- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended September 30, 2011

[ ] 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		(I.R.S. Employer Identification No.)
incorporation or organization)

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). [ X ] 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 November 9, 2011: 613,771

KILLBUCK BANCSHARES, INC.

Index

		Page Number

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):

	Consolidated Balance Sheet as of
	September 30, 2011 and December 31, 2010	3

	Consolidated Statement of Income for the
	nine months ended September 30, 2011 and 2010	4

	Consolidated Statement of Income for the
	three months ended September 30, 2011 and 2010	5

	Consolidated Statement of Changes In Shareholders’ Equity
	for the nine months ended September 30, 2011	6

	Consolidated Statement of Cash Flows for the
	nine months ended September 30, 2011 and 2010	7

	Notes to Unaudited Consolidated Financial Statements	8-23

Item 2.	Management’s Discussion and Analysis of Financial Condition
	and Results of Operations	24-36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37


Item 4.	Controls and Procedures	37


PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity
	Securities and Use of Proceeds	38

Item 3.	Default Upon Senior Securities	38

Item 4.	(Removed and Reserved)	38

Item 5.	Other Information	39

Item 6.	Exhibits	39

SIGNATURES		40

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Killbuck Bancshares, Inc.

CONSOLIDATED BALANCE SHEET

	September 30, 2011			December 31,
	(unaudited)			2010

ASSETS

Cash and cash equivalents:
Cash and amounts due from depository institutions	$	57,554,186		$	61,711,145
Federal funds sold		3,511,000			4,713,000
Total cash and cash equivalents		61,065,186			66,424,145

Investment securities:
Securities available for sale		84,650,985			76,044,672
Securities held to maturity (fair value of $47,181,073 and $40,482,091)		44,384,781			39,332,164
Total investment securities		129,035,766			115,376,836

Loans (net of allowance for loan losses of $2,277,700 and $2,665,607)		221,072,731			205,074,687

Loans held for sale, at lower of cost or market		189,000			320,000
Premises and equipment, net		5,489,371			5,751,540
Accrued interest receivable		1,517,119			1,165,298
Goodwill, net		1,329,249			1,329,249
Other assets		10,494,671			9,628,598
Total assets	$	430,193,093		$	405,070,353

LIABILITIES
Deposits:
Noninterest bearing demand	$	68,138,874		$	63,108,035
Interest bearing demand		31,886,455			28,812,536
Money market		53,742,506			43,906,637
Savings		56,504,196			51,094,094
Time		170,764,472			169,267,955
Total deposits		381,036,503			356,189,257
Short-term borrowings		2,305,000			3,585,000
Federal Home Loan Bank advances		474,418			643,735
Accrued interest and other liabilities		807,398			972,671
Total liabilities		384,623,319			361,390,663

SHAREHOLDERS’ EQUITY

Common stock – No par value: 1,000,000 shares authorized, 718,431 shares issued		8,846,670			8,846,670
Retained earnings		46,031,496			44,841,370
Accumulated other comprehensive income (loss)		543,073			(383,669	)
Treasury stock, at cost (104,560 and 102,486 shares at September 30, 2011 and December 31, 2010, respectively)		(9,851,465	)		(9,624,681	)
Total shareholders’ equity		45,569,774			43,679,690

Total liabilities and shareholders’ equity	$	430,193,093		$	405,070,353

See accompanying notes to the unaudited consolidated financial statements.

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Killbuck Bancshares, Inc.

CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

	Nine Months Ended
	September 30,
	2011		2010

INTEREST INCOME
Interest and fees on loans	$	8,189,541	$	8,601,845
Federal funds sold and other		99,674		71,989
Investment securities:
Taxable		1,418,376		1,434,990
Exempt from federal income tax		1,124,337		1,104,528
Total interest income		10,831,928		11,213,352

INTEREST EXPENSE
Deposits		2,873,756		2,983,019
Short term borrowings		4,943		7,417
Federal Home Loan Bank advances		26,982		45,094
Total interest expense		2,905,681		3,035,530

NET INTEREST INCOME		7,926,247		8,177,822

Provision for loan losses		0		215,182

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,926,247		7,962,640

NONINTEREST INCOME
Service charges on deposit accounts		775,274		851,156
Gain on sale of loans, net		67,556		136,189
Gain on sale of fixed assets		252,598		0
Bank-owned life insurance		161,439		174,304
Recovery on bank-owned life insurance		0		244,000
Other income		135,939		101,170
Total noninterest income		1,392,806		1,506,819

NONINTEREST EXPENSE
Salaries and employee benefits		3,891,189		3,730,454
Occupancy and equipment expense		729,895		720,533
Professional fees		219,035		247,403
Data processing		178,761		154,678
Insurance & bond expense		310,628		336,190
Franchise tax		400,801		396,658
Postage, Express and Freight		166,905		157,166
Impairment loss		0		456,585
Other expenses		891,778		848,380
Total noninterest expense		6,788,992		7,048,047

INCOME BEFORE INCOME TAXES		2,530,061		2,421,412
Income taxes		416,262		256,129

NET INCOME	$	2,113,799	$	2,165,283

Earning per common share	$	3.43	$	3.51

Dividend per share	$	1.50	$	1.50

Weighted Average shares outstanding		615,479		616,706

See accompanying notes to the unaudited consolidated financial statements.

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Killbuck Bancshares, Inc.

CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

	Three Months Ended
	September 30,
	2011		2010

INTEREST INCOME
Interest and fees on loans	$	2,778,685	$	2,840,300
Federal funds sold and other		33,082		28,518
Investment securities:
Taxable		492,216		472,459
Exempt from federal income tax		379,399		384,836
Total interest income		3,683,382		3,726,113

INTEREST EXPENSE
Deposits		932,963		1,018,148
Short term borrowings		1,317		2,396
Federal Home Loan Bank advances		8,069		12,935
Total interest expense		942,349		1,033,479

NET INTEREST INCOME		2,741,033		2,692,634

Provision for loan losses		0		60,000

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		2,741,033		2,632,634

NONINTEREST INCOME
Service charges on deposit accounts		267,867		285,411
Gain on sale of loans, net		30,008		84,258
Gain on sale of fixed assets		252,598		0
Bank-owned life insurance		52,226		57,844
Recovery on bank-owned life insurance		0		0
Other income		49,749		27,464
Total noninterest income		652,448		454,977

NONINTEREST EXPENSE
Salaries and employee benefits		1,296,712		1,358,849
Occupancy and equipment expense		237,612		234,582
Professional fees		69,431		54,163
Data processing		55,332		52,191
Insurance & bond expense		65,154		111,254
Franchise tax		132,450		129,965
Postage, Express and Freight		52,826		48,564
Impairment loss		0		456,585
Other expenses		323,425		307,227
Total noninterest expense		2,232,942		2,753,380

INCOME BEFORE INCOME TAXES		1,160,539		334,231
Income taxes, (benefit)		244,412		(73,188	)

NET INCOME	$	916,127	$	407,419

Earning per common share	$	1.49	$	0.66

Dividend per share	$	.00	$	.00

Weighted Average shares outstanding		614,827		616,706

See accompanying notes to the unaudited consolidated financial statements.

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Killbuck Bancshares, Inc.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2011

						Accumulated Other						Total
	Common		Retained			Comprehensive			Treasury			Shareholders’			Comprehensive
	Stock		Earnings			Income			Stock			Equity			Income

Balance, December 31, 2010	$	8,846,670	$	44,841,370		$	(383,669	)	$	(9,624,681	)	$	43,679,690

Net income				2,113,799									2,113,799		$	2,113,799
Cash dividends paid ($1.50 per share)				(923,673	)								(923,673	)
Other comprehensive income:
Net unrealized gain on securities, net of tax $477,413							926,742						926,742			926,742
Comprehensive income															$	3,040,541
Purchase of treasury stock, at cost (2,074 shares)										(226,784	)		(226,784	)

Balance, September 30, 2011 (Unaudited)	$	8,846,670	$	46,031,496		$	543,073		$	(9,851,465	)	$	45,569,774

See accompanying notes to the unaudited consolidated financial statements.

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Killbuck Bancshares, Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

	Nine Months Ended
	September 30,
	2011			2010
OPERATING ACTIVITIES
Net income	$	2,113,799		$	2,165,283
Adjustments to reconcile net income to net cash provided by Operating activities:
Provision for loan losses		0			215,182
Gain on sale of loans		(67,556	)		(136,189	)
Gain on sale of fixed assets		(252,598	)		0
Provision for depreciation and amortization		335,366			351,308
Origination of loans held for sale		(2,700,600	)		(7,373,245	)
Proceeds from the sale of loans		2,899,156			6,689,934
Proceeds from the sale of fixed assets		333,405			0
Impairment loss		0			456,585
Bank-owned life insurance income		(156,490	)		(418,304	)
Net change in:
Accrued interest and other assets		(38,818	)		48,253
Accrued expenses and other liabilities		(165,271	)		137,741
Net cash provided by operating activities		2,300,393			2,136,548

INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from maturities and repayments		53,070,970			56,378,792
Purchases		(60,273,129	)		(53,697,133	)
Investment securities held to maturity:
Proceeds from maturities and repayments		1,901,322			822,255
Purchases		(7,063,116	)		(6,404,804	)
Net (increase) decrease in loans		(15,998,044	)		347,366
Proceeds from sale of foreclosed assets		0			22,500
Net Purchase of premises and equipment		(44,827	)		(94,610	)
Proceeds from bank-owned life insurance		0			390,111
Purchase of bank-owned life insurance		(1,500,000	)		0
Net cash (used in) investing activities		(29,906,824	)		(2,235,523	)

FINANCING ACTIVITIES
Net increase (decrease) in demand deposits		8,104,758			(11,409,351	)
Net increase in money market and savings deposits		15,245,971			24,896,362
Net increase in time deposits		1,496,517			10,510,843
Net decrease in short term borrowings		(1,280,000	)		(1,750,000	)
Repayments of Federal Home Loan Bank advances		(169,317	)		(470,482	)
Purchase of treasury stock		(226,784	)		0
Dividends paid		(923,673	)		(925,059	)
Net cash provided by financing activities		22,247,472			20,852,313

Net increase (decrease) in cash and cash equivalents		(5,358,959	)		20,753,338
Cash and cash equivalents at beginning of period		66,424,145			45,513,944
Cash and cash equivalents at end of period	$	61,065,186		$	66,267,282

Supplemental Disclosures of Cash Flows Information
Cash Paid During the Period For:
Interest on deposits and borrowings	$	2,936,508		$	3,044,219
Income taxes	$	319,778		$	436,356

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, 2010 and related notes which are included on the Form 10-K (file no. 000-24147).

NOTE 2 – EARNINGS PER SHARE

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

NOTE 3 – COMPREHENSIVE INCOME

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

	Nine Months			Nine Months
	Ended			Ended
	September 30, 2011			September 30, 2010

Net income	$	2,113,799		$	2,165,283
Other comprehensive income:
Net unrealized gain on securities		1,404,155			700,744
Tax effect		(477,413	)		(238,253	)
Total comprehensive income	$	3,040,541		$	2,627,774

	Three Months			Three Months
	Ended			Ended
	September 30, 2011			September 30, 2010

Net income	$	916,127		$	407,419
Other comprehensive income:
Net unrealized gain on securities		16			275,979
Tax effect		(6	)		(93,833	)
Total comprehensive income	$	916,137		$	589,565

-8-

Killbuck Bancshares, Inc .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 4 – FAIR VALUE MEASUREMENTS

The Company utilizes 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 under the literature are as follows:

Level I:

Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II:		Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level III:		Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The following table presents the assets reported on the consolidated statements of financial condition at their fair value as of September 30, 2011 and December 31, 2010, by level within the fair value hierarchy. As required by the authoritative accounting guidance, financial assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	September 30, 2011
	Level I			Level II			Level III			Total
	(In thousands)

Assets measured on a recurring basis:
Securities available for sale :
U.S. Government and Agency Obligations		$	--		$	84,155		$	--		$	84,155
Mutual Funds			--			496			--			496

Assets measured on a nonrecurring basis:
Impaired loans			--			--		$	633		$	633

	December 31, 2010
	Level I			Level II			Level III			Total
	(In thousands)

Assets measured on a recurring basis:
Securities available for sale :
U.S. Government and Agency Obligations		$	--		$	75,486		$	--		$	75,486
Mutual Funds			--			559			--			559

Assets measured on a nonrecurring basis:
Impaired loans			--			--		$	1,234		$	1,234

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Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 5 - FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values at September 30, 2011 and December 31, 2010 are as follows:

	2011				2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In thousands)
Financial assets:
Cash and due from depository institutions	$	57,554	$	57,554	$	61,711	$	61,711
Federal funds sold		3,511		3,511		4,713		4,713
Securities available for sale		84,651		84,651		76,045		76,045
Securities held to maturity		44,385		47,181		39,332		40,482
Net loans		221,073		232,961		205,075		213,729
Loans held for sale		189		189		320		320
Accrued interest receivable		1,517		1,517		1,165		1,165
Regulatory stock		1,884		1,884		1,884		1,884
Bank-owned life insurance (“BOLI”)		7,384		7,384		5,727		5,727

Financial liabilities:
Deposits	$	381,037	$	385,294	$	356,189	$	359,687
Short-term borrowings		2,305		2,305		3,585		3,585
Federal Home Loan Bank advances		474		570		644		755
Accrued interest payable		154		154		185		185

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 Depository Institutions, 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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Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

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 the period presented. 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.

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.

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Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 6 – INVESTMENT SECURITIES

The amortized cost of securities and their estimated fair values are as follows:

Securities Available for Sale

	September 30, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

Obligations of U.S. Government Agencies and Corporations	$	83,284,732	$	905,264	$	(35,275	)	$	84,154,721

Mutual funds		543,415		--		(47,151	)		496,264

Total	$	83,828,147	$	905,264	$	(82,426	)	$	84,650,985


	December 31, 2010
			Gross		Gross
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value

Obligations of U.S. Government Agencies and Corporations	$	76,082,573	$	414,509	$	(1,011,398	)	$	75,485,684

Mutual funds		543,415		15,573		--			558,988

Total	$	76,625,988	$	430,082	$	(1,011,398	)	$	76,044,672

Securities Held to Maturity

	September 30, 2011
			Gross		Gross
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value

Obligations of States and Political Subdivisions	$	44,384,781	$	2,811,090	$	(14,798	)	$	47,181,073

Total	$	44,384,781	$	2,811,090	$	(14,798	)	$	47,181,073


		December 31, 2010
			Gross		Gross
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value

Obligations of States and Political Subdivisions	$	39,332,164	$	1,368,278	$	(218,351	)	$	40,482,091

Total	$	39,332,164	$	1,368,278	$	(218,351	)	$	40,482,091

-12-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 6 – INVESTMENT SECURITIES-CONTINUED

The following table shows the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time, that the individual securities have been in a continuous unrealized loss position, at September 30, 2011and December 31, 2010. As of September 30, 2011 there were a total of eight securities in an unrealized loss position.

	September 30, 2011

	Less Than 12 Months							12 Months or Greater
			Gross			Number of				Gross		Number of				Gross
	Fair		Unrealized			Impaired		Fair		Unrealized		Impaired		Fair		Unrealized
	Value		Loss			Securities		Value		Loss		Securities		Value		Loss

U. S. Government Agencies and Corporations	$	14,964,725	$	(35,275	)		3		-		-		-	$	14,964,725	$	(35,275	)

Obligations of States and Political Subdivisions		1,144,135		(14,798	)		4		-		-		-		1,144,135		(14,798	)

Total temporarily impaired debt securities		16,108,860		(50,073	)		7		-		-		-		16,108,860		(50,073	)

Mutual Funds		496,264		(47,151	)		1								496,264		(47,151	)

Total temporarily impaired equity securities		496,264		(47,151	)		1								496,264		(47,151	)

Total of all securities	$	16,605,124	$	(97,224	)		8		-		-		-	$	16,605,124	$	(97,224	)

	December 31, 2010

	Less Than 12 Months							12 Months or Greater
			Gross			Number of				Gross		Number of				Gross
	Fair		Unrealized			Impaired		Fair		Unrealized		Impaired		Fair		Unrealized
	Value		Loss			Securities		Value		Loss		Securities		Value		Loss

U. S. Government Agencies and Corporations	$	33,935,490	$	(1,011,398	)		18		-		-		-	$	33,935,490	$	(1,011,398	)

Obligations of States and Political Subdivisions		6,388,398		(218,351	)		26		-		-		-		6,388,398		(218,351	)

Total temporarily impaired debt securities		40,323,888		(1,229,749	)		44		-		-		-		40,323,888		(1,229,749	)

Total of all securities	$	40,323,888	$	(1,229,749	)		44		-		-		-	$	40,323,888	$	(1,229,749	)

-13-

K illbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 6 – INVESTMENT SECURITIES-CONTINUED

The amortized cost and fair values of debt securities at September 30, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.

	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	2,901,398	$	2,928,129	$	3,185,028	$	3,204,385

Due after one year through five years		38,830,314		39,412,303		12,766,397		13,402,705

Due after five through ten years		37,999,898		38,212,722		26,276,878		28,218,064

Due after ten years		3,553,122		3,601,567		2,156,478		2,355,919

	$	83,284,732	$	84,154,721	$	44,384,781	$	47,181,073

At least quarterly the corporation conducts a comprehensive security level impairment assessment on all securities in an unrealized loss position to determine if other than temporary impairment (OTTI) exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Under the current OTTI accounting model for debt securities, an OTTI loss must be recognized for a debt security in an unrealized loss position if the Corporation intends to sell the security or it is more likely than not that the corporation will be required to sell the security before recovery of its amortized cost basis. In this situation, the amount of loss recognized in income is equal to the difference between fair value and the amortized cost basis of the security. Even it the Corporation does not expect to sell the security, the Corporation must evaluate the expected cash flows to be received to determine if a credit loss has occurred. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized in income. The portion of the unrealized loss relating to other factors, such as liquidity conditions in the market or changes in the market interest rates, is recorded in other comprehensive income. Equity securities are also evaluated to determine whether the unrealized loss is expected to be recoverable based on whether evidence exists to support a realizable value equal to or greater than the amortized cost basis. If it is probable that the Corporation will not recover the amortized cost basis, taking into consideration the estimated recovery period and its ability to hold the equity security until recovery, OTTI is recognized. The security level assessment is performed on each security, regardless of the classification of the security as available for sale or held to maturity. The assessments are based on the nature of the securities, the financial condition of the issuer, the extent and duration of the securities, the extent and duration of the loss and whether Management intends to sell or it is more likely than not that it will be required to sell a security before recovery of its amortized cost basis, which may be maturity. For those securities for which the assessment shows the Corporation will recover the entire cost basis, Management does not intend to sell these securities and it is more likely than not that the Corporation will not be required to sell them before the anticipated recovery of the amortized cost basis, the gross unrealized losses are recognized in other comprehensive income, net of tax.

-14-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 7 – LOANS

Major classifications of loans are summarized as follows:

	September 30, 2011			December 31, 2010

Real estate – residential	$	95,445,517		$	87,505,717
Real estate – farm		10,729,243			9,925,340
Real estate – commercial		57,495,111			51,310,626
Real estate – construction		12,365,890			10,406,156
Commercial and other loans		41,636,656			41,931,142
Consumer and credit card loans		5,889,433			6,866,408
		223,561,850			207,945,389
Less allowance for loan losses		(2,277,700	)		(2,665,607	)
Less net deferred loan origination fees		(211,419	)		(205,095	)
Loans, net	$	221,072,731		$	205,074,687

	September 30, 2011
	Loans Individually		Loans Collectively
	Evaluated for		Evaluated for
	Impairment		Impairment		Total


Real estate – residential and farm	$	--	$	106,174,760	$	106,174,760
Real estate – commercial and construction		545,040		69,315,961		69,861,001
Commercial and other loans		248,166		41,388,490		41,636,656
Consumer and credit card loans		--		5,889,433		5,889,433
Total	$	793,206	$	222,768,644	$	223,561,850

	December 31, 2010
	Loans Individually		Loans Collectively
	Evaluated for		Evaluated for
	Impairment		Impairment		Total


Real estate – residential and farm	$	--	$	97,431,057	$	97,431,057
Real estate – commercial and construction		957,590		60,759,192		61,716,782
Commercial and other loans		639,218		41,291,924		41,931,142
Consumer and credit card loans		--		6,866,408		6,866,408
Total	$	1,596,808	$	206,348,581	$	207,945,389

Loans held for sale at September 30, 2011 and December 31, 2010 were $189,000 and $320,000, respectively and were carried at cost. Real estate loans serviced for the Federal Home Loan Mortgage Corporation (FHLMC), which are not included in the consolidated balance sheet, totaled $45.6 million and $47.8 million at September 30, 2011 and December 31, 2010, respectively. The Bank is currently collecting a fee of .25% for servicing these loans.

The Company’s primary business activity is with customers located within its local trade area. Residential, commercial, personal, and agricultural loans are granted. The Company also selectively funds loans originated outside of its trade area provided such loans meet its credit policy guidelines. Although the Company has a diversified loan portfolio at September 30, 2011 and December 31, 2010, loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate trade area.

-15-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 7 – LOANS – CONTINUED

The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The residential real estate loan segment is further disaggregated into two classes: amortizing term loans, which are primarily first liens, and home equity lines of credit, which are generally second liens. The commercial real estate (“CRE”) loan segment is further disaggregated into two classes. Non-owner occupied CRE loans, which include loans secured by non-owner occupied nonfarm nonresidential properties, generally have a greater risk profile than all other CRE loans, which include loans secured by multifamily structures and owner-occupied commercial structures. The commercial and other loans segment consists of loans made for the purpose of financing the activities of commercial customers. The consumer loan segment consists primarily of installment loans (direct and indirect) and credit card loans.

Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than $250,000 or is part of a relationship that is greater than $500,000, and if the loan either is in nonaccrual status, or is risk rated Substandard and is greater than 60 days past due. Loans are considered to be impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Corporation does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of larger relationship that is impaired, or are classified as a troubled debt restructuring agreement.

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by loan basis, with management primarily utilizing the fair value of collateral method. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Corporation’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

-16-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 7 – LOANS – CONTINUED

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of September 30, 2011 and December 31, 2010:

					Impaired
					Loans with No
	Impaired Loans with				Specific
September 30, 2011	Specific Allowance				Allowance		Total Impaired Loans
									Unpaid
	Recorded		Related		Recorded		Recorded		Principal
	Investment		Allowance		Investment		Investment		Balance

Real estate – commercial and construction		--		--	$	545,040	$	545,040	$	545,040
Commercial and other loans	$	248,166	$	160,004		--		248,166		248,166
Total Impaired Loans	$	248,166	$	160,004	$	545,040	$	793,206	$	793,206

					Impaired
					Loans with No
	Impaired Loans with				Specific
December 31, 2010	Specific Allowance				Allowance		Total Impaired Loans
									Unpaid
	Recorded		Related		Recorded		Recorded		Principal
	Investment		Allowance		Investment		Investment		Balance

Real estate – commercial and construction	$	957,590	$	131,765		--	$	957,590	$	957,590
Commercial and other loans		639,218		231,491		--		639,218		639,218
Total Impaired Loans	$	1,596,808	$	363,256		--	$	1,596,808	$	1,596,808

The following table presents the average recorded investment in impaired loans and related interest income recognized for the nine months ended September 30, 2011 and for the year 2010:

	September 30, 2011		December 31, 2010

Average Investment in impaired loans:
Real estate – commercial	$	751,315	$	969,209
Commercial loans		408,460		543,367
Interest income recognized on an accrual basis on impaired loans:
Real estate – commercial	$	0	$	71,163
Commercial loans		25,846		33,389
Interest income recognized on a cash basis on impaired loans		0		0

-17-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 7 – LOANS – CONTINUED

Total nonaccrual loans and the related interest for the nine months ended September 30, 2011 and for the year ended December 31, 2010 are as follows.

	2011		2010
Principal outstanding	$	618,342	$	107,402
Contractual interest due	$	36,553	$	3,524
Interest income recognized	$	--	$	--

The following table presents loans that are troubled debt restructurings as of September 30, 2011 and December 31, 2010:

									Troubled Debt
									Restructurings that
	Troubled Debt				New Troubled Debt				Subsequently
	Restructurings at				Restructurings in				Defaulted during Prior
	Period End				YTD Period				Twelve Months
	Number of		Recorded		Number of		Recorded		Number of		Recorded
September 30, 2011	Contracts		Investment		Contracts		Investment		Contracts		Investment

Real estate – residential and farm		--		--		--		--		--		--
Real estate – commercial and construction		--		--		--		--		--		--
Commercial and other loans		4	$	492,712		1	$	244,546		--		--
Consumer and credit card loans		1		1,343		--		--		--		--
Total		5	$	494,055		1	$	244,546		--		--

									Troubled Debt
									Restructurings that
	Troubled Debt				New Troubled Debt				Subsequently
	Restructurings at				Restructurings in				Defaulted during Prior
	Period End				YTD Period				Twelve Months
	Number of		Recorded		Number of		Recorded		Number of		Recorded
December 31, 2010	Contracts		Investment		Contracts		Investment		Contracts		Investment

Real estate – residential and farm		--		--		--		--		--		--
Real estate – commercial and construction		--		--		--		--		--		--
Commercial and other loans		3	$	283,205		3	$	292,482		--		--
Consumer and credit card loans		--		--		--		--		--		--
Total		3	$	283,205		3	$	292,482		--		--

Management uses an eight point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first four categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.

-18-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 7 – LOANS – CONTINUED

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, delinquency, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Credit Department performs an annual review of all commercial relationships $250,000 or greater. Confirmation of the appropriate risk grade is included in the review on an ongoing basis. The Bank has an experienced Loan Review Department that continually reviews and assesses loans within the portfolio. The Bank engages an external consultant to conduct loan reviews on at least an annual basis. Generally, the external consultant reviews commercial relationships greater than $250,000 and all criticized relationships. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of September 30, 2011 and December 31, 2010. Included in the Pass category are loans that have not been individually reviewed and graded on an annual basis.

			Special
September 30, 2011	Pass		Mention		Substandard		Doubtful		Total

Real estate – residential and farm	$	103,461,898	$	1,208,151	$	1,504,711		--	$	106,174,760
Real estate – commercial and construction		62,791,614		3,274,983		3,794,404		--		69,861,001
Commercial and other loans		39,974,391		435,850		1,099,318	$	127,097		41,636,656
Consumer and credit card loans		5,815,718		45,628		28,087		--		5,889,433
Total	$	212,043,621	$	4,964,612	$	6,426,520	$	127,097	$	223,561,850

			Special
December 31, 2010	Pass		Mention		Substandard		Doubtful		Total

Real estate – residential and farm	$	94,542,356	$	1,392,351	$	1,496,350		--	$	97,431,057
Real estate – commercial and construction		50,610,705		6,559,073		4,547,004		--		61,716,782
Commercial and other loans		39,304,012		688,352		1,803,409	$	135,369		41,931,142
Consumer and credit card loans		6,808,388		42,215		15,805		--		6,866,408
Total	$	191,265,461	$	8,681,991	$	7,862,568	$	135,369	$	207,945,389

-19-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 7 – LOANS – CONTINUED

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of September 30, 2011 and December 31, 2010:

			30-59 Days		60-89 Days		Greater Than		Total		Non-
September 30, 2011	Current		Past Due		Past Due		89 Days		Past Due		Accrual		Total Loans

Real estate – residential and farm	$	105,707,046	$	404,665	$	2,144		--	$	406,809	$	60,905	$	106,174,760
Real estate – commercial and construction		69,226,212		89,749		--		--		89,749		545,040		69,861,001
Commercial and other loans		41,321,888		253,043		61,725		--		314,768		--		41,636,656
Consumer and credit card loans		5,874,691		2,345		--		--		2,345		12,397		5,889,433
Total	$	222,129,837	$	749,802	$	63,869		--	$	813,671	$	618,342	$	223,561,850

			30-59 Days		60-89 Days		Greater Than		Total		Non-
December 31, 2010	Current		Past Due		Past Due		89 Days		Past Due		Accrual		Total Loans

Real estate – residential and farm	$	97,253,887	$	53,829	$	15,939		--	$	69,768	$	107,402	$	97,431,057
Real estate – commercial and construction		60,618,420		1,098,362		--		--		1,098,362		--		61,716,782
Commercial and other loans		41,734,675		178,788		17,679		--		196,467		--		41,931,142
Consumer and credit card loans		6,858,090		5,585		1,055	$	1,678		8,318		--		6,866,408
Total	$	206,465,072	$	1,336,564	$	34,673	$	1,678	$	1,372,915	$	107,402	$	207,945,389

NOTE 8 – ALLOWANCE FOR LOAN LOSSES

An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.

The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the Bank’s ALL.

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors.

The classes described above provide the starting point for the ALL analysis. Management tracks the historical net charge-off activity for each class. A historical charge-off factor is calculated for each class utilizing a rolling 12 quarters.

-20-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 8 – ALLOWANCE FOR LOAN LOSSES – CONTINUED

“Pass” rated credits are segregated from “Criticized” credits for the application of qualitative factors. Management has identified a number of qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

An analysis of the change in the allowance for loan losses for the nine months ended September 30, 2011 and the year ended December 31, 2010 follows:

	2011			2010
Balance, Beginning of the period	$	2,665,607		$	2,441,169
Add:
Provision charged to operations		0			215,182
Loan recoveries		20,083			69,651
Less: Loans charged off		(407,990	)		(60,395	)
Balance, End of the period	$	2,277,700		$	2,665,607

The following table summarizes the primary segments of the ALL, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of September 30, 2011. Activity in the allowance is presented for the nine months ended September 30, 2011:

	Real Estate Residential			Real Estate Commercial			Commercial and			Consumer and
September 30, 2011	and Farm			and Construction			Other Loans			Credit Cards			Total

Allowance for Loan Losses:
Beginning Balance	$	671,646		$	985,042		$	954,526		$	54,393		$	2,665,607
Charge-offs		(11,220	)		(392,831	)		--			(3,939	)		(407,990	)
Recoveries		--			2,700			15,700			1,683			20,083
Provision		13,660			23,715			(37,375	)		--			--
Ending Balance	$	674,086		$	618,626		$	932,851		$	52,137		$	2,277,700

Ending Balance: individually evaluated for impairment	$	0		$	0		$	160,004		$	0		$	160,004

Ending Balance: collectively evaluated for impairment	$	674,086		$	618,626		$	772,847		$	52,137		$	2,117,696

The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the breakdown of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.

-21-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 9 – RECENT ACCOUNTING PRONOUNCEMENTS

In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring . The amendments in this Update provide additional guidance or clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The amendments in this Update are effective for the first interim or annual reporting period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company has provided the necessary disclosures in Note 7.

In April 2011, the FASB issued ASU 2011-03, Reconsideration of Effective Control for Repurchase Agreements . The main objective in developing this Update is to improve the accounting for repurchase agreements (repos) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments in this Update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this Update apply to all entities, both public and nonpublic. The amendments affect all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The guidance in this Update is effective for the first interim or annual period beginning on or after December 15, 2011 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs . The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011. Early application by public entities is not permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.

-22-

Killbuck Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS - CONTINUED

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income . The amendments in this Update improve the comparability, clarity, consistency, and transparency of financial reporting and increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS, the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. All entities that report items of comprehensive income, in any period presented, will be affected by the changes in this Update. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. The amendments in this Update should be applied retrospectively, and early adoption is permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.

In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other Topics (Topic 350), Testing Goodwill for Impairment . The objective of this update is to simplify how entities, both public and nonpublic, test goodwill for impairment. The amendments in the Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this Update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this Update apply to all entities, both public and nonpublic, that have goodwill reported in their financial statements and are effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. This ASU is not expected to have a significant impact on the Company’s financial statements.

In September 2011, the FASB issued ASU 2011-09, Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80). The amendments in this Update will require additional disclosures about an employer’s participation in a multiemployer pension plan to enable users of financial statements to assess the potential cash flow implications relating to an employer’s participation in multiemployer pension plans. The disclosures also will indicate the financial health of all of the significant plans in which the employer participates and assist a financial statement user to access additional information that is available outside the financial statements. For public entities, the amendments in this Update are effective for annual periods for fiscal years ending after December 15, 2011, with early adoption permitted. For nonpublic entities, the amendments are effective for annual periods of fiscal years ending after December 15, 2012, with early adoption permitted. The amendments should be applied retrospectively for all prior periods presented. This ASU is not expected to have a significant impact on the Company’s financial statements.

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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 (“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, 2010. 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 involves 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, 2010.

Goodwill and Other Intangible Assets - As discussed in Note 6 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, 2010; 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 13 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, 2010.

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Financial Condition

Total assets at September 30, 2011 were $430.2 million compared to $405.1 million at December 31, 2010, an increase of $25.1 million, or 6.2%.

The asset growth during the first nine months of 2011 generally reflects a $24.8 million, or 7.0% increase in total deposits. The deposit growth is generally reflective of the Company’s continuing marketing efforts directed at profitable organic growth.

Cash and cash equivalents decreased by $5.4 million or 8.1% from December 31, 2010, to September 30, 2011, with cash and amounts due from depository institutions decreasing $4.2 million. The Company has maintained above normal levels of cash and cash equivalents due to the economic uncertainty in the environment.

Investment securities available for sale increased by $8.6 million or 11.3% from December 31, 2010 to September 30, 2011 due to an increase in suitable securities available to purchase for the portfolio. Investments held to maturity increased $5.1 million or 12.8% due to some attractive municipal securities available for the portfolio.

Net loans increased by $16.0 million or 7.8% from December 31, 2010 to September 30, 2011. An increase of $16.9 million occurred in the real estate loan category, which is attributable to increases in residential real estate lending of $7.9 million, an increase in farm lending of $0.8 million, an increase of $6.2 million in commercial real estate lending and an increase of $2.0 million in construction loan activity. The Company has seen increased loan demand in the real estate loan categories, offset by decreases in demand for commercial and consumer loan products. Commercial and other loan balances decreased by $0.3 million and consumer loan balances decreased by $1.0 million.

The Company’s allowance for loan losses at September 30, 2011 totaled $2.3 million, or 1.02% of total loans, as compared to $2.7 million, or 1.28% of total loans at December 31, 2010.

The allowance for loan losses is management’s estimate of the amount of probable credit losses in the portfolio. The Company determines the allowance for loan losses based upon an ongoing evaluation. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of cash flows expected to be received on impaired loans that may be susceptible to significant change. Increases to the allowance for loan losses are made by charges to the provision for loan losses. Loans deemed uncollectible are charged against the allowance for loan losses. Recoveries of previously charged-off amounts are credited to the allowance for loan losses.

The Company’s allowance for loan losses is the accumulation of various components calculated based upon independent methodologies. All components of the allowance for loan losses represent an estimation performed according to either Financial Accounting Standards Board Accounting Standards Codification Topic 450-Contingencies, or Topic 310-Receivables. Management’s estimate of each allowance component is based on certain observable data that management believes is the most reflective of the underlying loan losses being estimated. Changes in the amount of each component of the allowance for loan losses are directionally consistent with changes in the observable data and corresponding analyses. Some of the components that management factors in are current economic conditions, loan growth assumptions, credit concentrations, and levels of nonperforming loans.

A key element of the methodology for determining the allowance for loan losses is the Company’s credit-risk-evaluation process, which includes credit-risk grading of individual commercial loans. Loans are assigned credit-risk grades based on an internal assessment of conditions that affect a borrower’s ability to meet its contractual obligation under the loan agreement. The assessment process includes reviewing a borrower’s current financial information, historical payment experience, credit documentation, public information, and other information specific to each individual borrower. Certain commercial loans are reviewed on an annual or rotational basis or as management becomes aware of information affecting a borrower’s ability to fulfill its obligation.

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Total deposits at September 30, 2011 were $381.0 million compared to $356.2 million at December 31, 2010. Demand accounts increased $8.1 million, while money market accounts, savings accounts and time deposits accounts increased $9.8 million, $5.4 million and $1.5 million 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 increases are attributable to normal fluctuations due to customer usage.

Federal Home Loan Bank advances decreased $169,000 due to maturities and scheduled repayments, and short-term borrowings decreased $1.3 million at September 30, 2011 from December 31, 2010.

Shareholders’ Equity increased by $1.9 million or 4.3%, which was mainly due to earnings of $2.1 million plus an increase of $0.9 million of net unrealized gain on securities included in other comprehensive income for the first nine months of 2011, decreased by dividends paid totaling $0.9 million and $227,000 in treasury stock purchases. Management monitors risk-based capital and leveraged capital ratios in order to assess compliance of the regulatory guidelines. At September 30, 2011, the total capital ratio was 18.36%; the Tier I capital ratio was 17.45%, and the leverage ratio was 10.27%, compared to regulatory capital requirements of 8.0%, 4.0% and 4.0% respectively. These ratios are well in excess of regulatory capital requirements.

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RESULTS OF OPERATIONS

Comparison of the Nine Months Ended September 30, 2011 and 2010

Net income for the nine-month period ended September 30, 2011, was $2,114,000, a decrease of $51,000 or 2.4% from the $2,165,000 reported at September 30, 2010.

Total interest income of approximately $10,832,000 for the nine-month period ended September 30, 2011, compares to $11,213,000 for the same period in 2010, a decrease of $381,000 or 3.4%. The decrease in total interest income is primarily attributable to a decrease in interest and fees on loans due primarily to a decrease in the average yield on the underlying balances. See “Average Balance Sheet” for the nine-month periods ended September 30, 2011 and 2010. The yield on loans decreased to 5.09% for the first nine months of 2011 compared to 5.45% for the first nine months of 2010. Average loan balances were $214,401,000 for the first nine months of 2011 compared to $210,465,000 for the first nine months of 2010. The interest on investment securities of $2,543,000 for 2011 compares to $2,540,000 for 2010. The slight increase in investment income is primarily attributable to an increase in volume. Average investment balances were $120,036,000 compared to $102,138,000 and the yields were 2.82% compared to 3.32% for the first nine months of 2011 and 2010 respectively. The interest on Federal Funds decreased due to a decrease in yield from 0.13% to 0.08% and a decrease in average balances from $6,976,000 to 5,265,000. The interest on balances held at the Federal Reserve Bank increased $32,000 due to an increase in average volume. The average balance outstanding in Due from Federal Reserve Bank was $53,831,000 compared to $36,340,000 for the first nine months of 2011 and 2010 respectively. The yield on the excess liquidity in Due from Federal Reserve Bank remained stable at 0.24% for 2010 and 2011.

Total interest expense of $2,906,000 for the nine-month period ending September 30, 2011 represents a decrease of $130,000 from the $3,036,000 reported for the same nine-month period in 2010. The decrease in interest expense on deposits of $109,000 is due mainly to a decrease in the average rate paid on Time deposits. The cost of Time deposits was 1.95% compared to 2.18% for this nine-month period of 2011 and 2010, respectively. The cost on interest bearing liabilities was 1.25%, compared to 1.46% for the nine-month periods of 2011 and 2010 respectively. Average interest-bearing liabilities were $309,632,000 for the first nine months of 2011 compared to $278,111,000 for the first nine months of 2010. See “Average Balance Sheet” for the nine-month periods ended September 30, 2011 and 2010.

Net interest income of $7,926,000 for the nine months ended September 30, 2011, compares to $8,178,000 for the same nine-month period in 2010, a decrease of $252,000 or 3.1%. The foregoing factors culminated in the Company’s attainment of an interest rate spread of 2.42% and a net yield on earning assets of 2.69% in 2011, compared to 2.74% and 3.06% respectively, in 2010. Management believes the Company’s reduction in spread and margin in 2011 primarily stems from the need to carry higher levels of liquidity in the current environment, and does not represent a material adverse trend. The net interest margin is expected to stabilize but remain low.

The provision for loan losses was $0 for the first nine months of 2011, as compared to $215,000 for the same nine-month period in 2010. The decreased loss provision is attributable to management’s analysis of the allowance for loan losses. As stated previously, the Company maintains the allowance at a level commensurate with the credit risks inherent in the portfolio.

Total non-interest income for the nine-month period ended September 30, 2011, of $1,393,000 compares to $1,507,000 for the same nine-month period in 2010, a decrease of $114,000 or 7.6%. Service charges on deposit accounts decreased $76,000 due to a decrease in non-sufficient funds and overdraft fees. Gains on sale of loans decreased $69,000 primarily due to a decrease in refinancing. The gain on sale of fixed assets of $253,000 in 2011 represents the gain on the sale of a vacant branch facility. Recovery on bank owned life insurance (BOLI) income decreased $244,000 in 2011 compared to 2010.

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Total non-interest expense of $6,789,000 for the nine months ended September 30, 2011, compares to $7,048,000 for the same nine-month period in 2010. This represents a decrease of $259,000 or 3.7%. Salary and employee benefits increased approximately $161,000 due to normal increases in salaries and employee benefits. An impairment loss of $457,000 was recognized during the third quarter of 2010 on a mutual fund owned by the Company. The non-publicly traded mutual fund is comprised solely of community and regional financial institution stocks. The Company reviews its position in all securities quarterly and determined that, at September 30, 2010, the decline in fair value on the mutual fund should be recognized as other than temporary impairment. The changes in the remaining expense accounts were attributable to increases/decreases in items that are normal and recurring in nature.

Income tax expense increased to $416,000 for the nine months ended September 30, 2011, representing a $160,000, or 62.5% increase from the $256,000 of income tax expense recorded in 2010. The increase is primarily attributable to lower levels of tax-exempt income in 2011(including bank-owned life insurance). The Company’s effective tax rate was 16.5% in 2011, as compared to 10.6% in 2010. The principal difference between the Company’s effective tax rate in 2011 and 2010 and the 34% statutory tax rate in effect for both years resulted from the beneficial effects of tax-exempt income.

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RESULTS OF OPERATIONS

Comparison of the Three Months Ended September 30, 2011 and 2010

Net income for the three-month period ended September 30, 2011, was $916,000, an increase of $509,000 or 124.9% from the $407,000 reported at September 30, 2010.

Total interest income of approximately $3,683,000 for the three-month period ended September 30, 2011, compares to $3,726,000 for the same period in 2010, a decrease of $43,000 or 1.2%. The decrease in total interest income is primarily attributable to a decrease in interest and fees on loans due primarily to a decrease in the average yield on the underlying balances. See “Average Balance Sheet” for the three-month periods ended September 30, 2011 and 2010. Interest and fees on loans decreased $62,000 or 2.2% for the three-month period ended September 30, 2011 compared to the same period for 2010. The yield on loans decreased to 5.07% for the three-month period ended September 30, 2011 compared to 5.42% for the three-month period ended September 30, 2010. Average loan balances were $219,277,000 compared to $209,613,000 for this three-month period of 2011 and 2010, respectively. The interest on investment securities of $872,000 increased $14,000 or 1.7% for the three-month periods ended September 30, 2011 compared to the same period in 2010. The average balances of investment securities were $122,628,000 for 2011 compared to $106,090,000 for 2010 and the yield was 2.84% compared to 3.23% for this three-month period of 2011 and 2010 respectively. See “Average Balance Sheet” for the three-month periods ended September 30, 2011 and 2010.

Total interest expense of $942,000 for the three-month period ending September 30, 2011, represents a decrease of $91,000 from the $1,033,000 reported for the same three-month period in 2010. The decrease in interest expense on deposits of $85,000 is due mainly to the decreases in the average rate paid on the underlying balances of the interest bearing liabilities, specifically the Time deposits. The cost of Time deposits was 1.90% compared to 2.17% for this three-month period of 2011 and 2010, respectively and the cost of interest bearing liabilities was 1.20% compared to 1.43% for this three-month period of 2011 and 2010 respectively. The average Time deposits were $171,277,000 for this three-month period of 2011 compared to $161,948,000 for the same three months of 2010. Average interest-bearing liabilities were $315,141,000 for this three-month period of 2011 compared to $289,015,000 for the same three months of 2010. See “Average Balance Sheet” for the three-month periods ended September 30, 2011 and 2010.

Net interest income of $2,741,000 for the three months ended September 30, 2011, compares to $2,693,000 for the same three-month period in 2010, an increase of $48,000 or 1.8%. The foregoing factors culminated in the Company’s attainment of an interest rate spread of 2.46% and a net yield on earning assets of 2.72% in 2011, compared to 2.63% and 2.93% respectively, in 2010.

The provision for loan losses was $0 for the three-month period ended September 30, 2011, as compared to $60,000 for the same three-month period in 2010. The decreased loss provision is attributable to management’s analysis of the allowance for loan losses. As stated previously, the Company maintains the allowance at a level commensurate with the credit risks inherent in the portfolio.

Total non-interest income for the three-month period ended September 30, 2011, of $652,000 compares to $455,000 for the same three-month period in 2010, an increase of $197,000 or 43.3%. Service charges on deposit accounts decreased $18,000 due to a decrease in non-sufficient funds and overdraft fees. Gain on sale of loans decreased $54,000 primarily due to a decrease in refinancing. The gain on sale of fixed assets of $253,000 in 2011 represents the gain on the sale of a vacant branch facility. The changes in the remaining income accounts were attributable to increases/decreases in items that are normal and recurring in nature.

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Total non-interest expense of $2,233,000 for the three months ended September 30, 2011, compares to $2,753,000 for the same three-month period in 2010. This represents a decrease of $520,000 or 18.9%. Salary and employee benefits decreased $62,000 or 4.6% due to a reduction in salary expense, offset by higher employee benefits. Insurance and bond expense decreased $46,000 or 41.4% due to a reduction in FDIC assessments. An impairment loss of $457,000 was recognized during the third quarter of 2010 on a mutual fund owned by the Company. The non-publicly traded mutual fund is comprised solely of community and regional financial institution stocks. The Company reviews its position in all securities quarterly and determined that, at September 30, 2010, the decline in fair value on the mutual fund should be recognized as other than temporary impairment. The changes in the remaining expense accounts were attributable to increases/decreases in items that are normal and recurring in nature.

Income tax expense (benefit) increased to $244,000 for the three months ended September 30, 2011, representing a $317,000 increase from the $(73,000) of income tax benefit recorded in 2010. The increase is primarily attributable to the a higher level of pre-tax income in 2011.

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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 $61.1 million at September 30, 2011. These assets provide the primary source of liquidity for the Company. In addition, management has designated a portion of the investment portfolio, $84.7 million as available for sale and has an available unused line of credit of $38.2 million with the Federal Home Loan Bank of Cincinnati to provide additional sources of liquidity at September 30, 2011. As of September 30, 2011, the Company had commitments to fund loans of approximately $3.5 million and unused lines of credit totaling $53.4 million.

Cash was provided during the nine month period ended September 30, 2011, mainly from operating activities of $2.3 million, the net increase in deposits of $24.8 million, and the maturities and repayments of investment securities of $55.0 million. Cash was used during the nine month period ended September 30, 2011, mainly for the purchase of investment securities of $67.3 million, to fund loan growth of $16.0 million and to reduce $1.4 million in Federal Home Loan Bank advances and short-term borrowings. In addition, $924,000 was used to pay dividends to shareholders. Cash and cash equivalents totaled $61.1 million at September 30, 2011, a decrease of $5.3 million from $66.4 million at December 31, 2010.

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

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Risk Elements

The table below presents information concerning nonperforming assets including nonaccrual loans, renegotiated loans, loans 90 days or more past due, other real estate loans and repossessed assets at September 30, 2011, and December 31, 2010. 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 Bank President and the loan officers to determine whether they will be classified as nonperforming. These officers review various factors, which include, but are not limited to, the timing of the maturity of the loan in relation to the ability to collect, whether the loan is deemed to be well secured, whether the loan is in the process of collection, and the favorable results of the analysis of customer financial data. A nonperforming loan will only be re-classified as a performing loan when stringent criteria have been met. At the time the accrual of interest is discontinued, future income is recognized only when cash is received or the loan has been returned to performing loan status. Renegotiated loans are those loans which terms have been renegotiated to provide a reduction or deferral of principal or interest as of result of the deterioration of the borrower.

	September 30,			December 31,
	2011			2010
	(dollars in thousands)

Loans on nonaccrual basis	$	618		$	107
Loans past due 90 days or more		0			2
Renegotiated loans		0			283
Total nonperforming loans		618			392

Other real estate		0			0
Repossessed assets		0			0
Total nonperforming assets	$	618		$	392


Nonperforming loans as a percent of total loans		0.28	%		0.19	%

Nonperforming loans as a percent of total assets		0.14	%		0.10	%

Nonperforming assets as a percent of total assets		0.14	%		0.10	%

The allowance for loan losses at September 30, 2011 totaled $2,278,000 or 1.02% of total loans as compared to $2,666,000 or 1.28% at December 31, 2010. Provisions for loan losses were $0 for the nine months ended September 30, 2011 and $215,000 for the nine months ended September 30, 2010.

The level of funding for the provision is a reflection of the overall loan portfolio. Nonperforming loans as of September 30, 2011 consists of approximately $545,000 in commercial loans, $61,000 in residential mortgages and approximately $12,000 in consumer loan balances.

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 Nine-Month Period Ended September 30

The following table sets forth certain information relating to the Company’s average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.

	Period Ended
	September 30, 2011								September 30, 2010
	Average					Yield/			Average					Yield/
	Balance			Interest		Rate			Balance			Interest		Rate
Assets
Interest Earnings Assets:
Loans (1)(2)(3)	$	214,400,815		$	8,189,541		5.09	%	$	210,464,679		$	8,601,845		5.45	%
Securities-taxable (4)		75,966,677			1,358,161		2.38	%		62,347,836			1,373,056		2.94	%
Securities-nontaxable (4)		42,184,857			1,124,337		3.55	%		37,905,681			1,104,528		3.89	%
Securities-Equity (4,5)		1,884,560			60,215		4.26	%		1,884,560			61,934		4.38	%
Federal funds sold		5,264,812			3,015		0.08	%		6,976,357			6,675		0.13	%
Due from Federal Reserve Bank		53,830,757			96,659		0.24	%		36,339,715			65,314		0.24	%
Total interest earnings assets		393,532,478			10,831,928		3.67	%		355,918,828			11,213,352		4.20	%

Noninterest earning assets:
Cash and due from other institutions		9,369,903								9,477,807
Premises and equipment, net		5,644,398								5,913,166
Accrued interest		1,288,779								1,135,298
Other assets		9,270,350								9,434,916
Less allowance for loan losses		(2,666,797	)							(2,530,431	)
Total noninterest earnings assets		22,906,633								23,430,756
Total Assets	$	416,439,111							$	379,349,584

Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing demand	$	29,912,822			31,991		0.14	%	$	26,660,254			30,224		0.15	%
Money market accounts		51,275,043			203,480		0.53	%		43,964,261			256,283		0.78	%
Savings deposits		53,973,950			136,813		0.34	%		44,761,963			127,967		0.38	%
Time deposits		171,045,670			2,501,472		1.95	%		157,455,902			2,568,545		2.18	%
Short-term borrowings		2,878,754			4,943		0.23	%		4,321,467			7,417		0.23	%
Federal Home Loan Bank advances		545,342			26,982		6.60	%		947,006			45,094		6.35	%
Total interest bearing liabilities		309,631,581			2,905,681		1.25	%		278,110,853			3,035,530		1.46	%

Noninterest bearing liabilities:
Demand deposits		62,003,762								56,611,026
Accrued expenses and other liabilities		2,022,359								2,668,115
Total noninterest bearing liabilities		64,026,121								59,279,141
Shareholders’ equity		42,781,409								41,959,590
Total Liabilities and Shareholders’ Equity	$	416,439,111							$	379,349,584

Net interest income				$	7,926,247							$	8,177,822

Interest rate spread (6)							2.42	%							2.74	%

Net yield on interest earning assets (7)							2.69	%							3.06	%

(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 $247,000 and $246,000 in 2011 and 2010, respectively.

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

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

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

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

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

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AVERAGE BALANCE SHEET

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

	Period Ended
	September 30, 2011								September 30, 2010
	Average					Yield/			Average					Yield/
	Balance			Interest		Rate			Balance			Interest		Rate
Assets
Interest Earnings Assets:
Loans (1)(2)(3)	$	219,276,714		$	2,778,685		5.07	%	$	209,613,124		$	2,840,300		5.42	%
Securities-taxable (4)		77,169,116			474,685		2.46	%		64,301,850			453,209		2.82	%
Securities-nontaxable (4)		43,574,589			379,399		3.48	%		39,904,041			384,836		3.86	%
Securities-Equity (4,5)		1,884,560			17,531		3.72	%		1,884,560			19,250		4.09	%
Federal funds sold		4,292,475			430		0.04	%		9,222,546			3,225		0.14	%
Due from Federal Reserve Bank		56,830,601			32,652		0.23	%		42,346,255			25,293		0.24	%
Total interest earnings assets		403,028,055			3,683,382		3.66	%		367,272,376			3,726,113		4.06	%

Noninterest earning assets:
Cash and due from other institutions		9,810,353								9,822,551
Premises and equipment, net		5,544,022								5,856,230
Accrued interest		1,267,327								1,060,478
Other assets		9,346,875								9,523,310
Less allowance for loan losses		(2,659,203	)							(2,628,391	)
Total noninterest earnings assets		23,309,374								23,634,178
Total Assets	$	426,337,429							$	390,906,554


Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing demand	$	31,127,359			11,385		0.15	%	$	26,823,225			9,574		0.14	%
Money market accounts		54,610,909			62,795		0.46	%		49,602,647			87,361		0.70	%
Savings deposits		55,361,798			45,021		0.33	%		45,727,631			41,257		0.36	%
Time deposits		171,277,062			813,762		1.90	%		161,948,362			879,956		2.17	%
Short-term borrowings		2,273,271			1,317		0.23	%		4,122,934			2,396		0.23	%
Federal Home Loan Bank advances		490,245			8,069		6.58	%		790,521			12,935		6.54	%
Total interest bearing liabilities		315,140,644			942,349		1.20	%		289,015,320			1,033,479		1.43	%

Noninterest bearing liabilities:
Demand deposits		65,306,953							$	56,638,381
Accrued expenses and other liabilities		3,074,229								3,654,138
Total noninterest bearing liabilities		68,381,182								60,292,519
Shareholders’ equity		42,815,603								41,598,715
Total Liabilities and Shareholders’ Equity	$	426,337,429							$	390,906,554

Net interest income				$	2,741,033							$	2,692,634

Interest rate spread (6)							2.46	%							2.63	%

Net yield on interest earning assets (7)							2.72	%							2.93	%

(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 $83,000 and $90,000 in 2011 and 2010, 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.

-34-

Rate/Volume Analysis

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

	Nine-Month Period Ended September
	2011 Compared to 2010
	Increase (Decrease) Due To
	Volume			Rate			Net
Interest income
Loans	$	161		$	(573	)	$	(412	)
Securities-taxable		300			(315	)		(15	)
Securities-nontaxable		125			(106	)		19
Securities-equities		0			(2	)		(2	)
Federal funds sold		(2	)		(2	)		(4	)
Due from Federal Reserve Bank		31			1			32
Total interest earning assets		615			(997	)		(382	)

Interest expense
Interest bearing demand		4			(2	)		2
Money market accounts		43			(95	)		(52	)
Savings deposits		26			(17	)		9
Time deposits		222			(290	)		(68	)
Short-term borrowing		(2	)		(1	)		(3	)
Federal Home Loan Bank advances		(19	)		1			(18	)
Total interest bearing liabilities		274			(404	)		(130	)

Net change in net interest income	$	341		$	(593	)	$	(252	)

-35-

Rate/Volume Analysis

	Three-Month Period Ended September
	2011 Compared to 2010
	Increase (Decrease) Due To
	Volume			Rate			Net
Interest income
Loans	$	131		$	(193	)	$	(62	)
Securities-taxable		91			(69	)		22
Securities-nontaxable		35			(41	)		(6	)
Securities-equities		0			(2	)		(2	)
Federal funds sold		(2	)		(1	)		(3	)
Due from Federal Reserve Bank		9			(1	)		8
Total interest earning assets		264			(307	)		(43	)

Interest expense
Interest bearing demand		2			(1	)		1
Money market accounts		9			(33	)		(24	)
Savings deposits		9			(5	)		4
Time deposits		51			(117	)		(66	)
Short-term borrowing		(1	)		0			(1	)
Federal Home Loan Bank advances		(5	)		0			(5	)
Total interest bearing liabilities		65			(156	)		(91	)

Net change in net interest income	$	199		$	(151	)	$	48

-36-

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

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

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

-37-

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 September 30, 2011.

ISSUER PURCHASES OF EQUITY SECURITIES

Period	(a) Total Number of Shares (or Units) Purchased	(b) Average Price Paid per Share (or Unit)	(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
July 1 – 31, 2011	50	$109.26	N/A	N/A
August 1 – 31, 2011	1,554	$109.82	N/A	N/A
September 1 – 30, 2011	0	--	N/A	N/A
Total (1)	1,604	$109.80	N/A	N/A

(1) 1,604 shares of common stock were purchased by Killbuck Bancshares in open-market transactions.

Item 3 - Default upon senior securities

None

Item 4 - (Removed and Reserved)

-38-

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

101.INS

XBRL Instance

101.SCH

XBRL Taxonomy Extension Schema

101.CAL

XBRL Taxonomy Extension Calculation

101.DEF

XBRL Taxonomy Extension Definition

101.LAB

XBRL Taxonomy Extension Labels

101.PRE

XBRL Taxonomy Extension Presentation

*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.

-39-

Signatures

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

	Killbuck Bancshares, Inc.


Date: November 9, 2011		By: /s/ Craig Lawhead
		Craig Lawhead
		President and Chief Executive Officer


Date: November 9, 2011		By: /s/ Lawrence Cardinal
		Lawrence Cardinal
		Chief Financial Officer

-40-

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