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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 [FEE REQUIRED]

For the Fiscal Year Ended December 31, 2007

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from              to              .

Commission File No. 000-24147

 

 

Killbuck Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Ohio   34-1700284

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

165 North Main Street

Killbuck, Ohio 44637

(Address of principal executive offices)

Registrant’s telephone number, including area code: (330) 276-2771

Securities to be registered pursuant to Section 12(b) of the Act: None

Securities to be registered pursuant to Section 12(g) of the Act:

 

Title of each class   Name of each exchange on which registered
Common Stock No Par Value   None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ¨     No   x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes   ¨     No   x

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 than the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days.     x   Yes     ¨   No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K.   x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company (Check one):

Large accelerated filer   ¨     Accelerated filer   ¨ Non-accelerated filer   ¨     Smaller reporting Company   x

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

The aggregate market value of the voting stock held by nonaffiliates of the registrant, calculated by reference to the stock valuation done on Killbuck Bancshares, Inc. common stock as of June 30, 2007 was $70,837,995 (Registrant has assumed that all of its executive officers and directors are affiliates. Such assumption shall not be deemed to be conclusive for any other purpose):

There were 629,582 shares of no par value common stock outstanding as of December 31, 2007.

DOCUMENTS INCORPORATED BY REFERENCE

 

1. Portions of the Annual Report to Shareholders for the Year ended December 31, 2007. (Part II, III and IV)

 

2. Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on April 28, 2008 for the Year ended December 31, 2007. (Part III)

 

 

 

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FORM 10-K INDEX

 

PART I
Item 1.   Business
Item 1A   Risk Factors
Item 1B   Unresolved Staff Comments
Item 2.   Properties
Item 3.   Legal Proceedings
Item 4.   Submission of Matters to a Vote of Security Holders
PART II
Item 5.   Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchase of Equity Securities
Item 6.   Selected Financial Data
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.   Quantitative and Qualitative Disclosure About Market Risk
Item 8.   Financial Statements and Supplementary Data
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.   Controls and Procedures
Item 9B.   Other Information
PART III
Item 10.   Directors and Executive Officers of Registrant
Item 11.   Executive Compensation
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.   Certain Relationships and Related Transactions
Item 14.   Principal Accountant Fees and Services
PART IV
Item 15.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K
  Signatures

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PART I

Killbuck Bancshares, Inc. (the “Company”) may from time to time make written or oral “forward-looking statements”, including statements contained in the Company’s filings with the securities and exchange commission (including this annual report on Form 10-K and the exhibits thereto), in its report to shareholders and in other communications by the Company, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the private securities litigation reform act of 1995.

These forward-looking statements involve risks and uncertainties, such as statements of the Company’s plans, objectives, expectations, estimates and intentions that are subject to change based on various important factors (some of which are beyond the Company’s control). The following factors, among others, could cause the Company’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the board of governors of the federal reserve system, inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services; the willingness of users to substitute competitors’ products and services for the Company’s products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services’ laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes, acquisitions; changes in consumer spending and savings habits; and the success of the Company at managing the risks involved in the foregoing.

The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

Item 1. Business

Killbuck Bancshares, Inc. (the “Company”) was incorporated under the laws of the State of Ohio on November 29, 1991 at the direction of management of the Killbuck Savings Bank Company (the “Bank,”) for the purpose of becoming a bank holding company by acquiring all of the outstanding shares of the Bank. In November 1992, the Company became the sole shareholder of the Bank. The Bank carries on business under the name “The Killbuck Savings Bank Company.” The principal office of the Company is located at 165 N. Main Street, Killbuck, Ohio. The Killbuck Savings Bank Company was established under the banking laws of the State of Ohio in September, 1900.

The Bank is headquartered in Killbuck, Ohio, which is located in the northeast portion of Ohio, in the County of Holmes. Holmes County has a population of approximately 38,000.

The Bank provides a wide range of retail banking services to individuals and small to medium-sized businesses. These services include various deposit products, business and personal loans, credit cards, residential mortgage loans, home equity loans, internet banking, bill payment, and other consumer oriented financial services including IRA accounts, Health Savings Accounts (HSA), safe deposit and night depository facilities. The Bank also has automatic teller machines located at all locations providing 24 hour banking service to our customers. The Bank belongs to STAR, a national ATM network with thousands of locations nationwide. Neither the Company nor the Bank has any foreign operations, assets, investments or deposits.

The Company has one wholly owned subsidiary, The Killbuck Savings Bank Company. The Bank has ten offices, with seven in Holmes County including a loan production office, two in Knox County and one in Tuscarawas County. The Loan Production office in Millersburg, Ohio in Holmes County opened in July 2003. The full service branch facility in Berlin, Ohio in Holmes County opened in the German Village Market complex in April 2004.

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The Company, through its subsidiary, The Killbuck Savings Bank Company, conducts the business of a commercial banking organization. At December 31, 2007, the Company and its subsidiary had consolidated total assets of $336,337,048 and consolidated total equity of $41,117,641. The capital of the Company consists of 1,000,000 authorized shares of capital stock, no par value of which 629,582 shares were outstanding at December 31, 2007 to 1,016 shareholders.

The Bank is a state banking Company. The Bank is regulated by the Ohio Division of Financial Institutions (“ODFI”) and its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the extent permitted by law and, as a subsidiary of the Company, is regulated by the Federal Reserve Board.

Employees

As of December 31, 2007, the Bank had 104 full-time and 23 part-time employees. The Company had no employees. The Bank provides a number of benefits for its full-time employees, including health and life insurance, pension, workers’ compensation, social security, paid vacations, and numerous bank services. No employees are union participants or subject to a collective bargaining agreement.

Competition

The commercial banking business in the market areas served by the Bank is very competitive. The Company and the Bank are in competition with commercial banks located in their own service areas. Some competitors of the Company and the Bank are substantially larger than the Bank. In addition to local bank competition, the Bank competes with larger commercial banks located in metropolitan areas, savings banks, savings and loan associations, credit unions, finance companies and other financial institutions for loans and deposits.

There are eight financial institutions operating in Holmes County. As of June 30, 2007 (the most recent date for which information is available), the Bank had the largest market share with $219.1 million in total deposits as of such date, representing a market share of 41.5%. The institution with the second largest market share had deposits of $196.0 million as of such date, representing a market share of 37.1%. The Bank had total assets as of December 31, 2007, of $336.3 million compared to the other institution’s total assets of $350 million as of such date.

Certain Regulatory Considerations

The following is a summary of certain statutes and regulations affecting the Company and its subsidiary. This summary is qualified in its entirety by such statutes and regulations.

The Company

The Company is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, (“BHC Act”) and as such is subject to regulation by the Federal Reserve Board. A bank holding company is required to file with the Federal Reserve Board quarterly reports and other information regarding its business operations and those of its subsidiaries. A bank holding company and its subsidiary banks are also subject to examination by the Federal Reserve Board.

The BHC Act requires every bank holding company to obtain the prior approval of the Federal Reserve Board before acquiring substantially all the assets of any bank or bank holding company or ownership or control of any voting shares of any bank or bank holding company, if, after such acquisition, it would own or control, directly or indirectly, more than five percent (5%) of the voting shares of such bank or bank holding company.

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In approving acquisitions by bank holding companies of companies engaged in banking-related activities, the Federal Reserve Board considers whether the performance of any such activity by a subsidiary of the holding company reasonably can be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, which outweigh possible adverse effects, such as over concentration of resources, decrease of competition, conflicts of interest, or unsound banking practices.

Bank holding companies are restricted in, and subject to, limitations regarding transactions with subsidiaries and other affiliates.

In addition, bank holding companies and their subsidiaries are prohibited from engaging in certain “tie in” arrangements in connection with any extensions of credit, leases, sales of property, or furnishing of services.

The Company Subsidiary

The Company operates a single bank, namely, The Killbuck Savings Bank Company. As an Ohio state chartered commercial bank, the Bank is supervised and regulated by the ODFI, and subject to laws and regulations applicable to Ohio banks.

Capital

The Federal Reserve Board, ODFI, and FDIC require banks and holding companies to maintain minimum capital ratios.

The Federal Reserve Board adopted final “risk-adjusted” capital guidelines for bank holding companies. The guidelines became fully implemented as of December 31, 1992. The ODFI and FDIC have adopted substantially similar risk-based capital guidelines. These ratios involve a mathematical process of assigning various risk weights to different classes of assets, then evaluating the sum of the risk-weighted balance sheet structure against the Company’s capital base. The rules set the minimum guidelines for the ratio of capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) at 8%. At least half of the total capital is to be composed of common equity, retained earnings, and a limited amount of perpetual preferred stock less certain goodwill items (“Tier 1 Capital”). The remainder may consist of a limited amount of subordinated debt, other preferred stock, or a limited amount of loan loss reserves.

In addition, the federal banking regulatory agencies have adopted leverage capital guidelines for banks and bank holding companies. Under these guidelines, banks and bank holding companies must maintain a minimum ratio of three percent (3%) Tier 1 Capital (as defined for purposes of the year-end 1992 risk-based capital guidelines) to total assets. The Federal Reserve Board has indicated, however, that banking organizations that are experiencing or anticipating significant growth, are expected to maintain capital ratios well in excess of the minimum levels.

Regulatory authorities may increase such minimum requirements for all banks and bank holding companies or for specified banks or bank holding companies. Increases in the minimum required ratios could adversely affect the Company and the Bank, including their ability to pay dividends.

At December 31, 2007, the Company’s respective total and Tier 1 risk-based capital ratios and leverage ratios exceeded the minimum regulatory requirements. See Note 17 in the audited consolidated financial statements included in the Annual Report and incorporated herein by reference in the report as Exhibit 13.

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Additional Regulation

The Bank is also subject to federal regulation as to such matters as required reserves, limitation as to the nature and amount of its loans and investments, regulatory approval of any merger or consolidation, issuance or retirement of their own securities, limitations upon the payment of dividends and other aspects of banking operations. In addition, the activities and operations of the Bank are subject to a number of additional detailed, complex and sometimes overlapping laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-in-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Truth in Savings Act, the Community Reinvestment Act, anti-redlining legislation and antitrust laws.

Dividend Regulation

The ability of the Company to obtain funds for the payment of dividends and for other cash requirements is largely dependent on the amount of dividends that may be declared by the Bank. Generally, the Bank may not declare a dividend, without the approval of the ODFI, if the total of dividends declared in a calendar year exceeds the total of its net profits for that year combined with its retained profits of the preceding two years.

Government Policies and Legislation

The policies of regulatory authorities, including the ODFI, Federal Reserve Board, FDIC and the Depository Institutions Deregulation Committee, have had a significant effect on the operating results of commercial banks in the past and are expected to do so in the future. An important function of the Federal Reserve System is to regulate aggregate national credit and money supply through such means as open market dealings in securities, establishment of the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. Policies of these agencies may be influenced by many factors, including inflation, unemployment, short-term and long-term changes in the international trade balance and fiscal policies of the United States government.

Financial Services Modernization Act of 1999

Under the Gramm-Leach-Bliley Act (better known as the Financial Services Modernization Act of 1999), bank holding companies can become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized under the Federal Deposit Insurance Corporation Act of 1991 prompt corrective action provisions, is well managed, and has at least a satisfactory rating under the Community Reinvestment Act by filing a declaration that the bank holding company wishes to become a financial holding company. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board.

The Financial Services Modernization Act defines “financial in nature” to include”

 

  •  

securities underwriting, dealing and market making;

 

  •  

sponsoring mutual funds and investment companies;

 

  •  

insurance underwriting and agency;

 

  •  

merchant bank activities and activities that the Federal Reserve Board has determined to be closely relating to banking.

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In addition, a financial holding company may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company has a Community Reinvestment Act rating of satisfactory or better.

The United States Congress has periodically considered and adopted legislation, such as the Gramm-Leach-Bliley Act, which has resulted in further deregulation of both banks and other financial institutions, including mutual funds, securities brokerage firms and investment banking firms. No assurance can be given as to whether any additional legislation will be adopted or as to the effect such legislation would have on the business of the Bank or the Company.

Deposit Insurance

The Federal Deposit Insurance Company Improvement Act of 1991 (“FDICIA”) requires federal bank regulatory authorities to take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For these purposes, FDICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.

As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The amount each institution pays for FDIC deposit insurance coverage is determined in accordance with a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their level of capital and supervisory evaluation. Institutions classified as well capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered substantial supervisory concerns pay the highest premium. Because the Bank is presently “well capitalized” it pays the minimum deposit insurance premiums.

The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order, or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital. Management of the Company is not aware of any activity or condition that could result in termination of the deposit insurance of the Bank.

Proposed Legislation

There have been proposed a number of legislative and regulatory proposals designed to strengthen the federal deposit insurance system and to improve the overall financial stability of the U.S. banking system. It is impossible to predict whether or in what form these proposals may be adopted in the future, and if adopted, what their effect would be on the Company or Bank.

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Monetary Policies

The earnings of the Company are dependent upon the earnings of its wholly owned subsidiary bank. The earnings of the subsidiary bank are affected by the policies of regulatory authorities, including the Ohio Division of Financial Institutions, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation. The policies and regulations of the regulatory agencies have had and will continue to have a significant effect on deposits, loans and investment growth, as well as the rate of interest earned and paid, and therefore will affect the earnings of the subsidiary bank and the Company in the future, although the degree of such impact cannot accurately be predicted.

Securities Laws and Compliance

As of June 30, 1998, the Company’s common stock was registered with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended (“1934 Act”). This registration requires ongoing compliance with the 1934 Act and its periodic filing requirements as well as a wide range of Federal and State securities laws. These requirements include, but are not limited to, the filing of annual, quarterly and other reports with the SEC, certain requirements as to the solicitation of proxies from shareholders as well as other proxy rules, and compliance with the reporting requirements and “short-swing” profit rules imposed by section 16 of the 1934 Act.

Reports to Security Holders

The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy solicitation materials, as applicable, under Commission Regulation 14A. The public may read and copy any materials the Company files with the Commission at the SEC’s Public Reference Room at 100 F. Street, NE, Washington, DC 20549, on official business days during the hours of 10:00 am to 3:00 pm. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission at http://www.sec.gov . The Company’s Internet website is http://www.killbuckbank.com.

Item 1A Risk Factors

The following discusses risks that management believes are specific to our business and could have a negative impact on the Bank’s financial performance. When analyzing an investment in the Bank, the risks and uncertainties described below, together with all of the other information included or incorporated by reference in this report should be carefully considered. This list should not be viewed as comprehensive and may not include all risks that may affect the financial performance of the Bank:

Interest Rate Risk

The Bank’s profitability is largely a function of the spread between the interest rates earned on earning assets and the interest rates paid on deposits and other interest-bearing liabilities. Like most financial institutions, the Bank’s net interest income and margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the Federal government, that influence market interest rates and the Bank’s ability to respond to changes in such rates. At any given time, the Bank’s assets and liabilities may be such that they are affected differently by a change in interest rates. As a result, an increase or decrease in rates, the length of loan terms or the mix of adjustable- and fixed- rate loans or investment securities in the Bank’s portfolio could have a positive or negative effect on its net income, capital and liquidity. Although management believes it has implemented strategies and guidelines to reduce the potential effects of changes in interest rates on results of operations, any substantial and prolonged change in market interest rates could adversely affect operating results.

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Credit Risk

As a lender, the Bank is exposed to the risk that its borrowers may be unable to repay their loans and that any collateral securing the payment of their loans may not be sufficient to assure repayment in full. Credit losses are inherent in the lending business and could have a material adverse effect on the operating results of the Bank. Adverse changes in the economy or business conditions, either nationally or in the Bank’s market areas, could increase credit related losses and expenses and/or limit growth. Substantially all of the Bank’s loans are to businesses and individuals in its limited geographic area and any economic decline in this market could impact the Bank adversely. The Bank makes various assumptions and judgments about the collectability of its loan portfolio and provides an allowance for loan losses based on a number of factors. If these assumptions are incorrect, the allowance for loan losses may not be sufficient to cover losses, thereby having an adverse effect on operating results, and may cause the Bank to increase the allowance in the future by increasing the provision for loan losses. The Bank has adopted underwriting, credit monitoring procedures and credit policies that management believes are appropriate to control these risks; however, such policies, and procedures may not prevent unexpected losses that could have a material adverse affect on the Bank’s financial condition or results of operations.

Impairment Risk

The Bank regularly purchases U.S. Government agency debt securities, U.S. Government agency issued mortgage-backed securities, State and Political Subdivisions’ debt securities, corporate debt securities and equity securities. The Bank is exposed to the risk that the issuers of these securities may experience significant deterioration in credit quality, which could impact the market value of the issue. The Bank periodically evaluates its investments to determine if market value declines are other-than-temporary. Once a decline is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

Competition

The financial services industry is highly competitive with competition for attracting and retaining deposits and making loans coming from other banks and savings institutions, credit unions, mutual fund companies, insurance companies and other non-bank businesses. Some of the Bank’s competitors are much larger in terms of total assets and market capitalization, have a higher lending limit, and have greater access to capital and funding. In light of this, the Bank’s ability to continue to compete effectively is dependent upon its ability to maintain and build relationships through top quality service.

Government Regulation and Supervision

The banking industry is heavily regulated under both Federal and state law. Banking regulations, designed primarily for the safety of depositors, may limit a financial institution’s growth and the return to its investors, by restricting such activities as the payment of dividends, mergers with or acquisitions by other institutions, expansion of branch offices and the offering of securities. The Bank is also subject to capitalization guidelines established by Federal law and could be subject to enforcement actions to the extent that its subsidiary bank is found, by regulatory examiners, to be undercapitalized. It is improbable to predict what changes, if any, will be made to existing Federal and state legislation and regulations or the effect that such changes may have on the Bank’s future business and earnings prospects. Any substantial changes to applicable laws or regulations could also subject the Bank to additional costs, limit the types of financial services and products it may offer, and inhibit its ability to compete with other financial service providers.

Internal Controls and Procedures

Management diligently reviews and updates its internal controls, disclosure controls and procedures, and corporate governance policies and procedures. This system is designed to provide reasonable, not absolute, assurances that the objectives comply with appropriate regulatory guidance; any undetected circumvention of these controls could have a material adverse impact on the Bank’s financial condition and results of operations.

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Litigation

Although there is currently no litigation to which the Bank is the subject, future litigation that arises during the normal course of business could be material and have a negative impact on the Bank’s earnings. Future litigation or changes in current litigation could also adversely impact the reputation of the Bank in the communities that it serves.

Attracting and Retaining Skilled Personnel

Attracting and retaining key personnel is critical to the Bank’s success, and difficulty finding qualified personnel could have a significant impact on the Bank’s business due to the lack of required skill sets and years of industry experience. Management is cognizant of these risks and succession planning is built into the long-range strategic planning process. The Bank currently has employment agreements with its executive officers.

Goodwill

When the Bank acquired the Danville Office, a portion of the purchase price was allocated to goodwill and other identifiable intangible assets. The excess of the purchase price over the net identifiable assets acquired determines the amount of the purchase price, which was allocated to goodwill and other intangible assets. Under current accounting standards, if the Bank determines goodwill or intangible assets are impaired, it is required to write down the carrying value of these assets. The Bank cannot provide assurance that it will not be required to take an impairment charge in the future. Any impairment charge would have a negative effect on its stockholders’ equity and current financial results.

Item 1B Unresolved Staff Comments

None

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Item 2 Description of Property

Properties

The Company owns no real property but utilizes the main office of the Bank. The Company’s and the Bank’s executive offices are located at 165 North Main Street, Killbuck, Ohio. The Company pays no rent or other form of consideration for the use of this facility. All offices are owned by the Bank. The Bank has seven offices located in Holmes County (1), two in Knox County (2), and one in Tuscarawas County (3). A loan production facility in Millersburg, Ohio opened in July 2003, the Berlin Office relocated in November 2007, and an ATM remains at the old Berlin Branch location. The Bank’s total investment in office property and equipment was $11.3 million with a net book value $6.5 million at December 31, 2007. The offices are at the following locations.

 

Main Office: (1)

   ATM Location Berlin (1)    Mt. Hope Branch (1)

165 North Main Street

   4853 East Main Street    8115 State Rt. 241

Killbuck, Ohio 44637

   Berlin Ohio 44610    Mt. Hope, Ohio 44660

Millersburg North Branch (1)

   Millersburg South Branch (1)    Millersburg Loan Annex (1)

181 N. Washington Street

   1642 S. Washington Street    164 N. Clay Street

Millersburg, Ohio 44654

   Millersburg, Ohio 44654    Millersburg, Ohio 44654

German Village Branch (1)

   Sugarcreek Branch (3)    Apple Valley Branch (2)

4900 Oak Street

   1035 W. Main Street    21841 Plank Road

Berlin, Ohio 44610

   Sugarcreek, Ohio 44681    Howard, Ohio 43028

Danville Branch (2)

   Berlin Branch (1)   

701 S. Market Street

   4790 Township Road   

Danville, Ohio 43014

   Millersburg, Ohio 44654   

Item 3 Legal Proceedings

Neither the Bank nor the Company is involved in any material legal proceedings. The Bank, from time to time, is a party to litigation, which arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of the Bank. In the opinion of management the resolution of any such issues would not have a material adverse impact on the financial position, results of operation, or liquidity of the Bank or the Company.

Item 4 Submission of Matters to Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

PART II

Item 5 Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchase of Equity Securities

As of December 31, 2007, the Company had 1,016 shareholders of record, as calculated by excluding individual participants in securities positions listings, who collectively held 629,582 of the 1,000,000 authorized shares of the Company’s no par value stock.

Our common shares are currently quoted by a number of quotation services, including the Over the Counter Bulletin Board (the “OTCBB”) and the Pink Sheets Electronic Quotation Service (the “Pink Sheets”), as well as by Community Banc Investments, New Concord, Ohio (“CBI”), each of which handles a limited amount of the Corporation’s stock transactions. The OTCBB and the Pink Sheets are both quotation services for “over-the-counter securities,” which are generally considered to be any equity securities not otherwise listed on a national exchange, such as NASDAQ, NYSE or Amex. CBI is a licensed intrastate securities dealer that specializes in marketing the stock of independent banks in Ohio. The Company’s common shares are quoted on the OTCBB and the Pink Sheets under the trading symbol “KLIB.”

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The common stock of the Company trades infrequently. Parties interested in buying or selling the Company’s stock are generally referred to Community Banc Investments, New Concord, Ohio (“CBI”). The quarterly high and low price information in the table below was obtained from CBI and the OTCBB.

 

Quarter Ended

   High    Low    Cash
Dividends
Paid

2007

   March 31    $ 113.47    $ 111.17      N/A
   June 30      114.56      113.13    $ 1.35
   September 30      117.76      115.43      N/A
   December 31      119.14      116.49    $ 2.40

2006

   March 31    $ 105.42    $ 102.50      N/A
   June 30      106.66      103.00    $ 1.20
   September 30      110.85      103.00      N/A
   December 31      111.76      109.10    $ 2.30

Management does not have knowledge of the prices paid in all transactions and has not verified the accuracy of those prices that have been reported. Because of the lack of an established market for the Company’s stock, these prices may not reflect the prices at which the stock would trade in a more active market.

Cash dividends are paid on a semi-annual basis. The Company has paid regular semi-annual cash dividends since it became a bank holding company in 1992, and assuming the ability to do so, it is anticipated that the Company will continue to declare regular semi-annual cash dividends.

Included in the December 31, 2007 dividend of $2.40 per share was a special one-time dividend of $1.00 per share. This special dividend will not be repeated in the foreseeable future. Because of sustained profits in 2007 and a strong capital position, the Board of Directors declared this special one-time dividend to the shareholders.

For information on dividends per share, net income per share and ratio of dividends to net income per share see the Selected Financial Data of the Annual Report to Shareholders of Killbuck Bancshares, Inc. for the year ended December 31, 2007, included in this report as Exhibit 13 and is incorporated herein by reference.

The ability of the Company to pay dividends will depend on the earnings of its subsidiary bank and its financial condition, as well as other factors such as market conditions, interest rates and regulatory requirements. Therefore, no assurances may be given as to the continuation of the Company’s ability to pay dividends or maintain its present level of earnings. For a discussion on subsidiary dividends see Note 16 to the audited Consolidated Financial Statements of the Annual Report to Shareholders of Killbuck Bancshares, Inc. for the year ended December 31, 2007, included in this report as Exhibit 13 and is incorporated herein by reference.

The common stock of the Company is not subject to any redemption provisions or restrictions on alienability. The common stock is entitled to share pro rata in dividends and in distributions in the event of dissolution or liquidation. There are not any options, warrants, privileges nor other rights with respect to Company stock at the present time, nor are any such rights proposed to be issued.

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Performance Graph – Five-Year Shareholder Return Comparison

The following chart compares the five-year cumulative return on $100 invested on December 31, 2002 in each of the following: (1) Common Stock of Killbuck Bancshares, Inc.; (2) the Dow Jones US Index; and (3) the Dow Jones US Banks Index.

LOGO

 

     12/02    12/03    12/04    12/05    12/06    12/07

Killbuck Bancshares, Inc.

   100.00    100.92    107.65    118.78    134.05    143.94

Dow Jones US

   100.00    130.75    146.45    155.72    179.96    190.77

Dow Jones US Banks

   100.00    132.94    152.03    155.32    182.84    136.79

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Unregistered Sales of Equity Securities and Use of Proceeds

None

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

October 1 – 31, 2007

   1,380    $ 117.76    N/A    N/A

November 1 – 30, 2007

   60    $ 119.14    N/A    N/A

December 1 – 31, 2007

   621    $ 116.49    N/A    N/A

Total (1)

   2,061    $ 117.42    N/A    N/A

 

(1) 2,061 shares of common stock were purchased by Killbuck Bancshares in open-market transactions.

Item 6 Selected Financial Data

Selected Financial Data of the annual report to shareholders of Killbuck Bancshares, Inc. for the year ended December 31, 2007, included in this report as part of Exhibit 13, is incorporated herein by reference.

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Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Annual Report to Shareholders of Killbuck Bancshares, Inc. for the year ended December 31, 2007, included in this report as Exhibit 13, and is incorporated herein by reference. Additional statistical information noted below is provided pursuant to SEC’s Industry Guide 3, Statistical Disclosure by Bank Holding Companies.

Investment Portfolio

Book Value of Investments

Book values of investment securities at December 31 are as follows (in thousands):

 

     2007    2006    2005    2004    2003

Securities available for sale:

              

Obligations of U.S. Government Agencies and Corporations

   $ 53,116    $ 34,753    $ 14,307    $ 9,754    $ 17,582

Mutual Funds

     1,000      —        —        —        —  
                                  

Total available for sale

     54,116      34,753      14,307      9,754      17,582
                                  

Securities held to maturity:

              

Obligations of States and Political subdivisions

     29,552      29,993      30,771      35,564      39,900

Corporate securities

     —        —        —        451      729
                                  

Total held to maturity

     29,552      29,993      30,771      36,015      40,629
                                  

Total

   $ 83,668    $ 64,746    $ 45,078    $ 45,769    $ 58,211
                                  

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MATURITY SCHEDULE OF INVESTMENTS

The following table presents the investment portfolio, the weighted average yield and maturities at December 31, 2007 (dollars in thousands):

 

     Within three months     After three months but
Within one year 		    After one year but
Within five years 		    After five but
Within ten years 		    After 10 years      
     Amount    Yield     Amount    Yield     Amount    Yield     Amount    Yield     Amount    Yield     Total

Available for Sale (1)

                           

MBS

   $ —      0.00 %   $ —      0.00 %   $ 740    4.53 %   $ 506    4.36 %   $ 282    5.31 %   $ 1,528

Obligations of U.S. Government Agencies and Corporations

   $ 1,002    4.76 %   $ 3,005    4.72 %   $ 34,468    5.22 %   $ 13,113    5.07 %   $ —      0.00 %   $ 51,588

Mutual Funds

   $ —      0.00 %   $ 1,000    6.00 %   $ —      0.00 %   $ —      0.00 %   $ —      0.00 %   $ 1,000
                                                                       

Total

   $ 1,002    4.76 %   $ 4,005    5.04 %   $ 35,208    5.21 %   $ 13,619    5.04 %   $ 282    5.31 %   $ 54,116
                                                                       

Held to Maturity

                           

Obligations of States and Political subdivisions (2)

   $ —      0.00 %   $ 2,469    4.37 %   $ 15,190    4.41 %   $ 11,692    4.07 %   $ 201    3.95 %   $ 29,552
                                                                       

Total

   $ —      0.00 %   $ 2,469    4.37 %   $ 15,190    4.41 %   $ 11,692    4.07 %   $ 201    3.95 %   $ 29,552
                                                                       

 

(1) The weighted average yield has been computed using the historical amortized cost for available for sale securities.
(2) Weighted average yields on nontaxable obligations have been computed based on actual yield stated on the security.

Excluding holdings of U.S. Treasury and other agencies and corporations of the U.S. Government, there were no investments in securities of any one issuer that exceeded -10% of the Bank’s shareholder equity at December 31, 2007.

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TYPES OF LOANS

The following table presents the composition of the loan portfolio and the percentage of loans by type as follows (dollars in thousands):

 

     December 31,  
     2007     2006     2005     2004     2003  
     Amount    % of
Total Loans 		    Amount    % of
Total Loans 		    Amount    % of
Total Loans 		    Amount    % of
Total Loans 		    Amount    % of
Total Loans 		 

Real estate - residential

   $ 72,858    36.6 %   $ 77,025    39.6 %   $ 90,976    43.5 %   $ 97,811    45.0 %   $ 88,649    44.0 %

Real estate - farm

     9,967    5.0       13,368    6.9       14,550    7.0       12,309    5.6       12,298    6.1  

Real estate - commercial

     59,817    30.0       50,147    25.8       47,312    22.7       47,226    21.8       42,090    20.8  

Real estate - construction

     7,778    3.9       10,917    5.6       9,447    4.5       11,000    5.1       10,978    5.4  

Commercial and other

     41,678    20.9       36,225    18.6       38,399    18.4       40,752    18.8       38,269    19.0  

Consumer and credit card

     7,201    3.6       6,941    3.5       8,217    3.9       8,075    3.7       9,413    4.7  
                                                                 
   $ 199,299    100.0 %   $ 194,623    100.0 %   $ 208,901    100.0 %   $ 217,173    100.0 %   $ 201,697    100.0 %
                                                                 

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The largest category of loans comprising the Bank’s loan portfolio is residential real estate loans. These loans are primarily single-family residential real estate loans secured by a first mortgage on the dwelling. The risks associated with these loans are primarily the risk of default in repayment and inadequate collateral. Real estate commercial loans represent the second largest category and include development loans as well as investment commercial real estate loans. These loans have risks, which include the risk of default in the repayment of principal and inadequate collateral as well as the risk of cash flow interruption due to, in the case of rental real estate, the inability to obtain or collect adequate rental rates. The next largest loan segment of the Bank’s loan portfolio is the commercial and other category. The loans comprising this category represent loans to business interest located primarily within the Bank’s defined market areas, with no significant industry concentration. Commercial loans include both secured and unsecured loans. The risks associated with these loans are principally the risk in default of the repayment of principal resulting from economic problems of the commercial customer, economic downturn affecting the market in general and in the case of secured loans, inadequate collateral.

MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATE

The following table presents maturity distribution and interest rate sensitivity of real estate – commercial, real estate – construction and commercial and other loans at December 31, 2007 (dollars in thousands):

 

     Within
1 Year 		   After 1 Year
Within
5 Years 		   After 5 Years    Total

Real estate – commercial

   $ 24,077    $ 28,952    $ 6,788    $ 59,817

Real estate – construction

     5,236      1,903      639      7,778

Commercial and other

     28,156      12,264      1,258      41,678
                           
   $ 57,469    $ 43,119    $ 8,685    $ 109,273
                           

Fixed interest rates

   $ 8,112    $ 16,145    $ 4,311    $ 28,568

Variable interest rates

     49,357      26,974      4,374      80,705
                           
   $ 57,469    $ 43,119    $ 8,685    $ 109,273
                           

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RISK ELEMENTS

Loans are subject to ongoing periodic monitoring by management and the board of directors. The Company ceases accruing interest on residential mortgages secured by real estate and consumer loans when principal or interest payments are delinquent 90 days or more. Commercial loans that are 90 days or more past due are reviewed by the Executive Vice President and the loan officer to determine whether they will be classified as nonperforming. These officers review various factors which include, but are not limited to, the timing of the maturity of the loan in relation to the ability to collect, whether the loan is deemed to be well secured, whether the loan is in the process of collection, and the favorable results of the analysis of customer financial data. A nonperforming loan will only be re-classified as a performing loan when stringent criteria have been met. At the time the accrual of interest is discontinued, future income is recognized only when cash is received or the loan has been returned to performing loan status. Renegotiated loans are those loans which terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deterioration of the borrower. At December 31, 2007, the non-accrual loans are comprised of seven loans. The four commercial loans total approximately $482,000 secured by equipment and real estate. Three residential loans of approximately $357,000 are secured by real estate. The following table presents information concerning nonperforming assets including nonaccrual loans, loans 90 days or more past due, renegotiated loans, other real estate and repossessed assets at December 31, (dollars in thousands).

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     December 31,  
     2007     2006     2005     2004     2003  

Loans on nonaccrual basis

   $ 839     $ 471     $ 632     $ 1,095     $ 220  

Loans past due 90 days or more

     —         —         —         —         1  

Renegotiated loans

     —         —         —         —         —    
                                        

Total nonperforming loans

     839       471       632       1,095       221  

Other real estate

     —         80       700       —         —    

Repossessed assets

     —         —         —         —         —    
                                        

Total nonperforming assets

   $ 839     $ 551     $ 1,332     $ 1,095     $ 221  
                                        

Nonperforming loans as a percent of total loans

     .42 %     .24 %     .30 %     .50 %     .11 %
                                        

Nonperforming loans as a percent of total assets

     .25 %     .15 %     .21 %     .37 %     .08 %
                                        

Nonperforming assets as a percent of total assets

     .25 %     .18 %     .45 %     .37 %     .08 %
                                        

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The amount of interest income that would have been recognized had the loans performed in accordance with their original terms was approximately $35,000 and the amount of interest income that was recognized was $0 for the year ended December 31, 2007.

There are not any loans as of December 31, 2007, other than those disclosed above, where known information about the borrower caused management to have serious doubts about the borrower’s ability to comply with their contractual repayment obligations. There are no concentrations of loans to borrowers engaged in similar activities, which exceed 10% of total loans of which management is aware. Based upon the ongoing quarterly review and assessment of credit quality, management is not aware of any trends or uncertainties related to any accounts which might have a material adverse effect on future earnings, liquidity or capital resources.

There are no other interest bearing assets that would be subject to disclosure as either nonperforming or impaired if such interest bearing assets were loans.

LOAN LOSS EXPERIENCE

Management makes periodic provisions to the allowance for loan losses to maintain the allowance at an acceptable level commensurate with the credit risks inherent in the loan portfolio. There can be no assurances, however, that additional provisions will not be required in future periods. The following table presents a summary of loan losses by loan type and changes in the allowance for loan losses for the years ended December 31, (dollars in thousands):

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     Year Ended December 31,  
     2007     2006     2005     2004     2003  

Allowance for loan losses at beginning of year

   $ 2,394     $ 2,313     $ 2,646     $ 2,702     $ 2,326  

Provision charged to expense

     127       215       377       225       390  

Charge-offs:

          

Real estate - residential

     6       212       4       17       6  

Real estate - farm

     —         —         —         —         —    

Real estate - commercial

     71       92       500       —         —    

Real estate - construction

     —         —         —         —         —    

Commercial and other

     16       181       228       311       16  

Consumer and credit card

     39       9       52       28       99  
                                        

Total charge-offs

     132       494       784       356       121  
                                        

Recoveries:

          

Real estate - residential

     57       32       —         1       —    

Real estate - farm

     —         —         —         —         —    

Real estate - commercial

     27       308       —         —         —    

Real estate - construction

     —         —         —         —         —    

Commercial and other

     16       —         25       13       19  

Consumer and credit card

     21       20       49       61       88  
                                        

Total recoveries

     121       360       74       75       107  
                                        

Net charge-offs

     11       134       710       281       14  

Business acquisition

     —         —         —         —         —    
                                        

Allowance for loan losses at end of period

   $ 2,510     $ 2,394     $ 2,313     $ 2,646     $ 2,702  
                                        

Total loans outstanding

   $ 199,298     $ 194,623     $ 208,901     $ 217,173     $ 201,697  
                                        

Average loans outstanding

   $ 202,692     $ 202,525     $ 215,486     $ 213,463     $ 187,554  
                                        

Allowance for loan losses as a percent of total loans

     1.26 %     1.23 %     1.11 %     1.22 %     1.34 %

Net charge-offs as a percent of average loans

     .01 %     .07 %     .33 %     .13 %     .01 %

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The Bank reviews the adequacy of its allowance for loan losses on a quarterly basis. In determining the adequacy of its allowance account the Bank makes general allocations based upon loan categories, nonaccrual, past due and classified loans. After general allocations, the Bank makes specific allocations for individual credits. The Bank has determined that the reserve is adequate as of December 31, 2007, based upon its analysis and experience. However, there can be no assurance that the current allowance for loan losses will be adequate to absorb all future loan losses.

The following table presents management’s estimate of the allocation of the allowance for loan losses among the loan categories, although the entire allowance balance is available to absorb any actual charge-offs that may occur, along with the percentage of loans in each category to total loans for the years ended December 31 (dollars in thousands):

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     2007     2006     2005     2004     2003  
     Allowance    %
of Loans
to
Total Loans 		    Allowance    %
of Loans
to
Total Loans 		    Allowance    %
of Loans
to
Total Loans 		    Allowance    %
of Loans
to
Total Loans 		    Allowance    %
of Loans
to
Total Loans 		 

Real estate – residential

   $ 621    36.6 %   $ 540    39.6 %   $ 323    43.5 %   $ 478    45.0 %   $ 432    44.0 %

Real estate – farm

     21    5.0       60    6.9       —      7.0       58    5.7       124    6.1  

Real estate – commercial

     566    30.0       451    25.8       257    22.7       755    21.7       704    20.8  

Real estate – construction

     —      3.9       —      5.6       —      4.5       —      5.1       —      5.4  

Commercial and other loans

     1,191    20.9       1,181    18.6       1,598    18.4       1,034    18.8       1,038    19.0  

Consumer and credit loans

     111    3.6       162    3.5       135    3.9       321    3.7       404    4.7  
                                                                 
   $ 2,510    100.0 %   $ 2,394    100.0 %   $ 2,313    100.0 %   $ 2,646    100.00 %   $ 2,702    100.0 %
                                                                 

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CONTRACTUAL OBLIGATIONS

The following table presents, as of December 31, 2007, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the financial statements for December 31, 2007, attached hereto as Exhibit 13 to this Form 10K.

 

(In thousands)

   Note
Reference 		   One Year
or Less 		   One to
Three
Years 		   Three to
Five
Years 		   Over Five
Years 		   Total

Borrowed funds

   9,10    6,468    1,173    399    242    8,282

Certificates of Deposit

   8    125,034    23,960    4,010    3    153,007

Operating Leases

   13    19    39    40    254    352

Deposits without a stated maturity

      132,444    —      —      —      132,444

The Company entered into an operating lease to lease 1,600 square feet with a drive-thru facility within the German Village Store in Berlin, Ohio, which began in April 2004 and expires in the year 2024 with an additional ten-year option. The German Village grocery store closed in the fourth quarter of 2006. The branch and the other lessees remained open. A grocery store was opened in 2007 along with other new vendors.

COMMITMENTS

The following table details the amounts and expected maturities of significant commitments as of December 31, 2007. Further discussion of these commitments is included in Note 15 to the financial statements as of December 31, 2007, attached hereto as Exhibit 13 to this Form 10K.

 

(In thousands)

   One Year
or Less 		   One to
Three
Years 		   Three to
Five
Years 		   Over Five
Years 		   Total

Commitments to extend credit

              

Commercial

   23,325    413    —      —      23,738

Residential real estate

   1,823    158    500    —      2,481

Revolving home equity

   —      —      —      12,915    12,915

and credit card lines

   2,936    —      —      —      2,936

Standby letters of credit

   785    —      —      —      785

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Item 7A Quantitative and Qualitative Disclosures About Market Risk

The Bank’s primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. Because of the nature of the Bank’s operations, the Bank is not subject to currency exchange or commodity price risk and, since the Bank has no trading portfolio, it is not subject to trading risk. The Bank’s loan portfolio, concentrated primarily within the surrounding market area, is subject to risks associated with the local economy. Since all of the interest earning assets and interest bearing liabilities are located at the Bank, all of the interest rate risk lies at the Bank level. As a result, all significant interest rate risk management procedures are performed at the Bank level.

The Bank actively manages interest rate sensitivity and asset/liability products through an asset/liability management committee. The principle purposes of asset-liability management are to maximize current net interest income while minimizing the risk to future earnings of negative fluctuations in net interest margin and to insure adequate liquidity exists to meet operational needs.

In an effort to reduce interest rate risk and protect itself from the negative effects or rapid or prolonged changes in interest rates, the Bank has instituted certain asset and liability management measures, including underwriting long-term fixed rate loans that are saleable in the secondary market, offering longer term deposit products and diversifying the loan portfolio into shorter term consumer and commercial business loans. In addition, since the mid-1980’s, the Bank has originated variable rate loans and as of December 31, 2007, they comprised approximately 72.9% of the total loan portfolio.

One of the principal functions of the Company’s asset/liability management program is to monitor the level to which the balance sheet is subject to interest rate risk. The goal of this program is to manage the relationship between interest-earning assets and interest-bearing liabilities to minimize the fluctuations in the net interest spread and achieve consistent growth in net interest income during periods of changing interest rates.

Interest rate sensitivity is measured as the difference between the volume of assets and liabilities that are subject to repricing in a future period. These differences are known as interest sensitivity gaps. The Bank utilizes gap management as the primary means of measuring interest rate risk. Gap analysis identifies and quantifies the Bank’s exposure or vulnerability to changes in interest rates in relationship to the Bank’s interest rate sensitivity position. A rate sensitive asset or liability is one, which is capable of being repriced (i.e., the interest rate can be adjusted or principal can be reinvested) within a specified period of time. Subtracting total rate sensitive liabilities (RSL) from total rate sensitive assets (RSA) within specified time horizons nets the Bank’s gap positions. These gaps reflect the Bank’s exposure to changes in market interest rates, as discussed below.

Because many of the Bank’s deposit liabilities are capable of being immediately repriced, the Bank offers variable rate loan products in order to help maintain a proper balance in its ability to reprice various interest bearing assets and liabilities. Furthermore, the Bank’s deposit rates are not tied to an external index. As a result, although changing market interest rates impact repricing, the Bank has retained much of its control over repricing.

The Bank conducts the rate sensitivity analysis using a simulation model, which also monitors earnings at risk by projecting earnings of the Bank based upon an economic forecast of the most likely interest rate movement. The model also calculates earnings of the Bank based upon what are estimated to be the largest foreseeable rate increase and the largest foreseeable rate decrease. Such analysis translates interest rate movements and the Bank’s rate sensitivity position into dollar amounts by which earnings may fluctuate as a result of rate changes. A 2% immediate increase in interest rates would increase earnings by 7.0% and a 2% immediate decrease in interest rates would decrease earnings by 6.9%.

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The data included in the table that follows indicates that the Bank is asset sensitive within one year. Generally, an asset sensitive gap could negatively affect net interest income in an environment of decreasing interest rates as a greater amount of interest bearing assets could be repricing at lower rates. During times of rising interest rates, an asset sensitive gap could positively affect net interest income, as rates would be increased on a larger volume of assets as compared to deposits. As a result, interest income would increase more rapidly than interest expense. A liability sensitive gap indicates that declining interest rates could positively affect net interest income, as expense of liabilities would decrease more rapidly than interest income would decline. Conversely, rising rates could negatively affect net interest income, as income from assets would increase less rapidly than deposit costs. Although rate sensitivity analysis enables the Bank to minimize interest rate risk, the magnitude of rate increases or decreases on assets versus liabilities may not correlate directly. As a result, fluctuations in interest spreads can occur even when repricing capabilities are perfectly matched.

It is the policy of the Bank to generally maintain a gap ratio within a range that is minus 10 percent to plus 20 percent of total assets for the time horizon of one year. When Management believes that interest rates will increase it can take actions to increase the RSA/RSL ratios. When Management believes interest rates will decline, it can take actions to decrease the RSA/RSL ratio.

Changes in market interest rates can also affect the Bank’s liquidity position through the impact rate changes may have on the market value of the Bank’s investment portfolio. Rapid increases in market rates can negatively impact the market values of investment securities. As securities values decline, it becomes more difficult to sell investments to meet liquidity demands without incurring a loss. The Bank can address this by increasing liquid funds, which may be utilized to meet unexpected liquidity needs when a decline occurs in the value of securities.

The following table presents the Bank’s interest rate sensitivity gap position as of December 31, 2007 (dollars in thousands):

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INTEREST RATE SENSITIVITY GAPS

(IN THOUSANDS)

 

     2008     2009     2010     2011     2012     Thereafter     Total

Interest-earnings assets:

              

Loans:

              

Fixed

   $ 17,855     $ 8,665     $ 5,618     $ 4,573     $ 3,486     $ 13,806     $ 54,003

Variable

     104,986       11,023       10,464       9,295       5,876       3,652       145,296

Securities:

              

Fixed

     7,476       8,402       11,829       14,512       15,655       25,794       83,668

Other interest-earning assets

     29,548       —         —         —         —         —         29,548
                                                      

Total interest-earning assets

     159,865       28,090       27,911       28,380       25,017       43,252       312,515
                                                      

Interest-bearing liabilities:

              

Demand and savings deposits

     25,432       25,432       25,432       25,430       —         —         101,726

Time deposits:

              

Fixed

     125,034       20,569       2,192       2,533       2,676       3       153,007

Short-term borrowings

     5,745       —         —         —         —         —         5,745

FHLB advances

     723       642       530       224       175       243       2,537
                                                      

Total interest-bearing liabilities

     156,934       46,643       28,154       28,187       2,851       246       263,015
                                                      

Interest rate sensitivity gap

     2,931       (18,553 )     (243 )     193       22,166       43,006    
                                                  

Cumulative rate sensitivity gap

   $ 2,931     $ (15,622 )   $ (15,865 )   $ (15,672 )   $ 6,494     $ 49,500    
                                                  

Cumulative interest rate sensitivity gap as a percent of interest earning assets

     0.94 %     -5.00 %     -5.08 %     -5.01 %     2.08 %     15.84 %  
                                                  

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Item 8 Financial Statements and Supplementary Data

The report of independent auditors and consolidated financial statements included in the Annual Report to shareholders of Killbuck Bancshares, Inc. for the year ended December 31, 2007, included in this report as Exhibit 13, are incorporated herein by reference.

Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

Item 9A. Controls and Procedures

The Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer and Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the President and Chief Executive Officer and Vice President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective, as of the end of the period covered by this report, in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

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

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for the preparation and fair presentation of the financial statements included in this annual report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and reflect management’s judgments and estimates concerning effects of events and transactions that are accounted for or disclosed.

Management is also responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting includes those policies and procedures that pertain to the Company’s ability to record, process, summarize and report reliable financial data. Management recognizes that there are inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility of human error and the circumvention or overriding of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.

In order to ensure that the Company’s internal control over financial reporting is effective, management is required to evaluate, with the participation of the Company’s principal executive and principal financial officers, the effectiveness of the Company’s internal control over financial reporting as of the end of each fiscal year and did so most recently for its financial reporting as of December 31, 2007. Management’s assessment of the effectiveness of the Company’s internal control over financial reporting was based on criteria for effective internal control over financial reporting described in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on this assessment, management has concluded that the internal control over financial reporting was effective as of December 31, 2007. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

The Board of Directors, acting through its Audit Committee, is responsible for the oversight of the Company’s accounting policies, financial reporting and internal control. The Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of management. The Audit Committee is responsible for the appointment and compensation of the independent auditor and approves decisions regarding the appointment or removal of the Company’s Internal Auditor. It meets periodically with management, the independent auditors and the internal auditors to ensure that they are carrying out their responsibilities. The Audit Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting and auditing procedures of the Company in addition to reviewing the

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Company’s financial reports. The independent auditors and the internal auditor have full and unlimited access to the Audit Committee, with or without management, to discuss the adequacy of internal control over financial reporting, and any other matter which they believe should be brought to the attention of the Audit Committee.

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PART III

Item 10 Directors and Executive Officers of Registrant

The following table lists the Executive Officers of the Company and its subsidiary, Killbuck Savings Bank Company, and certain other information with respect to each individual, as of December 31, 2007. The information required by this item with respect to Directors and other executive officers of the Company and its subsidiary, Killbuck Savings Bank Company, is incorporated herein by reference to the information under the heading “Election of Directors and Information with Respect to Directors and Officers” in the Proxy Statement of the Company. The information required regarding disclosure of any known late filings or failure by an insider to file a report required by Section 16(a) of the Securities Exchange Act is incorporated herein by reference to the information under the heading “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in the Proxy Statement of the Company.

 

Name

   Age   

All Positions with Company and Bank

Luther E. Proper

   58    President and CEO of the Company and the Bank since 1991. Vice-chairman of the Board of Directors of both the Company and the Bank since 2001.

Craig A. Lawhead

   50    Vice president and treasurer of Company since 1992; Executive vice president of bank since 1991.

Diane S. Knowles

   45    Vice president and secretary of Company since July, 2000; Senior vice president and Chief Financial Officer of Bank since June, 2000.

The Company has adopted a code of ethics that applies to its principal executive, financial and accounting officers. A copy of the code of ethics is posted on the Company’s web site at http://www.killbuckbank.com . In the event we make any amendment to, or grant any waiver of, a provision of the code of ethics that applies to the principal executive, financial or accounting officer, or any person performing similar functions, that requires disclosure under applicable SEC rules, we intend to disclose such amendment or waiver, the nature of and reasons for it, along with the name of the person to whom it was granted and the date, on our internet website.

Item 11 Executive Compensation

Information required by this item is incorporated herein by reference to the information under the heading “Executive Compensation and Other Information” in the Proxy Statement of the Company.

Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required by this item is incorporated herein by reference to the information under the heading “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement of the Company. The Company currently has no equity compensation plans or arrangements, such as stock option or restricted stock arrangements, pursuant to which equity securities of the Company are authorized for issuance.

Item 13 Certain Relationships and Related Transactions

Information required by this item is incorporated herein by reference to the information under the heading “Certain Relationships and Related Transactions” in the Proxy Statement of the Company and in Note 4 of the Notes to Consolidated Financial statements included in the Annual Report to Shareholders for the year ended December 31, 2007, included in this report as Exhibit 13, and incorporated herein by reference.

Item 14 Principal Accountant Fees and Services

Information required by this item is incorporated here in by reference to the information under the heading “Audit Committee Report” in the Proxy Statement of the Company.

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PART IV

Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K

Financial Statements and Schedules

The following consolidated financial statements of Killbuck Bancshares, Inc. and subsidiary, included in the Annual Report to Shareholders for the year ended December 31, 2007, are incorporated by reference in item 8:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheet at December 31, 2007 and 2006

Consolidated Statement of Income for the Years ended December 31, 2007, 2006 and 2005

Consolidated Statement of Changes in Shareholders’ Equity for the Years ended December 31, 2007, 2006 and 2005

Consolidated Statement of Cash Flows for the Years ended December 31, 2007, 2006 and 2005

Notes to Consolidated Financial Statements

Schedules are omitted because they are inapplicable, not required, or the information is included in the consolidated financial statements or notes thereto.

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Exhibits

The following exhibits are filed herewith and/or are incorporated herein by reference.

 

Exhibit
Number

 

Description

3(i)

  Certificate and Articles of Incorporation of Killbuck Bancshares, Inc.*

3(ii)

  Code of regulations of Killbuck Bancshares, Inc.*

10.1

  Employment Agreement dated April 23, 2007 between Killbuck Savings Bank Company and Luther E. Proper. **

10.2

  Employment Agreement dated April 23, 2007 between Killbuck Savings Bank Company and Craig A. Lawhead. **

10.3

  Employment Agreement dated April 23, 2007 between Killbuck Savings Bank Company and Diane S. Knowles. **

12

  Statement regarding computation of ratios.

13

  Portions of the 2008 Annual Report to Shareholders

21

  Subsidiary of the Holding Company.*

31.1

  Rule 13a-14(a) Certification

31.2

  Rule 13a-14(a) Certification

32.1

  Certification pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003.

32.2

  Certification pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003.

 

* Incorporated by reference to an identically numbered exhibit to the Form 10 (File No. 000-24147) filed with the SEC on April 30, 1998 and subsequently amended on July 8, 1998 and July 31, 1998.
** Incorporated by reference to an identically numbered exhibit to the Form 8-K filed with the SEC on April 27, 2007.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Killbuck Bancshares, Inc.

 

(Registrant)

By:  

/s/ Luther E. Proper

  Luther E. Proper
 

President and Chief Executive Officer/Director

 

(Duly authorized representative)

Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signatures

  

Description

   Date

/s/ Luther E. Proper

   President, Chief Executive Officer and Director    March 26, 2008

Luther E. Proper

     

/s/ John W. Baker

   Director    March 26, 2008

John W. Baker

     

/s/ Ted Bratton

   Director    March 26, 2008

Ted Bratton

     

/s/ Gail E. Patterson

   Director    March 26, 2008

Gail E. Patterson

     

/s/ Allan R. Mast

   Director    March 26, 2008

Allan R. Mast

     

/s/ Max A. Miller

   Director    March 26, 2008

Max A. Miller

     

/s/ Dean J. Mullet

   Director    March 26, 2008

Dean J. Mullet

     

/s/ Kenneth E. Taylor

   Director    March 26, 2008

Kenneth E. Taylor

     

/s/ Michael S. Yoder

   Director    March 26, 2008

Michael S. Yoder

     

/s/ Diane S. Knowles

   Chief Financial and Chief Accounting Officer    March 26, 2008

Diane S. Knowles

     
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