KLIB Killbuck Bancshares Inc (PK)

Table of Contents

 

 

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, 2009

 

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

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

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

Class: Common Stock, no par value

Outstanding at May 5, 2009: 619,090

 

 

 

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KILLBUCK BANCSHARES, INC.

Index

 

				Page Number
PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited):
		Consolidated Balance Sheet as of March 31, 2009 and December 31, 2008		3
		Consolidated Statements of Income for the three months ended March 31, 2009 and 2008		4
		Consolidated Statements of Changes In Shareholders’ Equity for the three months ended March 31, 2009		5
		Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008		6
		Notes to Unaudited Consolidated Financial Statements		7-11
Item 2.		Management’s Discussion and Analysis of Financial Condition		12-18
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		19
Item 4.		Controls and Procedures		19
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings		20
Item 1A.		Risk Factors		20
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		20
Item 3.		Default Upon Senior Securities		20
Item 4.		Submissions of Matters to a Vote of Security Holders		20
Item 5.		Other Information		20
Item 6.		Exhibits		21
SIGNATURES				22

 

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Killbuck Bancshares, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEET (UNAUDITED)

 

		March 31, 2009				December 31, 2008
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions		$	18,288,991			$	31,868,633
Federal funds sold			6,003,000				8,448,000
Total cash and cash equivalents			24,291,991				40,316,633
Investment securities:
Securities available for sale			64,322,647				51,549,966
Time deposits			1,715,000				—
Securities held to maturity (fair value of $34,283,885 and $33,265,569)			33,441,432				32,168,512
Total investment securities			99,479,079				83,718,478
Loans (net of allowance for loan losses of $2,526,160 and $2,525,202)			204,139,794				200,448,708
Loans held for sale			460,250				—
Premises and equipment, net			6,232,716				6,321,031
Accrued interest receivable			1,776,318				1,470,883
Goodwill, net			1,329,249				1,329,249
Other assets			7,726,482				7,732,841
Total assets		$	345,435,879			$	341,337,823
LIABILITIES
Deposits:
Noninterest bearing demand		$	46,227,136			$	52,971,305
Interest bearing demand			25,521,325				27,372,343
Money market			32,381,267				23,834,736
Savings			40,972,031				40,496,289
Time			149,263,146				144,272,233
Total deposits			294,364,905				288,946,906
Short-term borrowings			5,410,000				6,385,000
Federal Home Loan Bank advances			1,692,487				1,862,667
Accrued interest and other liabilities			892,625				1,207,652
Total liabilities			302,360,017				298,402,225
SHAREHOLDERS’ EQUITY
Common stock – No par value: 1,000,000 shares authorized, 718,431 issued			8,846,670				8,846,670
Retained earnings			43,281,676				42,461,137
Accumulated other comprehensive income			229,721				643,359
Treasury stock, at cost (99,242 and 96,949 shares)			(9,282,205	)			(9,015,568	)
Total shareholders’ equity			43,075,862				42,935,598
Total liabilities and shareholders’ equity		$	345,435,879			$	341,337,823

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,
		2009			2008
INTEREST INCOME
Interest and fees on loans		$	3,162,735		$	3,842,642
Federal funds sold			16,307			197,013
Investment securities:
Taxable			596,426			696,805
Exempt from federal income tax			341,019			344,624
Total interest income			4,116,487			5,081,084
INTEREST EXPENSE
Deposits			1,185,864			1,881,351
Federal Home Loan Bank advances			25,736			34,834
Short term borrowing			3,391			8,300
Total interest expense			1,214,991			1,924,485
NET INTEREST INCOME			2,901,496			3,156,599
Provision for loan losses			1,000			—
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			2,900,496			3,156,599
NON INTEREST INCOME
Service charges on deposit accounts			86,532			85,291
NSF & OD fees, net			180,803			209,978
Gain on sale of loans, net			17,718			16,203
BOLI			59,452			49,080
Other income			39,154			39,416
Total non interest income			383,659			399,968
NON INTEREST EXPENSE
Salaries and employee benefits			1,344,773			1,373,598
Occupancy and Equipment expense			261,533			278,860
Professional fees			96,502			86,250
Franchise tax			128,300			123,050
Stationery, Supplies & Printing			47,342			52,339
Postage, Express, & Freight			56,657			46,146
Data Processing			50,872			48,738
Other expenses			248,792			244,262
Total non interest expense			2,234,771			2,253,243
INCOME BEFORE INCOME TAXES			1,049,384			1,303,324
Income taxes			228,845			315,784
NET INCOME		$	820,539		$	987,540
Earning per common share		$	1.32		$	1.57
Weighted Average shares outstanding			620,269			629,418

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, 2009

 

		Common Stock			Retained Earnings			Accumulated Other Comprehensive Income				Treasury Stock				Total Shareholders’ Equity				Comprehensive Income
Balance, December 31, 2008		$	8,846,670		$	42,461,137		$	643,359			$	(9,015,568	)		$	42,935,598
Net income						820,539											820,539			$	820,539
Purchase of Treasury stock, at cost (2,293 shares)													(266,637	)			(266,637	)
Other comprehensive income:
Net unrealized loss on securities, net of tax $213,086									(413,638	)							(413,638	)			(413,638	)
Comprehensive income																				$	406,901
Balance, March 31, 2009		$	8,846,670		$	43,281,676		$	229,721			$	(9,282,205	)		$	43,075,862

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,
		2009				2008
OPERATING ACTIVITIES
Net income		$	820,539			$	987,540
Adjustments to reconcile net income to net cash provided by Operating activities:
Provision for loan losses			1,000				—
Gain on sale of loans			(17,718	)			(16,203	)
Provision for depreciation and amortization			227,932				135,658
Origination of loans held for sale			(3,561,750	)			(1,940,500	)
Proceeds from the sale of loans			3,119,218				1,801,703
Net change in:
Accrued interest and other assets			(295,464	)			(745,392	)
Accrued expenses and other liabilities			(105,553	)			62,812
Net cash provided by operating activities			188,204				285,618
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from maturities and repayments			11,125,787				6,040,684
Purchases			(24,614,040	)			(5,996,250	)
Bank CDs – Purchases			(1,715,000	)			—
Investment securities held to maturity:
Proceeds from maturities and repayments			301,364				—
Purchases			(1,589,074	)			(940,032	)
Net (increase) decrease in loans			(3,692,086	)			(4,616,123	)
Purchase of premises and equipment			(35,979	)			(134,141	)
Purchase of BOLI			—				(2,000,000	)
Net cash used in investing activities			(20,219,028	)			(7,645,862	)
FINANCING ACTIVITIES
Net increase in demand, money market and savings deposits			427,086				356,771
Net increase in time deposits			4,990,913				3,044,284
Net decrease in short term borrowings			(975,000	)			(465,000	)
Repayment of Federal Home Loan Bank advances			(170,180	)			(179,591	)
Purchase of Treasury stock			(266,637	)			(236,422	)
Net cash provided by financing activities			4,006,182				2,520,042
Net decrease in cash and cash equivalents			(16,024,642	)			(4,840,202	)
Cash and cash equivalents at beginning of period			40,316,633				41,172,750
Cash and cash equivalents at end of period		$	24,291,991			$	36,332,548
Supplemental Disclosures of Cash Flows Information
Cash Paid During the Period For:
Interest on deposits and borrowings		$	1,238,139			$	1,986,131
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, 2008 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, 2009				Three Months Ended March 31, 2008
Net income		$	820,539			$	987,540
Other comprehensive income:
Net unrealized (loss) gain on securities			(626,724	)			571,983
Tax effect			213,086				(194,474	)
Total comprehensive income		$	406,901			$	1,365,049

 

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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 March 31, 2009 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.

 

		March 31, 2009
		Level I			Level II			Level III			Total
		(In thousands)
Assets:
Securities available for sale		$	—		$	64,322,647		$	—		$	64,322,647
Loans held for sale			460,250			—			—			460,250

 

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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 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 encouraged. 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 FASB Staff Position (“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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In April 2008, the FASB issued FSP 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. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

In June 2008, the FASB issued 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 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 April 2009, the FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies. This FSP requires companies acquiring contingent assets or assuming contingent liabilities in business combination to either (a) if the assets’ or liabilities’ fair value can be determined, recognize them at fair value, at the acquisition date, or (b) if the assets’ or liabilities’ fair value cannot be determined, but (i) it is probable that an asset existed or that a liability had been incurred at the acquisition date and (ii) the amount of the asset or liability can be reasonably estimated, recognize them at their estimated amount, at the acquisition date. If the fair value of these contingencies cannot be determined and they are not probable or cannot be reasonably estimated, then companies should not recognize these contingencies as of the acquisition date and instead should account for them in subsequent periods by following other applicable GAAP. This FSP also eliminates the FAS 141R requirement of disclosing in the footnotes to the financial statements the range of expected outcomes for a recognized contingency. This FSP shall be effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly . This FSP relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. FSP No. FAS 157-4 is effective for interim and annual periods ending after June 15, 2009, but entities may early adopt this FSP for the interim and annual periods ending after March 15, 2009. 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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In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments , which relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value. Prior to issuing this FSP, fair values for these assets and liabilities were only disclosed once a year. The FSP now requires these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. FSP No. FAS 107-1 and APB 28-1 is effective for interim and annual periods ending after June 15, 2009, but entities may early adopt this FSP for the interim and annual periods ending after March 15, 2009. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments , which provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. FSP No. FAS 115-2 and FAS 124-2 is effective for interim and annual periods ending after June 15, 2009, but entities may early adopt this FSP for the interim and annual periods ending after March 15, 2009. 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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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, 2008. 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, 2008.

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, 2008; 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, 2008.

 

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Financial Condition

Total assets at March 31, 2009 were $345,436,000 compared to $341,338,000 at December 31, 2008.

Cash and cash equivalents decreased by $16,025,000 or 39.8% from December 31, 2008, to March 31, 2009, with federal funds sold decreasing $2,445,000. The federal funds were used to partially fund the increase in loans.

Investment securities available for sale increased by $12,773,000 or 24.7% from December 31, 2008 to March 31, 2009, due to an effort to maximize the yield on excess liquidity. Due to the low interest rate on Federal Funds, a new investment in Bank time deposits was made for $1,715,000. Investments held to maturity increased $1,273,000 or 4.0% due to the same effort to increase earnings.

Net loans increased by $3,691,000 or 1.84% from December 31, 2008, to March 31, 2009. An increase of $728,000 occurred in the real estate loan category, which is attributable primarily to an increase of $1,018,000 in construction lending. Residential real estate increased $433,000 with additional increases in farm lending activity of $453,000. These increases were partially offset by a decrease in commercial real estate loan activity of $1,176,000. Commercial and other loan balances increased by $3,698,000 due to seasonal changes and inventory growth while consumer loan balances continued to decrease by $735,000.

Total deposits at March 31, 2009 were $294,365,000 compared to $288,947,000 at December 31, 2008. Time deposits increased $4,991,000, demand accounts decreased $8,595,000, and money market and savings accounts increased $8,546,000 and $476,000, respectively. Management believes demand account decreases are 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, 2008 included additional funds due to the holiday period; and the disintermediation into other financial markets.

Short-term borrowings decreased $975,000 and Federal Home Loan Bank advances decreased $170,000 due to scheduled repayments at March 31, 2009 from December 31, 2008.

Shareholders’ Equity increased by $140,000 or .33%, which was mainly due to earnings of $821,000 for the first three months of 2009 decreased by a $414,000 unrealized loss on securities included in other comprehensive income and decreased by the purchase of Treasury stock for $267,000. 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 2009. Management monitors risk-based capital and leveraged capital ratios in order to assess compliance with the regulatory guidelines. At March 31, 2009, the total capital ratio was 18.83%; the Tier I capital ratio was 17.74%, and the leverage ratio was 12.03%, compared to regulatory capital requirements of 8.00%, 4.00% and 4.00% respectively. These ratios are well in excess of regulatory capital requirements.

 

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RESULTS OF OPERATIONS

Comparison of the Three Months Ended March 31, 2009 and 2008

Net income for the three-month period ended March 31, 2009, was $821,000 a decrease of $167,000 or 20.3% from the $988,000 reported at March 31, 2008.

Total interest income of approximately $4,117,000 for the three-month period ended March 31, 2009, compares to $5,081,000 for the same period in 2008, a decrease of $964,000 or 19.0%. The decrease in total interest income is mainly attributable to the interest and fees on loans decreasing $680,000 or 17.7% for the three-month period ended March 31, 2009 compared to the same period for 2008. The decrease in interest and fees on loans is due to a decrease in the interest rates on the loan portfolio. The yield was 7.68% compared to 6.16% for this three-month period of 2009 and 2008 respectively. Average loan balances were $205,375,000 for 2009 compared to $200,231,000 for 2008. See “Average Balance Sheet” for the three-month periods ended March 31, 2009 and 2008. The interest on Federal Funds also decreased. It decreased due to the low interest rates. The excess funds were invested in securities earning a higher yield; thereby decreasing the volume in Federal Funds. The yield on the excess liquidity in Federal Funds and Due from Federal Reserve decreased from 3.22% for 2008 to .31% for 2009. The average balance outstanding of $21,261,000 compares to $24,449,000 for 2008. The decrease in interest on taxable investment securities including equities adds to the reduction in interest income. The decrease in interest on taxable investment securities of $96,000 was due to the decrease in rate. The average balances outstanding of $57,503,000 for 2009 compared to $53,997,000 for 2008 and the yield was 4.01% compared to 4.99% for this three-month period of 2009 and 2008 respectively.

Total interest expense of $1,215,000 for the three-month period ending March 31, 2009, represents a decrease of $709,000 from the $1,924,000 reported for the same three-month period in 2008. The decrease in interest expense on deposits is due mainly to a decrease in the rate paid on the time deposits. The cost of time deposits was 2.92% compared to 4.35% for this three-month period of 2009 and 2008 respectively. Average time deposits were $147,762,000 for this three-month period of 2009 compared to $153,836,000 for the same three months of 2008. The cost of interest bearing deposits was 2.0% compared to 3.2% for this three-month period of 2009 and 2008 respectively. See “Average Balance Sheet” for the three-month periods ended March 30, 2009 and 2008.

Net interest income of $2,902,000 for the three months ended March 31, 2009, compares to $3,157,000 for the same three-month period in 2008, a decrease of $255,000 or 8.1%. The net interest margin is expected to stabilize but remain low in 2009.

Total non-interest income for the three-month period ended March 31, 2009 decreased approximately $16,000 or 4.0% to $384,000 from $400,000 for the same three-month period in 2008. Net NSF and overdraft fees decreased approximately $29,000 or 13.8% on the overdraft program due to the conservative culture of our service areas. Gains on sale of loans increased $2,000 due to increased activity in the secondary market. Other income remained stable at approximately $39,000.

Total non-interest expense of $2,235,000 for the three months ended March 31, 2009, compares to $2,253,000 for the same three-month period in 2008. This represents a decrease of $18,000 or .8%. Approximately a net $29,000 decrease was attributable to a decrease in pension expenses and bonus expenses off set by normal recurring employee cost increases for annual salary increases and employee benefits. Approximately $17,000 of the decrease was attributable to snow related expenses associated with less severe winter weather conditions. 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 $24,292,000 at March 31, 2009. These assets provide the primary source of liquidity for the Company. In addition, management has designated a portion of the investment portfolio, $64,323,000 as available for sale and has an available unused line of credit of $41,710,000 with the Federal Home Loan Bank of Cincinnati to provide additional sources of liquidity at March 31, 2009. As of March 31, 2009, the Company had commitments to fund loans of approximately $2,901,000 and unused lines of credit totaling $36,588,000.

Cash was provided during the three month period ended March 31, 2009, mainly from the maturities and repayments of investment securities of $11.4 million, operating activities of $.2 million, and a net increase in deposits of $5.4 million. Cash was used during the three month period ended March 31, 2009, mainly to fund a net increase in loans of $3.7 million, and for the purchase of investment securities of $27.9 million. In addition, $.2 million was used to reduce Federal Home Loan Bank advances during the first three months of 2009, short-term borrowings decreased $1.0 million, and $.2 million was used to purchase Treasury Stock. Cash and cash equivalents totaled $24.3 million at March 31, 2009, a decrease of $16.0 million from $40.3 million at December 31, 2008.

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, 2009, and December 31, 2008. 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, 2009				December 31, 2008
		(dollars in thousands)
Loans on nonaccrual basis		$	293			$	73
Loans past due 90 days or more			—				—
Renegotiated loans			—				—
Total nonperforming loans			293				73
Other real estate			—				—
Repossessed assets			—				—
Total nonperforming assets		$	293			$	73
Nonperforming loans as a percent of total loans			.14	%			.04	%
Nonperforming loans as a percent of total assets			.08	%			.02	%
Nonperforming assets as a percent of total assets			.08	%			.02	%

Management monitors impaired loans on a continual basis. As of March 2009, impaired loans had no material effect on the Company’s financial position or results from operations.

The allowance for loan losses at March 31, 2009, totaled $2,526,000 or 1.22% of total loans as compared to $2,525,000 or 1.24% at December 31, 2008. Provisions for loan losses were $1,000 for the three months ended March 31, 2009 and $0 for the three months ended March 31, 2008.

The level of funding for the provision is a reflection of the overall loan portfolio. Nonperforming loans consist of approximately $94,000 in commercial real estate and $199,000 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 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, 2009										March 31, 2008
		Average Balance				Interest			Yield/ Rate			Average Balance				Interest			Yield/ Rate
Assets
Interest Earnings Assets:
Loans (1)(2)(2)(3)		$	205,375,436			$	3,162,735		6.16	%		$	200,231,008			$	3,842,642		7.68	%
Securities-taxable (4)			57,502,775				576,746		4.01				53,997,140				673,422		4.99
Securities-nontaxable			32,577,793				341,019		4.19				29,806,864				344,624		4.62
Securities-equity (4)(5)			1,734,560				19,680		4.54				1,680,910				23,383		5.56
Federal funds sold			8,717,330				4,135		0.19				24,449,445				197,013		3.22
Due from Federal Reserve Bank (6)			12,543,596				12,172		0.39				—				—		0.00
Total interest earnings assets			318,451,490				4,116,487		5.17				310,165,367				5,081,084		6.55
Noninterest earning assets
Cash and due from other institutions		$	11,405,574									$	11,004,192
Premises and equipment, net			6,276,168										6,549,278
Accrued interest			1,193,378										1,376,733
Other assets			7,994,780										7,161,635
Less allowance for loan losses			(2,524,381	)									(2,504,000	)
Total noninterest earnings assets			24,345,519										23,587,838
Total Assets		$	342,797,009									$	333,753,205
Liabilities and Shareholders Equity
Interest bearing liabilities:
Interest bearing demand		$	26,387,451			$	9,878		0.15	%		$	26,095,256			$	30,836		0.47	%
Money market accounts			27,546,420				57,121		0.83				19,050,357				94,717		1.99
Savings deposits			40,790,685				39,854		0.39				37,991,536				83,029		0.87
Time deposits			147,761,678				1,079,011		2.92				153,836,201				1,672,769		4.35
Short term borrowings			5,981,772				3,391		0.23				5,376,376				8,300		0.62
Federal Home Loan Advances			1,749,807				25,736		5.88				2,418,358				34,834		5.76
Total interest bearing liabilities			250,217,813				1,214,991		1.94				244,768,084				1,924,485		3.14
Noninterest bearing liabilities:
Demand deposits			48,709,094										46,577,118
Accrued expenses and other liabilities			1,906,756										2,147,708
Total noninterest bearing liabilities			50,615,850										48,724,826
Shareholder’s equity			41,963,346										40,260,295
Total Liabilities and Equity		$	342,797,009									$	333,753,205
Net interest income						$	2,901,496									$	3,156,599
Interest rate spread (7)									3.23	%									3.41	%
Net yield on interest earning assets (8)									3.64	%									4.07	%

 

(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 $82,000 and $85,000 in 2009 and 2008, 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)	In 2009, The Federal Reserve Bank began paying interest on excess deposits. In 2008, excess liquidity was held in the Federal Funds.

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

(8)	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 2009 Compared to 2008 Increase (Decrease) Due To
		Volume				Rate				Net
Interest income
Loans		$	395			$	(1,075	)		$	(680	)
Securities-taxable			175				(271	)			(96	)
Securities-nontaxable			128				(132	)			(4	)
Securities-equities			3				(6	)			(3	)
Federal funds sold			(103	)			(78	)			(181	)
Total interest earning
Assets			598				(1,562	)			(964	)
Interest expense
Interest bearing demand			1				(22	)			(21	)
Money market accounts			169				(206	)			(37	)
Savings deposits			24				(67	)			(43	)
Time deposits			(264	)			(330	)			(594	)
Short-term borrowing			4				(9	)			(5	)
Federal Home Loan Bank
Advances			(38	)			29				(9	)
Total interest bearing
Liabilities			(104	)			(605	)			(709	)
Net change in net interest income		$	702			$	(957	)		$	(255	)

 

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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 March 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Part II – OTHER INFORMATION

Item 1 – Legal Proceedings

None

Item 1A – Risk Factors

Not applicable to Smaller Reporting Companies.

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

The Company did not engage in any unregistered sales of its securities during the quarter ended March 31, 2009.

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, 2009		735		$	116.12		N/A		N/A
February 1 – 28, 2009		748		$	116.36		N/A		N/A
March 1 – 31, 2009		810		$	116.36		N/A		N/A
Total (1)		2,293		$	116.28		N/A		N/A

 

(1)	2,293 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 13, 2009		By:		/s/ Luther E. Proper
				Luther E. Proper
				President and Chief Executive Officer
Date: May 13, 2009		By:		/s/ Diane Knowles
				Diane Knowles
				Chief Financial Officer

 

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