KLIB Killbuck Bancshares Inc (PK)

Table of Contents

 

 

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 June 30, 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 July 22, 2009: 618,404

 

 

 

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KILLBUCK BANCSHARES, INC.

Index

 

				Page Number
PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited):
		Consolidated Balance Sheet as of June 30, 2009 and December 31, 2008		3
		Consolidated Statement of Income for the six months ended June 30, 2009 and 2008		4
		Consolidated Statement of Income for the three months ended June 30, 2009 and 2008		5
		Consolidated Statement of Changes In Shareholders’ Equity for the six months ended June 30, 2009		6
		Consolidated Statement of Cash Flows for the six months ended June 30, 2009 and 2008		7
		Notes to Unaudited Consolidated Financial Statements		8-15
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		16-25
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		26
Item 4.		Controls and Procedures		26
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings		27
Item 1A.		Risk Factors		27
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		27
Item 3.		Default Upon Senior Securities		27
Item 4.		Submissions of Matters to a Vote of Security Holders		27-28
Item 5.		Other Information		28
Item 6.		Exhibits		28
SIGNATURES				29

 

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Killbuck Bancshares, Inc.

CONSOLIDATED BALANCE SHEET (UNAUDITED)

 

		June 30, 2009				December 31, 2008
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions		$	21,540,956			$	31,868,633
Federal funds sold			3,137,000				8,448,000
Total cash and cash equivalents			24,677,956				40,316,633
Investment securities:
Securities available for sale			61,934,601				51,549,966
Time Deposits			1,715,000				—
Securities held to maturity (fair value of $35,122,135 and $33,265,569)			34,193,986				32,168,512
Total investment securities			97,843,587				83,718,478
Loans (net of allowance for loan losses of $2,505,632 and $2,525,202)			204,228,408				200,448,708
Loans held for sale			472,000				—
Premises and equipment, net			6,135,507				6,321,031
Accrued interest receivable			1,642,391				1,470,883
Goodwill, net			1,329,249				1,329,249
Other assets			7,934,806				7,732,841
Total assets		$	344,263,904			$	341,337,823
LIABILITIES
Deposits:
Noninterest bearing demand		$	49,185,186			$	52,971,305
Interest bearing demand			25,170,991				27,372,343
Money market			26,087,505				23,834,736
Savings			41,175,910				40,496,289
Time			152,908,053				144,272,233
Total deposits			294,527,645				288,946,906
Short-term borrowings			4,240,000				6,385,000
Federal Home Loan Bank advances			1,520,944				1,862,667
Accrued interest and other liabilities			945,577				1,207,652
Total liabilities			301,234,166				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			43,270,838				42,461,137
Accumulated other comprehensive gain			243,529				643,359
Treasury stock, at cost (99,712 and 96,949 shares)			(9,331,299	)			(9,015,568	)
Total shareholders’ equity			43,029,738				42,935,598
Total liabilities and shareholders’ equity		$	344,263,904			$	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)

 

		Six Months Ended June 30,
		2009			2008
INTEREST INCOME
Interest and fees on loans		$	6,271,761		$	7,415,755
Federal funds sold			24,081			332,011
Investment securities:
Taxable			1,170,922			1,413,447
Exempt from federal income tax			695,572			653,740
Total interest income			8,162,336			9,814,953
INTEREST EXPENSE
Deposits			2,295,384			3,539,243
Short term borrowings			6,348			11,290
Federal Home Loan Bank advances			49,347			67,414
Total interest expense			2,351,079			3,617,947
NET INTEREST INCOME			5,811,257			6,197,006
Provision for loan losses			2,000			—
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			5,809,257			6,197,006
NON INTEREST INCOME
Service charges on deposit accounts			68,147			70,983
ATM fees			116,327			109,511
NSF & OD fees, net			373,747			424,778
Gain on sale of loans, net			90,692			23,837
BOLI			118,559			340,513
Other income			75,218			78,383
Total non interest income			842,690			1,048,005
NON INTEREST EXPENSE
Salaries and employee benefits			2,484,861			2,509,789
Occupancy and equipment expense			510,479			543,238
Professional fees			196,105			183,260
Stationary, supplies and printing			85,938			86,310
Data processing			98,420			104,052
Insurance and bond expense			230,842			36,177
Franchise tax			258,935			248,540
Other expenses			569,357			579,103
Total non interest expense			4,434,937			4,290,469
INCOME BEFORE INCOME TAXES			2,217,010			2,954,542
Income taxes			509,977			641,620
NET INCOME		$	1,707,033		$	2,312,922
Earning per common share		$	2.75		$	3.68
Dividend per share		$	1.45		$	1.45
Weighted Average shares outstanding			619,614			628,832

See accompanying notes to the unaudited consolidated financial statements.

 

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Killbuck Bancshares, Inc. and Subsidiary

CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

 

		Three Months Ended June 30,
		2009			2008
INTEREST INCOME
Interest and fees on loans		$	3,109,026		$	3,573,113
Federal funds sold			7,774			134,998
Investment securities:
Taxable			574,496			716,642
Exempt from federal income tax			354,553			309,116
Total interest income			4,045,849			4,733,869
INTEREST EXPENSE
Deposits			1,109,521			1,657,892
Short term borrowings			2,957			2,990
Federal Home Loan Bank advances			23,610			32,580
Total interest expense			1,136,088			1,693,462
NET INTEREST INCOME			2,909,761			3,040,407
Provision for loan losses			1,000			—
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			2,908,761			3,040,407
NON INTEREST INCOME
Service charges on deposit accounts			34,627			35,614
ATM fees			63,315			59,589
NSF & OD fees, net			192,944			214,800
Gain on sale of loans, net			72,974			7,634
BOLI			59,107			291,434
Other income			36,064			38,966
Total non interest income			459,031			648,037
NON INTEREST EXPENSE
Salaries and employee benefits			1,140,088			1,136,191
Occupancy and equipment expense			248,946			264,377
Professional fees			99,603			97,010
Stationary, supplies and printing			38,596			33,971
Data processing			47,548			55,314
Insurance and bond expense			208,793			17,827
Franchise tax			130,635			125,490
Other expenses			285,957			307,046
Total non interest expense			2,200,166			2,037,226
INCOME BEFORE INCOME TAXES			1,167,626			1,651,218
Income taxes			281,132			325,836
NET INCOME		$	886,494		$	1,325,382
Earning per common share		$	1.43		$	2.11
Dividend per share		$	1.45		$	1.45
Weighted Average shares outstanding			618,960			628,247

See accompanying notes to the unaudited consolidated financial statements.

 

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Killbuck Bancshares, Inc. and Subsidiary

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2009

 

		Common Stock			Retained Earnings				Accumulated Other Comprehensive Income				Treasury Stock				Total Shareholders’ Equity				Comprehensive Income (Loss)
Balance, December 31, 2008		$	8,846,670		$	42,461,137			$	643,359			$	(9,015,568	)		$	42,935,598
Net income						1,707,033												1,707,033			$	1,707,033
Purchase of Treasury stock, at cost (2,763 shares)														(315,731	)			(315,731	)
Cash dividends paid ($1.45 per share)						(897,332	)											(897,332	)
Other comprehensive income:
Net unrealized (loss) on securities, net of tax $205,973										(399,830	)							(399,830	)			(399,830	)
Comprehensive income																					$	1,307,203
Balance, June 30, 2009		$	8,846,670		$	43,270,838			$	243,529			$	(9,331,299	)		$	43,029,738

See accompanying notes to the unaudited consolidated financial statements.

 

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Killbuck Bancshares, Inc. and Subsidiary

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

 

		Six Months Ended June 30,
		2009				2008
OPERATING ACTIVITIES
Net income		$	1,707,033			$	2,312,922
Adjustments to reconcile net income to net cash provided by
Operating activities:
Provision for loan losses			2,000				—
Gain on sale of loans			(90,692	)			(23,837	)
Provision for depreciation and amortization			494,754				250,076
Origination of loans held for sale			(12,015,300	)			(2,705,600	)
Proceeds from the sale of loans			11,633,992				2,899,437
Federal Home Loan Bank stock dividend			—				—
Bank Owned Life Insurance (BOLI) benefit income			—				(234,396	)
Net change in:
Accrued interest and other assets			(387,553	)			(497,935	)
Accrued expenses and other liabilities			(42,022	)			(143,528	)
Net cash provided by operating activities			1,302,212				1,857,139
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from maturities and repayments			19,059,165				12,107,505
Purchases			(30,289,856	)			(11,902,043	)
Bank CDs – purchases			(1,715,000	)			—
Investment securities held to maturity:
Proceeds from maturities and repayments			1,459,701				360,054
Purchases			(3,509,129	)			(1,956,330	)
Net (increase) in loans			(3,781,700	)			(1,713,716	)
Bank Owned Life Insurance (BOLI)
Proceeds			—				395,915
Purchases			—				(2,000,000	)
Net Purchase of premises and equipment			(45,023	)			(208,431	)
Net cash (used in) investing activities			(18,821,842	)			(4,917,046	)
FINANCING ACTIVITIES
Net (decrease) increase in demand, money market and savings deposits			(3,055,081	)			3,755,304
Net increase (decrease) in time deposits			8,635,820				(1,088,177	)
Repayments of Federal Home Loan Bank advances			(341,723	)			(357,759	)
Net (decrease) in short term borrowings			(2,145,000	)			(235,000	)
Purchase of Treasury stock			(315,731	)			(277,620	)
Dividends paid			(897,332	)			(909,464	)
Net cash provided by financing activities			1,880,953				887,284
Net decrease in cash and cash equivalents			(15,638,677	)			(2,172,623	)
Cash and cash equivalents at beginning of period			40,316,633				41,172,750
Cash and cash equivalents at end of period		$	24,677,956			$	39,000,127
Supplemental Disclosures of Cash Flows Information
Cash Paid During the Period For:
Interest on deposits and borrowings		$	2,399,549			$	3,731,100
Income taxes		$	481,735			$	644,193

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:

 

		Six Months Ended June 30, 2009				Six Months Ended June 30, 2008
Net income		$	1,707,033			$	2,312,922
Other comprehensive income:
Net unrealized loss on securities			(605,802	)			(377,801	)
Tax effect			205,973				111,677
Total comprehensive income		$	1,307,204			$	2,046,798
		Three Months Ended June 30, 2009				Three Months Ended June 30, 2008
Net income		$	886,494			$	1,325,382
Other comprehensive income:
Net unrealized gain (loss) on securities			20,921				(949,785	)
Tax effect			(7,113	)			306,152
Total comprehensive income		$	900,302			$	681,749

 

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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 June 30, 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.

 

		June 30, 2009
		Level I			Level II			Level III			Total
		(In thousands)
Assets:
Securities available for sale		$	—		$	61,934,601		$	—		$	61,934,601
Loans held for sale			472,000			—						472,000

 

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NOTE 5 – FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values at June 30, 2009 and December 31, 2008 are as follows:

 

		2009						2008
		Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial assets:
Cash and due from depository institutions		$	21,540,956		$	21,540,956		$	31,868,633		$	31,868,633
Federal funds sold			3,137,000			3,137,000			8,448,000			8,448,000
Securities available for sale			61,934,601			61,934,601			51,549,966			51,549,966
Time Deposits			1,715,000			1,715,000			—			—
Securities held to maturity			34,193,986			35,122,135			32,168,512			33,265,569
Net loans			204,228,408			212,089,000			200,448,708			211,277,000
Loans held for sale			472,000			472,000			—			—
Accrued interest receivable			1,642,391			1,642,391			1,470,833			1,470,883
Regulatory Stock			1,734,560			1,734,560			1,734,560			1,734,560
Bank Owned Life Insurance			5,552,676			5,552,676			5,442,906			5,442,906
Financial liabilities:
Deposits			294,527,645			296,231,939		$	288,946,906		$	292,313,673
Short term borrowings			4,240,000			4,240,000			6,385,000			6,385,000
Federal Home Loan Bank advances			1,520,944			1,531,677			1,862,667			2,180,000
Accrued interest payable			196,777			196,777			245,247			245,247

Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.

Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument.

If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or simulation modeling. As many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in assumptions on which the estimated fair values are based may have a significant impact on the resulting estimated fair values.

As certain assets and liabilities such as deferred tax assets and liabilities, premises and equipment and many other operational elements of the Company, are not considered financial instruments, but have value, this estimated fair value of financial instruments would not represent the full market value of the Company.

The Company employed simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices were not available based upon the following assumptions:

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

The fair value approximates the current carrying value.

 

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NOTE 5 – FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS CONTINUED

 

Investment Securities and Loans Held for Sale

The fair value of investment securities and loans held for sale are equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities.

Loans, Deposits, and Federal Home Loan Bank Advances

The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value. Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of year end. The fair values of certificates of deposit and other borrowed funds are based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities. Demand, Savings, and money market deposits are valued at the amount payable on demand as of year-end.

Commitments to Extend Credit and Standby Letters of Credit

These financial instruments are generally not subject to sale, and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure. The contractual amounts of unfunded commitments and letters of credit are presented previously in the commitments and contingent liabilities note.

NOTE 6 – SUBSEQUENT EVENTS

The Company assessed events occurring subsequent to June 30, 2009 through August 12, 2009 for potential recognition and disclosure in the consolidated financial statements. No events were identified that would require adjustment to or disclosure in the financial statements.

 

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NOTE 7 – RECENT ACCOUNTING PRONOUNCEMENTS

In December 2008, 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, 2009. 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 7 – RECENT ACCOUNTING PRONOUNCEMENTS CONTINUED

 

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

In May 2009, the FASB issued FAS No. 165, Subsequent Events , which requires companies to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued, or available to be issued in the case of non-public entities. FAS No. 165 requires entities to recognize in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial preparation process. Entities shall not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. FAS No. 165 also requires entities to disclose the date through which subsequent events have been evaluated. FAS No. 165 was effective for interim and annual reporting periods ending after June 15, 2009. The Company adopted the provisions of FAS No. 165 for the quarter ended June 30, 2009, as required, and adoption did not have a material impact on Company’s results of operations or financial position.

 

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NOTE 7 – RECENT ACCOUNTING PRONOUNCEMENTS CONTINUED

 

In June 2009, the FASB issued FAS No. 166, Accounting for Transfers of Financial Assets . FAS 166 removes the concept of a qualifying special-purpose entity (QSPE) from FAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities , and removes the exception from applying FIN 46(R). This statement also clarifies the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. This statement is effective for fiscal years beginning after November 15, 2009. As such, the Company plans to adopt FAS No. 166 effective January 1, 2010. 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 2009, the FASB issued FAS No. 167, Amendments to FASB Interpretation No. 46(R) . FAS 167, which amends FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities , (FIN 46(R)), prescribes a qualitative model for identifying whether a company has a controlling financial interest in a variable interest entity (VIE) and eliminates the quantitative model prescribed by FIN 46(R). The new model identifies two primary characteristics of a controlling financial interest: (1) provides a company with the power to direct significant activities of the VIE, and (2) obligates a company to absorb losses of and/or provides rights to receive benefits from the VIE. FAS No. 167 requires a company to reassess on an ongoing basis whether it holds a controlling financial interest in a VIE. A company that holds a controlling financial interest is deemed to be the primary beneficiary of the VIE and is required to consolidate the VIE. This statement is effective for fiscal years beginning after November 15, 2009. 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 2009, the FASB issued FAS No. 168, The ‘FASB Accounting Standards Codification’ and the Hierarchy of Generally Accepted Accounting Principles . FAS No. 168 establishes the FASB Accounting Standards Codification (Codification), which was officially launched on July 1, 2009, and became the primary source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under the authority of Federal securities laws are also sources of authoritative GAAP for SEC registrants. The subsequent issuances of new standards will be in the form of Accounting Standards Updates that will be included in the Codification. FAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. As such, the Company plans to adopt FAS No.168 in connection with its third quarter 2009 reporting. As the Codification is neither expected nor intended to change GAAP, the adoption of FAS No.168 will not have a material impact on its 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.

 

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NOTE 7 – RECENT ACCOUNTING PRONOUNCEMENTS CONTINUED

 

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.

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

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. The Company has presented the necessary disclosures in Note (5) herein.

 

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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. (“The Company”) 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 (“The Bank”). 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 June 30, 2009 were $344,264,000 compared to $341,338,000 at December 31, 2008.

Cash and cash equivalents decreased by $15,639,000 or 38.8% from December 31, 2008, to June 30, 2009, with federal funds sold decreasing $5,311,000. The decrease was used to fund the increase in the Bank’s loan portfolio and partially fund the increase in Investment securities.

Investment securities available for sale increased by $10,385,000 or 20.1% from December 31, 2008, to June 30, 2009 due to an increase in suitable securities available to purchase for the portfolio. Time Deposits held at other institutions were purchased for $1.7 million due to attractive rates and the increase in FDIC insurance limits. Investments held to maturity increased $2,025,000 or 6.3% due to some attractive municipal securities available for the portfolio.

Net loans increased by $3,779,000 or 1.9% from December 31, 2008 to June 30, 2009. An increase of $3,256,000 occurred in the real estate loan category, which is attributable primarily to residential real estate lending of $5,004,000 with an additional increase in farm lending of $540,000 and a decrease of $1,177,000 in construction loan activity and $1,111,000 in commercial lending. Management believes the residential loan activities have seen a small refinancing boom in the Bank’s lending area. Commercial and other loan balances increased by $1,134,000 due to continued inventory growth, which will start to pay down in the third quarter. The Consumer loan balances decreased by $611,000.

Total deposits at June 30, 2009 were $294,528,000 compared to $288,947,000 at December 31, 2008. Demand accounts decreased $5,988,000, while money market accounts, savings accounts and time deposits accounts increased $2,253,000, $680,000 and $8,636,000 respectively. Management attributes these changes to the changes in interest rates. A Money Market account is a short term investment that customers use while waiting until the interest rates meet their expectations for longer term time deposits. Management believes the demand accounts decreases are attributable to normal fluctuations due to customer usage.

Federal Home Loan Bank advances decreased $342,000 due to maturities and scheduled repayments, and short-term borrowings decreased $2,145,000 at June 30, 2009 from December 31, 2008.

Shareholders’ Equity increased by $94,000 or .02%, which was mainly due to earnings of $1,707,000 for the first six months of 2009 decreased by a $400,000 unrealized loss on securities included in other comprehensive income, dividends paid totaling $897,000 and by the purchase of Treasury stock for $316,000. 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 six months of 2009. Management monitors risk-based capital and leveraged capital ratios in order to assess compliance of the regulatory guidelines. At June 30, 2009, the total capital ratio was 19.36%; the Tier I capital ratio was 18.26%, and the leverage ratio was 11.93%, compared to regulatory capital requirements of 8.00%, 4.00% and 4.00% respectively. These ratios are well in excess of regulatory capital requirements.

 

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RESULTS OF OPERATIONS

Comparison of the Six Months Ended June 30, 2009 and 2008

Net income for the six-month period ended June 30, 2009, was $1,707,000, a decrease of $606,000 or 26.2% from the $2,313,000 reported at June 30, 2008.

Total interest income of approximately $8,162,000 for the six-month period ended June 30, 2009, compares to $9,815,000 for the same period in 2008, a decrease of $1,653,000 or 16.8%. 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 principle balances. See “Average Balance Sheet” for the six-month periods ended June 30, 2009 and 2008. The yield on loans decreased to 6.07% for the first six months of 2009 compared to 7.36% for the first six months of 2008. Average loan balances were $206,565,000 for the first six months of 2009 compared to $201,399,000 for the first six months of 2008. The interest on investment securities of $1,866,000 for 2009 compares to $2,067,000 for 2008. The decrease in investment income is primarily attributable to a decrease in yield. Average investment balances were $97,239,000 compared to $85,306,000 and the yields were 3.84% compared to 4.85% for the first six months of 2009 and 2008 respectively. The interest on Federal Funds also decreased. It decreased due to the decrease in volume and yield. The average balance outstanding in Federal Funds and Due from Federal Reserve Bank were $18,458,000 compared to $25,301,000 for the first six months of 2009 and 2008 respectively. The yield on the excess liquidity in Federal Funds and Due from Federal Reserve Bank decreased from 2.62% for 2008 to .26% for 2009.

Total interest expense of $2,351,000 for the six-month period ending June 30, 2009 represents a decrease of $1,267,000 from the $3,618,000 reported for the same six-month period in 2008. The decrease in interest expense on deposits of $1,245,000 is due mainly to a decrease in interest rates. The decreases in the average rate paid on the underlying principle balances of the interest bearing liabilities are due mainly to the Time deposits. The cost of Time deposits was 2.78% compared to 4.11% for this six-month period of 2009 and 2008, respectively. The cost on interest bearing deposits was 1.70%, compared to 2.97% for the six-month periods of 2009 and 2008 respectively. Average interest-bearing deposits were $244,725,000 for the first six months of 2009 compared to $238,682,000 for the first six months of 2008. See “Average Balance Sheet” for the six-month periods ended June 30, 2009 and 2008.

Net interest income of $5,811,000 for the six months ended June 30, 2009, compares to $6,197,000 for the same six-month period in 2008, a decrease of $386,000 or 6.2%. The net interest margin is expected to stabilize in 2009 but remain low.

Total non-interest income for the six-month period ended June 30, 2009, of $843,000 compares to $1,048,000 for the same six-month period in 2008, a decrease of $205,000 or 19.6%. The net Non-sufficient funds fees and overdraft fees decreased $51,000 due to a decrease in Non-sufficient funds activity. Gains on sale of loans increased $67,000 primarily due to refinancings. Bank Owned Life Insurance (BOLI) income decreased $222,000 primarily due to an asset reduction resulting from a benefit payout in the first six months of 2008.

Total non-interest expense of $4,435,000 for the six months ended June 30, 2009, compares to $4,290,000 for the same six-month period in 2008. This represents an increase of $145,000 or 3.4%. Salary and employee benefits decreased approximately $25,000. The bonus accrual has decreased approximately $35,000; however, this decrease was partially offset by normal increases in salaries and employee benefits. Occupancy and Equipment costs decreased approximately $32,000; approximately $13,000 is due to decreased depreciation expense and computer technology expense. Professional fees increased approximately $13,000, which included additional auditing fees for SOX 404 compliance and other professional assistance with regulatory requirements including the Bank Secrecy Act and the Gramm-Leach-Bliley Act, increasing regulatory examination and the legal expense associated with these areas. Insurance and bond expense increased approximately $195,000 or 5.42% due to FDIC assessments. The Federal Deposit Insurance Corporation (FDIC) increased the regular FDIC assessment rates on all insured institutions as well as levied a special 5 basis points (bps) assessment that was assessed as of June 30, 2009. There is speculation that another special assessment may be assessed in the fourth quarter. 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 June 30, 2009 and 2008

Net income for the three-month period ended June 30, 2009, was $886,000, a decrease of $439,000 or 33.1% from the $1,325,000 reported at June 30, 2008.

Total interest income of approximately $4,046,000 for the three-month period ended June 30, 2009, compares to $4,734,000 for the same period in 2008, a decrease of $688,000 or 14.5%. The decrease in total interest income is primarily attributable to a decrease in the loan category. Interest and fees on loans decreased $464,000 or 13.0% for the three-month period ended June 30, 2009 compared to the same period for 2008. The decrease in interest and fees on loans is due to a decrease in the yields earned on the underlying principle balances. The yield was 5.99% compared to 7.06% for this three-month period of 2009 and 2008, respectively and the average loan balances were $207,754,000 compared to $202,567,000. See “Average Balance Sheet” for the three-month periods ended June 30, 2009 and 2008. The decrease in interest on investment securities of $96,000 was primarily attributable to a decrease in the yield of 3.62% compared to 4.82% for this three-month period of 2009 and 2008, respectively. The Average balances outstanding of investment securities of $102,663,000 for 2009 compared to $85,127,000 for 2008. See “Average Balance Sheet” for the three-month periods ended June 30, 2009 and 2008.

Total interest expense of $1,136,000 for the three-month period ending June 30, 2009, represents a decrease of $557,000 from the $1,693,000 reported for the same three-month period in 2008.

The decrease in interest expense on deposits of $549,000 is due mainly to the decreases in the average rate paid on the underlying principle balances of the interest bearing liabilities, specifically the Time deposits. The cost of Time deposits was 2.64% compared to 3.87% for this three-month period of 2009 and 2008, respectively and the cost of interest bearing deposits was 1.80% compared to 2.76% for this three-month period of 2009 and 2008 respectively. The average time deposits were $151,617,000 for this three-month period of 2009 compared to $154,275,000 for the same three months of 2008. Average interest-bearing deposits were $246,963,000 for this three-month period of 2009 compared to $240,391,000 for the same three months of 2008. See “Average Balance Sheet” for the three-month periods ended June 30, 2009 and 2008.

Net interest income of $2,910,000 for the three months ended June 30, 2009, compares to $3,041,000 for the same three-month period in 2008, a decrease of $131,000 or .03%. The net interest margin is expected to stabilize in 2009 but remain low.

Total non-interest income for the three-month period ended June 30, 2009, of $459,000 compares to $648,000 for the same three-month period in 2008, a decrease of $189,000 or 29.2%. Non-sufficient funds (NSF) fees and Overdraft fees decreased $22,000. Gain on sale of loans increased $65,000 due to a number of loan refinancings. Approximately $232,000 of the decrease was due to income from the Bank-Owned Life Insurance (BOLI) from the benefit payout in 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 $2,200,000 for the three months ended June 30, 2009, compares to $2,037,000 for the same three-month period in 2009. This represents an increase of $163,000 or 8.0%. Salary and employee benefits increased $4,000. The expense was due to normal recurring employee cost increase for salary and employee benefits and staff additions. Occupancy and equipment expenses decreased $15,000 or 5.7%, of which, approximately $9,000 is due to decreased depreciation expense and computer technology expense. Insurance and bond expense increased approximately $191,000 or 10.61% due to FDIC assessments. The FDIC increased the regular FDIC assessment rates on all insured institutions as well as levied a special 5 bps assessment that was assessed as of June 30, 2009. There is speculation that another special assessment may be assessed in the fourth quarter. 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 $24,678,000 at June 30, 2009. These assets provide the primary source of liquidity for the Company. In addition, management has designated a portion of the investment portfolio, $61,935,000 as available for sale and has an available unused line of credit of $41,881,000 with the Federal Home Loan Bank of Cincinnati to provide additional sources of liquidity at June 30, 2009. As of June 30, 2009, the Company had commitments to fund loans of approximately $2,613,000 and unused lines of credit totaling $38,862,000.

Cash was provided during the six month period ended June 30, 2009, mainly from operating activities of $1.3 million, and the net increase in deposits of $5.6 million, and the maturities and repayments of investment securities of $20.5 million. Cash was used during the six month period ended June 30, 2009, mainly to fund a net increase in loans of $3.8 million, for the purchase of investment securities of $35.5 million, and to reduce $2.5 million in Federal Home Loan Bank advances and short-term borrowings. In addition, $.3 million was used to purchase Treasury Stock, and $.9 million was used to pay dividends to shareholders. Cash and cash equivalents totaled $24.7 million at June 30, 2009, a decrease of $15.6 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 June 30, 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 the terms of which have been renegotiated to provide a reduction or deferral of principal or interest as of result of the deterioration of the borrower.

 

		June 30, 2009				December 31, 2008
		(dollars in thousands)
Loans on nonaccrual basis		$	—			$	73
Loans past due 90 days or more			—				—
Renegotiated loans			—				—
Total nonperforming loans		$	—			$	73
Other real estate			—				—
Repossessed assets			—				—
Total nonperforming assets		$	—			$	73
Nonperforming loans as a percent of total loans			.00	%			.04	%
Nonperforming loans as a percent of total assets			.00	%			.02	%
Nonperforming assets as a percent of total assets			.00	%			.02	%

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

The allowance for loan losses at June 30, 2009, totaled $2,506,000 or 1.21% of total loans as compared to $2,525,000 or 1.24% at December 31, 2008. Provisions for loan losses were $2,000 for the six months ended June 30, 2009 and $0 for the six months ended June 30, 2008. The provision was for the Overdraft Privilege program.

The level of funding for the provision is a reflection of the overall loan portfolio. There were not any Nonperforming loans as of June 30, 2009. The collateral requirements on such loans reduce the risk of potential losses to an acceptable level in management’s opinion.

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

 

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AVERAGE BALANCE SHEET

Average Balance Sheet for the Six-Month Period Ended June 30

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

 

		Period Ended
		2009										2008
		Average Balance				Interest			Yield/ Rate			Average Balance				Interest			Yield/ Rate
Assets
Interest Earnings Assets:
Loans (1)(2)(3)		$	206,564,748			$	6,271,761		6.07	%		$	201,399,245			$	7,415,755		7.36	%
Securities-taxable (4)			62,285,236				1,127,681		3.62	%			53,382,523				1,364,802		5.11	%
Securities-nontaxable (4)			33,219,396				695,572		4.19	%			30,234,021				653,740		4.32	%
Securities-Equity (4,5)			1,734,560				43,241		4.99	%			1,689,532				48,645		5.76	%
Federal funds sold			6,439,879				5,643		0.18	%			25,300,562				332,011		2.62	%
Due from Federal Reserve Bank			12,017,677				18,438		0.31	%			—				—		0.00	%
Total interest earnings assets			322,261,496				8,162,336		5.07	%			312,005,883				9,814,953		6.29	%
Noninterest earning assets:
Cash and due from other institutions			10,462,319										11,255,494
Premises and equipment, net			6,232,940										6,546,152
Accrued interest			1,328,767										1,439,102
Other assets			8,115,048										7,560,007
Less allowance for loan losses			(2,527,974	)									(2,499,920	)
Total noninterest earnings assets			23,611,100										24,300,835
Total Assets		$	345,872,596									$	336,306,718
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing demand			26,470,288				20,329		0.15	%			26,371,723				56,718		0.43	%
Money market accounts			27,642,783				116,122		0.84	%			20,137,976				173,661		1.72	%
Savings deposits			40,922,430				79,667		0.39	%			38,116,901				142,659		0.75	%
Time deposits			149,689,301				2,079,266		2.78	%			154,055,664				3,166,205		4.11	%
Short term borrowings			5,569,248				6,348		0.23	%			5,298,620				11,290		0.43	%
Federal Home Loan Advances			1,668,711				49,347		5.91	%			2,334,680				67,414		5.78	%
Total interest bearing liabilities			251,962,761				2,351,079		1.87	%			246,315,564				3,617,947		2.94	%
Noninterest bearing liabilities:
Demand deposits			49,876,221										47,248,392
Accrued expenses and other liabilities			2,428,490										2,779,012
Total noninterest bearing liabilities			52,304,711										50,027,404
Shareholders’ equity			41,605,124										39,963,750
Total Liabilities and Shareholders’ Equity		$	345,872,596									$	336,306,718
Net interest income						$	5,811,257									$	6,197,006
Interest rate spread (6)									3.20	%									3.35	%
Net yield on interest earning assets (7)									3.61	%									3.97	%

 

(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 $173,000 and $186,000 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 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 June 30

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

 

		Period Ended
		2009										2008
		Average Balance				Interest			Yield/ Rate			Average Balance				Interest			Yield/ Rate
Assets
Interest Earnings Assets:
Loans (1)(2)(3)		$	207,754,060			$	3,109,026		5.99	%		$	202,567,482			$	3,573,113		7.06	%
Securities-taxable (4)			67,067,697				550,935		3.29	%			52,767,906				691,380		5.24	%
Securities-nontaxable (4)			33,861,000				354,553		4.19	%			30,661,178				309,116		4.03	%
Securities-Equity (4,5)			1,734,560				23,561		5.43	%			1,698,155				25,262		5.95	%
Federal funds sold			4,162,426				1,508		0.14	%			26,151,679				134,998		2.06	%
Due from Federal Reserve Bank			11,491,758				6,266		0.22	%			—				—		0.00	%
Total interest earnings assets			326,071,501				4,045,849		4.96	%			313,846,400				4,733,869		6.03	%
Noninterest earning assets:
Cash and due from other institutions		$	9,519,064									$	11,506,796
Premises and equipment, net			6,189,713										6,543,027
Accrued interest			1,464,155										1,501,470
Other assets			8,235,315										7,958,378
Less allowance for loan losses			(2,531,566	)									(2,495,839	)
Total noninterest earnings assets			22,876,681										25,013,832
Total Assets		$	348,948,182									$	338,860,232
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing demand		$	26,553,124			$	10,452		0.16	%		$	26,648,190			$	25,882		0.39	%
Money market accounts			27,739,146				59,002		0.85	%			21,225,595				78,945		1.49	%
Savings deposits			41,054,176				39,812		0.39	%			38,242,265				59,630		0.62	%
Time deposits			151,616,924				1,000,255		2.64	%			154,275,126				1,493,435		3.87	%
Short term borrowings			5,156,724				2,957		0.23	%			5,220,867				2,990		0.23	%
Federal Home Loan Advances			1,587,615				23,610		5.95	%			2,251,002				32,580		5.79	%
Total interest bearing liabilities			253,707,709				1,136,088		1.79	%			247,863,045				1,693,462		2.73	%
Noninterest bearing liabilities:
Demand deposits			51,043,348										47,919,665
Accrued expenses and other liabilities			2,950,222										3,410,318
Total noninterest bearing liabilities			53,993,570										51,329,983
Shareholders’ equity			41,246,903										39,667,204
Total Liabilities and Shareholders’ Equity		$	348,948,182									$	338,860,232
Net interest income						$	2,909,761									$	3,040,407
Interest rate spread (6)									3.17	%									3.30	%
Net yield on interest earning assets (7)									3.57	%									3.88	%

 

(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 $91,000 and $100,000 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 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).

 

		Six-Month Period Ended June 2009 Compared to 2008 Increase (Decrease) Due To
		Volume				Rate				Net
Interest income
Loans		$	380			$	(1,524	)		$	(1,144	)
Securities-taxable			455				(692	)			(237	)
Securities-nontaxable			129				(88	)			41
Securities-equities			3				(8	)			(5	)
Federal funds sold			(179	)			(129	)			(308	)
Total interest earning Assets			788				(2,441	)			(1,653	)
Interest expense
Interest bearing demand			—				(37	)			(37	)
Money market accounts			129				(187	)			(58	)
Savings deposits			21				(84	)			(63	)
Time deposits			(179	)			(908	)			(1,087	)
Short-term borrowing			1				(5	)			(4	)
Federal Home Loan Bank
Advances			(38	)			20				(18	)
Total interest bearing Liabilities			(66	)			(1,201	)			(1,267	)
Net change in net interest income		$	854			$	(1,240	)		$	(386	)

 

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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 June 2009 Compared to 2008 Increase (Decrease) Due To
		Volume				Rate				Net
Interest income
Loans		$	366			$	(830	)		$	(464	)
Securities-taxable			749				(890	)			(141	)
Securities-nontaxable			129				(83	)			46
Securities-equities			2				(3	)			(1	)
Federal funds sold			(216	)			88				(128	)
Total interest earning Assets			1,030				(1,718	)			(688	)
Interest expense
Interest bearing demand			—				(16	)			(16	)
Money market accounts			97				(117	)			(20	)
Savings deposits			17				(37	)			(20	)
Time deposits			(103	)			(390	)			(493	)
Short-term borrowing			—				—				—
Federal Home Loan Bank
Advances			(38	)			30				(8	)
Total interest bearing Liabilities			(27	)			(530	)			(557	)
Net change in net interest income		$	1,057			$	(1,188	)		$	(131	)

 

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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 June 30, 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 June 30, 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
April 1 – 30, 2009		99		$	104.35		N/A		N/A
May 1 – 31, 2009		240		$	104.80		N/A		N/A
June 1 – 30, 2009		131		$	103.90		N/A		N/A
Total (1)		470		$	104.45		N/A		N/A

 

(1)	470 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

 

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The following represent the results of matters submitted to a vote of the shareholders at the annual meeting held on April 27, 2009.

Affixing the number of directors at nine for 2009:

 

For		444,540
Abstain		3,460
Absent		171,189

Election of Directors:

The following directors were elected with terms to expire 2012:

 

		For		Withheld
Allan Mast		444,540		174,649
Dean Mullet		444,540		174,649
Luther Proper		444,540		174,649

Other directors not up for election but continuing in office include: Theodore A. Bratton, Max A. Miller, Michael S. Yoder, John W. Baker, Gail E. Patterson, and Kenneth E. Taylor.

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: August 12, 2009		By:		/s/ Luther E. Proper
				Luther E. Proper
				President and Chief Executive Officer
Date: August 12, 2009		By:		/s/ Diane Knowles
				Diane Knowles
				Chief Financial Officer

 

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