life Insurance (BOLI) income increased $289,000 primarily due to a benefit payout of approximately $234,000. Approximately $55,000 of the increase is due to the additional $2.0 million Bank Owned Life Insurance (BOLI) purchased on certain Bank officers.

Total non-interest expense of $6,477,000 for the nine months ended September 30, 2008, compares to $6,181,000 for the same nine-month period in 2007. This represents an increase of $296,000 or 4.8%. Salary and employee benefits increased approximately $172,000. The expenses are due to normal increases in salaries and employee benefits. Occupancy and Equipment costs increased approximately $68,000; approximately $55,000 is due to increased depreciation expense on updated branch facilities and updated technologies in the computer network area in the last year. Approximately $9,000 of the increase was attributable to snow related expenses associated with more severe winter weather conditions in early 2008. Professional fees increased approximately $53,000, which includes additional auditing fees for SOX 404 compliance and other regulatory requirements such as Bank Secrecy Act and Gramm-Leach-Bliley Act, increasing regulatory examination costs, and legal expenses. Franchise tax expense to the State of Ohio increased approximately $20,000. 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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RESULTS OF OPERATIONS

Comparison of the Three Months Ended September 30, 2008 and 2007

Net income for the three-month period ended September 30, 2008, was $1,098,000, a decrease of $76,000 or 6.5% from the $1,174,000 reported at September 30, 2007.

Total interest income of approximately $4,618,000 for the three-month period ended September 30, 2008, compares to $5,496,000 for the same period in 2007, a decrease of $878,000 or 16.0%. The decrease in total interest income is primarily attributable to a decrease in the loan category. Interest and fees on loans decreased $789,000 or 18.6% for the three-month period ended September 30, 2008 compared to the same period for 2007. The decrease in interest and fees on loans is due to both a decrease in the volume of principal loan balances and the yields earned on the underlying balances. Average loan balances were $201,033,000 compared to $202,252,000 and the yield was 6.86% compared to 8.38% for this three-month period of 2008 and 2007, respectively. See “Average Balance Sheet” for the three-month periods ended September 30, 2008 and 2007. The increase in interest on taxable investment securities of $145,000 was primarily attributable to an increase in the average balances outstanding. The average balances of taxable investment securities were $55,474,000 for 2008 compared to $41,571,000 for 2007 and the yield was 4.93% compared to 5.19% for this three-month period of 2008 and 2007 respectively. See “Average Balance Sheet” for the three-month periods ended September 30, 2008 and 2007.

Total interest expense of $1,527,000 for the three-month period ending September 30, 2008, represents a decrease of $561,000 from the $2,088,000 reported for the same three-month period in 2007. The decrease in interest expense on deposits of $521,000 is due mainly to the decreases in the average rate paid on the underlying balances of the interest bearing liabilities, specifically the Time deposits. The cost of Time deposits was 3.52% compared to 4.73% for this three-month period of 2008 and 2007, respectively and the cost of interest bearing deposits was 2.50% compared to 3.50% for this three-month period of 2008 and 2007 respectively. The average time deposits were $149,429,000 for this three-month period of 2008 compared to $147,624,000 for the same three months of 2007. Average interest-bearing deposits were $239,361,000 for this three-month period of 2008 compared to $229,885,000 for the same three months of 2007. See “Average Balance Sheet” for the three-month periods ended September 30, 2008 and 2007.

Net interest income of $3,091,000 for the three months ended September 30, 2008, compares to $3,408,000 for the same three-month period in 2007, a decrease of $317,000 or 9.3%. The net interest margin is expected to continue decreasing in 2008.

Total non-interest income for the three-month period ended September 30, 2008, of $393,000 compares to $377,000 for the same three-month period in 2007, an increase of $16,000 or 4.2%. Service charges on checking accounts contributed approximately $5,000 to the increase. Non-sufficient funds (NSF) fees and Overdraft fees decreased $8,000. Approximately $19,000 of the increase was due to income from the Bank-Owned Life Insurance (BOLI), which was due to the additional $2 million purchased in the first quarter of 2008. The changes in the remaining income accounts were attributable to increases/decreases in items that are normal and recurring in nature.

Total non-interest expense of $2,186,000 for the three months ended September 30, 2008, compares to $2,113,000 for the same three-month period in 2007. This represents an increase of $73,000 or 3.3%. Salary and employee benefits increased $70,000. The expense was due to normal recurring employee cost increase for salary and employee benefits and staff additions. Occupancy and equipment expenses increased $13,000 or 5.4%, of which, approximately $17,000 is due to increased depreciation expense on updated branch facilities and updated technologies in the computer network area in the last year; and general equipment costs decreased approximately $4,000. 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 $34,163,000 at September 30, 2008. These assets provide the primary source of liquidity for the Company. In addition, management has designated a portion of the investment portfolio, $57,050,000 as available for sale and has an available unused line of credit of $41,766,000 with the Federal Home Loan Bank of Cincinnati to provide additional sources of liquidity at September 30, 2008. As of September 30, 2008, the Company had commitments to fund loans of approximately $2,859,000 and unused lines of credit totaling $39,446,000.

Cash was provided during the nine month period ended September 30, 2008, mainly from operating activities of $2.5 million, and the net increase in deposits of $2.8 million, the maturities and repayments of investment securities of $14.7 million, and the proceeds from a Bank Owned Life Insurance (BOLI) benefit payment of $.4 million. Cash was used during the nine month period ended September 30, 2008, mainly to fund a net increase in loans of $1.8 million, for the purchase of investment securities of $21.1 million, to purchase an additional $2.0 million of Bank Owned Life Insurance (BOLI), and to reduce $.9 million in Federal Home Loan Bank advances and short-term borrowings. In addition, $.2 million was used to purchase equipment, $.5 million was used to purchase Treasury Stock, and $.9 million was used to pay dividends to shareholders. Cash and cash equivalents totaled $34.2 million at September 30, 2008, a decrease of $7.0 million from $41.2 million at December 31, 2007.

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 September 30, 2008, and December 31, 2007. 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.

	September 30, 2008			December 31, 2007
	(dollars in thousands)
Loans on nonaccrual basis	$	106		$	839
Loans past due 90 days or more		145			—
Renegotiated loans		—			—
Total nonperforming loans	$	251		$	839
Other real estate		—			—
Repossessed assets		—			—
Total nonperforming assets	$	251		$	839
Nonperforming loans as a percent of total loans		0.13	%		0.42	%
Nonperforming loans as a percent of total assets		0.07	%		0.25	%
Nonperforming assets as a percent of total assets		0.07	%		0.25	%

Management monitors impaired loans on a continual basis. As of September 2008, impaired loans had no material effect on the Company’s financial position or results from operations.

The allowance for loan losses at September 30, 2008, totaled $2,483,000 or 1.24% of total loans as compared to $2,510,000 or 1.26% at December 31, 2007. Provisions for loan losses were $0 for the nine months ended September 30, 2008 and $127,000 for the nine months ended September 30, 2007.

The level of funding for the provision is a reflection of the overall loan portfolio. Nonperforming loans consist of approximately $84,000 in commercial real estate and $167,000 in one to four family residential mortgages. The collateral requirements on such loans reduce the risk of potential losses to an acceptable level in management’s opinion.

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 Nine-Month Period Ended September 30

The following table sets forth certain information relating to the Company’s average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. 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
	2008							2007
	Average Balance			Interest		Yield/ Rate		Average Balance			Interest		Yield/ Rate
Assets
Interest Earnings Assets:
Loans (1)(2)(3)	$	201,277,236		$	10,862,950	7.20	%	$	203,297,871		$	12,740,769	8.36	%
Securities-taxable (4)		54,079,797			2,048,880	5.05	%		38,842,068			1,501,478	5.15	%
Securities-nontaxable (4)		30,811,689			996,637	4.31	%		31,828,071			1,050,831	4.40	%
Securities-Equity (4,5)		1,697,923			69,349	5.45	%		1,680,628			72,596	5.76	%
Federal funds sold		25,108,478			454,919	2.42	%		23,200,924			913,114	5.25	%
Total interest earnings assets		312,975,123			14,432,735	6.15	%		298,849,562			16,278,788	7.26	%
Noninterest earning assets:
Cash and due from other institutions		11,517,628							10,507,877
Premises and equipment, net		6,519,352							5,817,197
Accrued interest		1,381,096							1,453,017
Other assets		7,711,671							5,837,800
Less allowance for loan losses		(2,495,053	)						(2,451,509	)
Total noninterest earnings assets		24,634,694							21,164,382
Total Assets	$	337,609,817						$	320,013,944
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing demand		26,721,053			84,687	0.42	%		27,141,403			119,554	0.59	%
Money market accounts		21,114,047			261,374	1.65	%		19,467,642			394,599	2.70	%
Savings deposits		38,560,113			205,903	0.71	%		37,214,597			284,516	1.02	%
Time deposits		152,513,352			4,481,110	3.92	%		142,018,599			4,939,164	4.64	%
Short term borrowings		5,328,085			14,410	0.36	%		5,168,874			108,132	2.79	%
Federal Home Loan Advances		2,250,118			97,533	5.78	%		2,941,388			126,123	5.72	%
Total interest bearing liabilities		246,486,768			5,145,017	2.78	%		233,952,503			5,972,088	3.40	%
Noninterest bearing liabilities:
Demand deposits		48,267,996							44,239,812
Accrued expenses and other liabilities		3,316,456							3,298,436
Total noninterest bearing liabilities		51,584,452							47,538,248
Shareholders’ equity		39,538,597							38,523,193
Total Liabilities and Shareholders’ Equity	$	337,609,817						$	320,013,944
Net interest income				$	9,287,718						$	10,306,700
Interest rate spread (6)						3.37	%						3.86	%
Net yield on interest earning assets (7)						3.96	%						4.60	%

(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 $275,000 and $266,000 in 2008 and 2007, 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.

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AVERAGE BALANCE SHEET

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

The following table sets forth certain information relating to the Company’s average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. 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
	2008							2007
	Average Balance			Interest		Yield/ Rate		Average Balance			Interest		Yield/ Rate
Assets
Interest Earnings Assets:
Loans (1)(2)(3)	$	201,033,218		$	3,447,195	6.86	%	$	202,251,651		$	4,235,981	8.38	%
Securities-taxable (4)		55,474,344			684,079	4.93	%		41,570,652			539,209	5.19	%
Securities-nontaxable (4)		31,967,024			342,897	4.29	%		32,887,881			363,217	4.42	%
Securities-Equity (4,5)		1,714,703			20,703	4.83	%		1,680,910			24,057	5.72	%
Federal funds sold		24,724,312			122,908	1.99	%		25,991,815			333,295	5.13	%
Total interest earnings assets		314,913,601			4,617,782	5.87	%		304,382,909			5,495,759	7.22	%
Noninterest earning assets:
Cash and due from other institutions	$	12,041,897						$	10,729,460
Premises and equipment, net		6,465,752							5,993,462
Accrued interest		1,265,083							1,443,927
Other assets		8,015,000							5,889,582
Less allowance for loan losses		(2,485,320	)						(2,501,740	)
Total noninterest earnings assets		25,302,412							21,554,691
Total Assets	$	340,216,013						$	325,937,600
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing demand	$	27,419,713		$	27,969	0.41	%	$	26,230,167		$	39,194	0.60	%
Money market accounts		23,066,191			87,712	1.52	%		19,681,760			138,136	2.81	%
Savings deposits		39,446,537			63,245	0.64	%		36,348,964			93,738	1.03	%
Time deposits		149,428,729			1,314,905	3.52	%		147,623,817			1,744,225	4.73	%
Short term borrowings		5,387,011			3,120	0.23	%		5,443,314			33,163	2.44	%
Federal Home Loan Advances		2,080,994			30,119	5.79	%		2,765,560			39,453	5.71	%
Total interest bearing liabilities		246,829,175			1,527,070	2.47	%		238,093,582			2,087,909	3.51	%
Noninterest bearing liabilities:
Demand deposits		50,307,203							45,370,443
Accrued expenses and other liabilities		4,391,342							4,659,626
Total noninterest bearing liabilities		54,698,545							50,030,069
Shareholders’ equity		38,688,293							37,813,949
Total Liabilities and Shareholders’ Equity	$	340,216,013						$	325,937,600
Net interest income				$	3,090,712						$	3,407,850
Interest rate spread (6)						3.40	%						3.71	%
Net yield on interest earning assets (7)						3.93	%						4.48	%

(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 $89,000 and $100,000 in 2008 and 2007, 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.

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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).

	Nine-Month Period Ended September 2008 Compared to 2007 Increase (Decrease) Due To
	Volume			Rate			Net
Interest income
Loans	$	(169	)	$	(1,709	)	$	(1,878	)
Securities-taxable		785			(237	)		548
Securities-nontaxable		(45	)		(9	)		(54	)
Securities-equities		1			(5	)		(4	)
Federal funds sold		100			(558	)		(458	)
Total interest earning Assets		672			(2,518	)		(1,846	)
Interest expense
Interest bearing demand		(2	)		(33	)		(35	)
Money market accounts		44			(178	)		(134	)
Savings deposits		14			(92	)		(78	)
Time deposits		487			(945	)		(458	)
Short-term borrowing		4			(98	)		(94	)
Federal Home Loan Bank
Advances		(40	)		12			(28	)
Total interest bearing Liabilities		507			(1,334	)		(827	)
Net change in net interest income	$	165		$	(1,184	)	$	(1,019	)

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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 September 2008 Compared to 2007 Increase (Decrease) Due To
	Volume			Rate			Net
Interest income
Loans	$	(102	)	$	(687	)	$	(789	)
Securities-taxable		722			(577	)		145
Securities-nontaxable		(41	)		21			(20	)
Securities-equities		2			(5	)		(3	)
Federal funds sold		(65	)		(146	)		(211	)
Total interest earning Assets		516			(1,394	)		(878	)
Interest expense
Interest bearing demand		7			(18	)		(11	)
Money market accounts		95			(145	)		(50	)
Savings deposits		32			(63	)		(31	)
Time deposits		85			(514	)		(429	)
Short-term borrowing		(1	)		(29	)		(30	)
Federal Home Loan Bank
Advances		(39	)		29			(10	)
Total interest bearing Liabilities		179			(740	)		(561	)
Net change in net interest income	$	337		$	(654	)	$	(317	)

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Item 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable to Smaller Reporting Companies.

Item 4 – CONTROLS AND PROCEDURES

The Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s 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 September 30, 2008 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

In addition to the risk factors disclosed in our annual report on Form 10-K for the year ended December 31, 2007, the following risk factors could affect the Company’s business, financial condition or results of operations.

Government Regulation and Supervision

As indicated in the Company’s discussion of risk factors contained in its annual report on Form 10-K for the fiscal year ended, December 31, 2007, the banking industry is heavily regulated, and it is difficult to predict the effect that any changes in regulation will have on the Bank’s future business and earnings prospects. In that respect, on October 3, 2008 President Bush signed into law the Emergency Economic Stabilization Act of 2008 (the “EESA”) for the purpose of stabilizing and providing liquidity to the U.S. financial markets. Pursuant to the authority provided by EESA, various programs have been proposed or are currently in the process of being implemented, including but not limited to, a program pursuant to which the U.S. Treasury will acquire senior preferred stock and warrants for the purchase of common stock from participating financial institutions (the “TARP Capital Purchase Program”). Any programs established under the EESA may ultimately result in the banking and financial services industry becoming even more heavily regulated, and compliance with new regulations may increase the Company’s costs and subject it to additional restrictions. However, it is impossible for the Company to predict with certainty the impact these programs and any related regulatory changes will ultimately have on the business of the Company.

Economic Conditions

The Company’s success depends significantly on the economic conditions of the local markets in which it operates. Currently, increased concern over the stability of the financial markets in general has led to a widespread tightening of credit, and the local economies within which the Company operates have been affected by the current economic situation impacting the broader economy. Further general economic and market–related developments also have the potential to negatively affect the Company’s primary markets, which in turn could negatively impact the financial condition and performance of the Company.

In addition, there can be no assurance regarding the actual impact that the EESA, its implementing regulations, and any related U.S. Treasury or any other governmental program will have on the financial markets. The failure of the EESA and any measures implemented thereunder to stabilize the financial markets could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock.

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

The Company did not engage in any unregistered sales of its securities during the quarter ended September 30, 2008.

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
July 1 – 30, 2008	376	$	113.77	N/A	N/A
August 1 – 31, 2008	1,009	$	113.91	N/A	N/A
September 1 – 30, 2008	444	$	114.73	N/A	N/A
Total (1)	1,829	$	114.08	N/A	N/A

(1) 1,829 shares of common stock were purchased by Killbuck Bancshares in open-market transactions.

Item 3 - Default upon senior securities

None

Item 4 - Results of votes of security holders

None

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Item 5 - Other Information

None

Item 6 - Exhibits

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

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

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

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

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Signatures

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

	Killbuck Bancshares, Inc.
Date: November 12, 2008	By:	/s/ Luther E. Proper
		Luther E. Proper
		President and Chief Executive Officer
Date: November 12, 2008	By:	/s/ Diane Knowles
		Diane Knowles
		Chief Financial Officer

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