UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2009
0-20159
(Commission File Number)
CROGHAN BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
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Ohio
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31-1073048
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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323 Croghan Street, Fremont, Ohio
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43420
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(Address of principal executive offices)
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(Zip Code)
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(419) 332-7301
(Registrants 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
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller 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
o
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
þ
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
o
No
þ
1,720,330 common shares, par value $12.50 per share, of the registrant were outstanding as of
October 30, 2009.
This document contains 29 pages. The Exhibit Index is on page 26 immediately preceding the filed
exhibits.
CROGHAN BANCSHARES, INC.
Index
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CROGHAN
BANCSHARES, INC.
Consolidated Balance Sheets (Unaudited)
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September 30
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December 31
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2009
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2008
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(Dollars in thousands, except par value)
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ASSETS
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CASH AND CASH EQUIVALENTS
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Cash and due from banks
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$
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10,602
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$
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10,100
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Interest-bearing deposits in other banks
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3,190
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32
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Total cash and cash equivalents
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13,792
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10,132
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SECURITIES
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Available-for-sale, at fair value
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90,931
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68,748
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Held-to-maturity, at amortized cost, fair value of $532 in 2009 and $512 in 2008
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502
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504
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Restricted stock
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3,729
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3,729
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Total securities
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95,162
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72,981
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LOANS
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330,061
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349,433
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Less: Allowance for loan losses
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4,636
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3,287
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Net loans
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325,425
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346,146
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Premises and equipment, net
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7,086
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7,181
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Cash surrender value of life insurance
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10,841
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10,601
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Goodwill
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10,430
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10,430
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Core deposit intangible asset, net
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187
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230
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Accrued interest receivable
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1,975
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1,874
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Other assets
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1,300
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901
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TOTAL ASSETS
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$
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466,198
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$
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460,476
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LIABILITIES AND STOCKHOLDERS EQUITY
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LIABILITIES
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Deposits:
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Demand, non-interest bearing
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$
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51,686
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$
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49,820
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Savings, NOW, and Money Market deposits
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145,270
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143,922
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Time
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156,861
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151,335
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Total deposits
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353,817
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345,077
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Federal funds purchased and securities sold under repurchase agreements
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14,434
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17,351
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Federal Home Loan Bank borrowings
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37,500
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39,500
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Dividends payable
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550
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551
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Other liabilities
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3,227
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3,178
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Total liabilities
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409,528
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405,657
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STOCKHOLDERS EQUITY
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Common stock, $12.50 par value. Authorized 6,000,000 shares;
issued 1,914,109 shares
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23,926
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23,926
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Surplus
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179
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179
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Retained earnings
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37,744
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37,281
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Accumulated other comprehensive income
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1,872
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471
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Treasury stock, 193,779 shares in 2009 and 193,251 shares in 2008, at cost
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(7,051
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)
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(7,038
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)
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Total stockholders equity
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56,670
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54,819
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
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$
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466,198
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$
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460,476
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See notes to consolidated financial statements.
3
CROGHAN BANCSHARES, INC.
Consolidated Statements of Operations (Unaudited)
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Three months ended
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September 30
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2009
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2008
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(Dollars in thousands,
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except per share data)
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INTEREST INCOME
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Loans, including fees
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$
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4,996
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$
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5,690
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Securities:
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Obligations of U.S. Government agencies and corporations
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601
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566
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Obligations of states and political subdivisions
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293
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200
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Other
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59
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61
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Interest on deposits in other banks
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5
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12
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Total interest income
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5,954
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6,529
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INTEREST EXPENSE
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Deposits
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1,207
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1,607
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Other borrowings
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351
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368
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Total interest expense
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1,558
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1,975
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Net interest income
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4,396
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4,554
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PROVISION FOR LOAN LOSSES
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1,250
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300
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Net interest income, after provision for
loan losses
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3,146
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4,254
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NON-INTEREST INCOME
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Gain on sale of loans
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35
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Trust income
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226
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231
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Service charges on deposit accounts
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394
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396
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Gain on sale of securities
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16
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Other
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189
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232
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Total non-interest income
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844
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875
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NON-INTEREST EXPENSES
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Salaries, wages, and employee benefits
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1,867
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1,892
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Occupancy of premises
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203
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|
212
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Amortization of core deposit intangible asset
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15
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14
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|
Other operating
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1,499
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1,237
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Total non-interest expenses
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|
3,584
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|
|
3,355
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|
|
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|
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Income before federal income taxes
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|
406
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1,774
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FEDERAL INCOME TAXES
|
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|
35
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|
|
|
519
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|
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|
|
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NET INCOME
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$
|
371
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|
$
|
1,255
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Net income per share, based on 1,720,330 shares in 2009 and 1,725,996 shares in 2008
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$
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0.22
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$
|
0.73
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|
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|
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|
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Dividends declared per share
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$
|
0.32
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$
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0.32
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See notes to consolidated financial statements.
4
CROGHAN BANCSHARES, INC.
Consolidated Statements of Operations (Unaudited)
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Nine months ended
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September 30
|
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2009
|
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2008
|
|
|
|
(Dollars in thousands,
|
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|
|
except per share data)
|
|
INTEREST INCOME
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
15,405
|
|
|
$
|
17,168
|
|
Securities:
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government agencies and corporations
|
|
|
1,652
|
|
|
|
1,486
|
|
Obligations of states and political subdivisions
|
|
|
736
|
|
|
|
606
|
|
Other
|
|
|
167
|
|
|
|
178
|
|
Federal funds sold
|
|
|
|
|
|
|
71
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|
Interest on deposits in other banks
|
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|
21
|
|
|
|
73
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
17,981
|
|
|
|
19,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
3,725
|
|
|
|
5,325
|
|
Other borrowings
|
|
|
1,080
|
|
|
|
1,040
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
4,805
|
|
|
|
6,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
13,176
|
|
|
|
13,217
|
|
|
|
|
|
|
|
|
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|
PROVISION FOR LOAN LOSSES
|
|
|
2,350
|
|
|
|
1,150
|
|
|
|
|
|
|
|
|
Net interest income, after provision for
loan losses
|
|
|
10,826
|
|
|
|
12,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST INCOME
|
|
|
|
|
|
|
|
|
Gain on sale of loans
|
|
|
269
|
|
|
|
|
|
Trust income
|
|
|
676
|
|
|
|
655
|
|
Service charges on deposit accounts
|
|
|
1,105
|
|
|
|
1,161
|
|
Gain on sale of securities
|
|
|
|
|
|
|
16
|
|
Other
|
|
|
676
|
|
|
|
736
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
|
2,726
|
|
|
|
2,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST EXPENSES
|
|
|
|
|
|
|
|
|
Salaries, wages, and employee benefits
|
|
|
5,724
|
|
|
|
5,612
|
|
Occupancy of premises
|
|
|
634
|
|
|
|
675
|
|
Amortization of core deposit intangible asset
|
|
|
43
|
|
|
|
43
|
|
Other operating
|
|
|
4,392
|
|
|
|
3,753
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
|
10,793
|
|
|
|
10,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before federal income taxes
|
|
|
2,759
|
|
|
|
4,552
|
|
|
|
|
|
|
|
|
|
|
FEDERAL INCOME TAXES
|
|
|
644
|
|
|
|
1,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
2,115
|
|
|
$
|
3,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, based on 1,720,438 shares in 2009 and 1,736,273 shares in 2008
|
|
$
|
1.23
|
|
|
$
|
1.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
|
$
|
0.96
|
|
|
$
|
0.96
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
5
CROGHAN BANCSHARES, INC.
Condensed Consolidated Statements of Stockholders Equity (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
September 30
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands,
|
|
|
|
except per share data)
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT BEGINNING OF PERIOD
|
|
$
|
55,689
|
|
|
$
|
53,599
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
Net income
|
|
|
371
|
|
|
|
1,255
|
|
Change in net unrealized gain (loss) on securities
available-for-sale,
net of reclassification adjustments and related income taxes
|
|
|
1,160
|
|
|
|
(184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
1,531
|
|
|
|
1,071
|
|
|
|
|
|
|
|
|
|
|
Purchase of 7,254 shares in 2008
|
|
|
|
|
|
|
(199
|
)
|
|
|
|
|
|
|
|
|
|
Cash dividends declared, $.32 per share in 2009 and 2008
|
|
|
(550
|
)
|
|
|
(551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT END OF PERIOD
|
|
$
|
56,670
|
|
|
$
|
53,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
September 30
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands,
|
|
|
|
except per share data)
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT BEGINNING OF PERIOD
|
|
$
|
54,819
|
|
|
$
|
53,288
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in accounting principle, net of tax
|
|
|
|
|
|
|
(149
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
Net income
|
|
|
2,115
|
|
|
|
3,262
|
|
Change in net unrealized gain (loss) on securities
available-for-sale,
net of reclassification adjustments and related income taxes
|
|
|
1,401
|
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
3,516
|
|
|
|
3,178
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury shares, 528 shares in 2009 and 23,145 shares in 2008
|
|
|
(13
|
)
|
|
|
(734
|
)
|
|
|
|
|
|
|
|
|
|
Cash dividends declared, $.96 per share in 2009 and 2008
|
|
|
(1,652
|
)
|
|
|
(1,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT END OF PERIOD
|
|
$
|
56,670
|
|
|
$
|
53,920
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
6
CROGHAN BANCSHARES, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
September 30
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
NET CASH FLOW FROM OPERATING ACTIVITIES
|
|
$
|
4,664
|
|
|
$
|
4,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from maturities of securities
|
|
|
17,000
|
|
|
|
8,508
|
|
Proceeds from sale of available-for-sale securities
|
|
|
|
|
|
|
3,649
|
|
Purchases of available-for-sale securities
|
|
|
(37,237
|
)
|
|
|
(30,782
|
)
|
Net decrease in loans
|
|
|
18,139
|
|
|
|
1,473
|
|
Additions to premises and equipment
|
|
|
(631
|
)
|
|
|
(528
|
)
|
Proceeds from sale of property
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from investing activities
|
|
|
(2,663
|
)
|
|
|
(17,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net change in deposits
|
|
|
8,740
|
|
|
|
(9,900
|
)
|
Net change in federal funds purchased and securities sold under
repurchase agreements
|
|
|
(2,917
|
)
|
|
|
1,972
|
|
Net change in borrowed funds
|
|
|
(2,000
|
)
|
|
|
10,000
|
|
Cash dividends paid
|
|
|
(1,653
|
)
|
|
|
(1,653
|
)
|
Purchase of treasury stock
|
|
|
(13
|
)
|
|
|
(734
|
)
|
Payment of deferred compensation
|
|
|
(498
|
)
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from financing activities
|
|
|
1,659
|
|
|
|
(365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
3,660
|
|
|
|
(13,284
|
)
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
10,132
|
|
|
|
25,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
13,792
|
|
|
$
|
12,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
5,474
|
|
|
$
|
6,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income taxes
|
|
$
|
915
|
|
|
$
|
1,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING ACTIVITY:
|
|
|
|
|
|
|
|
|
Change in net unrealized gain on
available-for-sale securities
|
|
$
|
2,123
|
|
|
$
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH OPERATING AND INVESTING ACTIVITY:
|
|
|
|
|
|
|
|
|
Transfer of loans to other real estate owned
|
|
$
|
227
|
|
|
$
|
117
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
7
CROGHAN BANCSHARES, INC.
Notes to Consolidated Financial Statements
September 30, 2009
(Unaudited)
NOTE 1 CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements of Croghan Bancshares, Inc. (Croghan or the Corporation)
and its wholly-owned subsidiary, The Croghan Colonial Bank (the Bank), have been prepared without
audit. In the opinion of management, all adjustments (including normal recurring adjustments)
necessary to present fairly the Corporations consolidated financial position, results of
operations and changes in cash flows have been made.
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with U.S. generally accepted accounting principles (GAAP) have been omitted. The
Corporations Annual Report to shareholders for the year ended December 31, 2008, contains
consolidated financial statements and related footnote disclosures which should be read in
conjunction with the accompanying consolidated financial statements. The results of operations for
the period ended September 30, 2009, are not necessarily indicative of the operating results for
the full year.
Management evaluated subsequent events through October 30, 2009, the date the financial statements
were available to be issued. Events or transactions occurring after September 30, 2009, but prior
to October 30, 2009, that provided additional evidence about conditions that existed at September
30, 2009, have been recognized in the financial statements for the quarter ended September 30,
2009. Events or transactions that provided evidence about conditions that arose before the
financial statements were available to be issued, but did not exist at September 30, 2009 have not
been recognized in the financial statements for the period ended September 30, 2009.
NOTE 2 NEW ACCOUNTING PRONOUCEMENTS
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157, Fair
Value Measurements (FAS 157), which is codified in FASB ASC 820-10 (ASC 820-10), which defines
fair value, establishes a framework for measuring fair value, and expands disclosures about fair
value measurements. FAS 157 also establishes a fair value hierarchy which requires the use of
observable inputs and minimizes the use of unobservable inputs when measuring fair value. The
standard describes three levels of inputs that may be used to measure fair value:
|
Level 1
|
|
Quoted prices in active markets for identical assets or liabilities.
|
|
|
Level 2
|
|
Observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilities; quoted prices in active markets that are not active; or
other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
|
|
|
Level 3
|
|
Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
|
The Corporation adopted the provisions of FAS 157 for the quarter ended March 31, 2008. There was
no impact on the consolidated financial statements of the Corporation as a result of the adoption
of FAS 157.
8
Following is a description of the valuation methodologies used for instruments measured at fair
value on a recurring basis and recognized in the accompanying consolidated balances sheet, as well
as the general classification of such instruments pursuant to the valuation hierarchy.
Securities available for sale
Where quoted market prices are available in an active market, securities are classified within
Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government
bonds, mortgage products, and exchange traded equities. If quoted market prices are not available,
then fair values are estimated by using pricing models, quoted prices of securities with similar
characteristics or discounted cash flows. Level 2 securities include U.S. agency securities,
mortgage-backed agency securities, obligations of states and political subdivisions and certain
corporate, asset backed and other securities. In certain cases where Level 1 or Level 2 inputs are
not available, securities are classified within Level 3 of the hierarchy. Currently, all of the
Corporations securities are considered to be Level 2 securities and fair values are provided by a
third party pricing vendor.
Following is a description of the valuation methodologies used for instruments measured at fair
value on a non-recurring basis and recognized in the accompanying consolidated balance sheet, as
well as the general classification of such instruments pursuant to the valuation hierarchy.
Impaired Loans
Loan impairment is reported when full payment under the loan terms is not expected.
Impaired loans are carried at the present value of estimated future cash flows using the loans
existing rate, or the fair value of collateral if the loan is collateral dependent. A portion
of the allowance for loan losses is allocated to impaired loans if the value of such loans is
deemed to be less than the unpaid balance. This valuation is considered Level 3 when consisting
of appraisals of underlying collateral. Substantially all impaired loans are valued considering
appraisals of underlying collateral.
During 2007, the FASB issued Emerging Issues Task Force 06-4, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsed Split-Dollar Life Insurance Arrangements (EITF
06-4),which is codified in FASB ASC 715-60 (ASC 715-60), which requires an employer to recognize a
liability for postemployment death benefits provided under endorsement split-dollar agreements. An
endorsement split-dollar agreement is an arrangement whereby an employer owns a life insurance
policy that covers the life of an employee and, pursuant to a separate agreement, endorses a
portion of the policys death benefits to the insured employees beneficiary. EITF 06-4 clarifies
that such liability be provided over the estimated service period of the employee rather than over
the life expectancy of the employee. As a result of the adoption of ASC 715-60 as it relates to
EITF 06-4, effective January 1, 2008, the Bank recognized a cumulative effect adjustment (decrease)
to retained earnings of $149,000 in the first quarter of 2008 representing additional liability
($226,000) required to be provided under EITF 06-4 relating to the Banks agreements, net of
deferred income taxes ($77,000).
In December 2007, the FASB issued Statement of Financial Accounting Standards No 141 (Revised
2007), Business Combinations (SFAS 141 (R)), which is codified in ASC 805-20 (ASC 805-20). SFAS
141 (R) recognizes and measures the goodwill acquired in a business combination, defines a bargain
purchase, and requires the acquirer to recognize that excess as a gain attributable to the
acquirer. In contrast, SFAS 141 required a bargain purchase or negative goodwill to be allocated
as a pro rata reduction of the amounts assigned to assets acquired. SFAS 141 (R) also requires the
expensing of transaction costs that were previously capitalized as part of the cost of the
transaction under SFAS 141. SFAS 141 (R) applies prospectively to business combinations for which
the acquisition date is on or after December 15, 2008. The Corporation has not entered into any
business combination transactions since the effective date of ASC 805-20 as it relates to SFAS 141
(R).
9
Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments
and Hedging Activities an amendment of FASB Statement No. 133 (SFAS 161), which is codified in
ASC 815-10 (ASC 815-10), requires qualitative disclosures about objectives and strategies for using
derivative instruments, quantitative disclosures about fair value amount of and gains and losses on
derivative instruments, and disclosures about credit-risk-related contingent features in derivative
agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. Since the Corporation has not held any derivative
instruments or conducted hedging activities, adoption of ASC 815-10 as it relates to SFAS 161 did
not have any impact on the consolidated financial statements.
FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment
Transactions are Participating Securities (FSP EITF 03-6-1), which is codified in FASB ASC 260-10
(ASC 260-10). FSP EITF 03-6-1 requires companies to treat unvested share-based payment awards that
have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities
in calculating earnings per share. FSP EITF 03-6-1 is effective for financial statements issued
for fiscal years and interim periods beginning after December 15, 2008, and requires retroactive
adjustment to earnings per share data. Since the Corporation has not made any share-based payment
awards, it was not required to adopt the provisions of ASC 260-10 as it relates to FSP EITF 03-6-1.
In April 2009, the FASB issued Staff Positions (FSP) No. 115-2 and No. 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments, which is codified in ASC 320-10-35 (ASC
320-10-35), which amends existing guidance for determining whether an impairment is
other-than-temporary for debt securities. This FSP requires an entity to assess whether it intends
to sell, or it is more likely than not that it will be required to sell, a security in an
unrealized loss position before recovery of its amortized cost and fair value is recognized in
earnings. For securities that do not meet the aforementioned criteria, the amount of impairment
recognized in earnings is limited to the amount related to credit losses, while impairment related
to other factors is recognized in other comprehensive income. Additionally, this FSP expands and
increases the frequency of existing disclosures about other-than-temporary impairments for debt and
equity securities. This FSP is effective for interim and annual reporting periods ending after
June 15, 2009. The Corporation adopted ASC 320-10-35 as it relates to FSP in the second quarter of
2009, but the adoption did not have any impact on the consolidated financial statements since the
Corporation did not hold any other-than-temporarily impaired debt securities.
In April 2009, the FASB issued Staff Position No. 157-4, Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly (FSP 157-4) which is codified in ASC 820-10-65 (ASC 820-10-65).
FSP 157-4 emphasizes that even if there has been a significant decrease in the volume and level of
activity, the objective of a fair value measurement remains the same. Fair value is the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction (that
is, not a forced liquidation or distressed sale) between market participants. FSP 157-4 provides a
number of factors to consider when evaluating whether there has been a significant decrease in the
volume and level of activity for an asset or liability in relation to normal market activity. In
addition, when transactions or quoted prices are not considered orderly, adjustments to those
prices based on the weight of available information may be needed to determine the appropriate fair
value. FSP 157-4 also requires increased disclosures. FSP 157-4 is effective for interim and
annual reporting periods ending after June 15, 2009, and shall be applied prospectively. There was
no impact on the consolidated financial statements of the Corporation as a result of the adoption
of ASC 820-10-65 as it relates to FSP 157-4 during the second quarter of 2009.
10
In April 2009, the FASB issued Staff Position (FSP) No. 107-1 and APB 28-1, Interim Disclosures
about Fair Value of Financial Instruments, which is codified in ASC 825-10-65 (ASC 825-10-65),
which amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to
require disclosures about fair value of financial instruments for interim reporting periods of
publically traded companies that were previously only required in annual financial statements.
This FSP is effective for interim reporting periods ending after June 15, 2009. The Corporation
adopted this ASC 825-10-65 as it relates to FSP for the quarter ended June 30, 2009.
The estimated fair values of recognized financial instruments at September 30, 2009 and December
31, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
Carrying
|
|
|
Estimated fair
|
|
|
Carrying
|
|
|
Estimated fair
|
|
|
|
amount
|
|
|
value
|
|
|
amount
|
|
|
value
|
|
|
|
(Dollars in thousands)
|
|
FINANCIAL ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,792
|
|
|
$
|
13,792
|
|
|
$
|
10,132
|
|
|
$
|
10,132
|
|
Securities
|
|
|
95,162
|
|
|
|
95,192
|
|
|
|
72,981
|
|
|
|
72,989
|
|
Loans, net
|
|
|
325,425
|
|
|
|
327,948
|
|
|
|
346,146
|
|
|
|
354,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
434,379
|
|
|
$
|
436,932
|
|
|
$
|
429,259
|
|
|
$
|
437,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
353,817
|
|
|
$
|
355,506
|
|
|
$
|
345,077
|
|
|
$
|
346,575
|
|
Federal funds purchased and
securities sold under
repurchase agreements
|
|
|
14,434
|
|
|
|
14,441
|
|
|
|
17,351
|
|
|
|
16,575
|
|
Federal Home Loan Bank
borrowings
|
|
|
37,500
|
|
|
|
39,651
|
|
|
|
39,500
|
|
|
|
41,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
405,751
|
|
|
$
|
409,598
|
|
|
$
|
401,928
|
|
|
$
|
404,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The preceding summary does not include accrued interest receivable, cash surrender value of
life insurance, dividends payable, and other liabilities which are also considered financial
instruments. The estimated fair value of such items is considered to be their carrying amount.
The Bank also has unrecognized financial instruments which relate to commitments to extend credit
and standby letters of credit. The contract amount of such financial instruments, $77,933,000 at
September 30, 2009, and $74,079,000 at December 31, 2008, is considered to be the fair value since
they represent commitments at current interest rates.
The following methods and assumptions were used to estimate fair value of each class of financial
instruments:
Cash and cash equivalents:
Fair value is determined to be the carrying amount for these items because they represent cash or
mature in 90 days or less and do not represent unanticipated credit concerns.
11
Securities:
The fair value of securities (both available-for-sale and held-to-maturity) is determined based on
quoted market prices of the individual securities or, if not available, estimated fair value was
obtained by comparison to other known securities with similar risk and maturity characteristics.
Such value does not consider possible tax ramifications or estimated transaction costs. The fair
value of restricted stock is considered to be its carrying amount.
Loans:
Fair value for loans was estimated for portfolios of loans with similar financial characteristics.
For adjustable rate loans, which re-price at least annually and generally possess low risk
characteristics, the carrying amount is believed to be a reasonable estimate of fair value. For
fixed rate loans, the fair value is estimated based on a discounted cash flow analysis, considering
weighted average rates and terms of the portfolio, adjusted for credit and interest rate risk
inherent in the loans. Fair value for nonperforming loans is based on recent appraisals or
estimated discounted cash flows. The estimated value of credit card loans is based on existing
loans and does not include the value that relates to estimated cash flows from new loans generated
from existing cardholders over the remaining life of the portfolio.
Deposit liabilities:
The fair value of core deposits, including demand deposits, savings accounts, and certain money
market deposits, is the amount payable on demand. The fair value of fixed-maturity certificates of
deposit is estimated using the rates offered at year-end for deposits of similar remaining
maturities. The estimated fair value does not include the benefit that results from the low-cost
funding provided by the deposit liabilities compared to the cost of borrowing funds in the
marketplace.
Other financial instruments:
The fair value of federal funds purchased and securities sold under repurchase agreements, as well
as Federal Home Loan Bank borrowings, is determined based on a discounted cash flow analysis using
current interest rates.
The fair value estimates of financial instruments are made at a specific point in time based on
relevant market information. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect these estimates.
In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No.
162, which is codified in ASC 105-10 (ASC 105-10). Under the Statement, the FASB Accounting
Standards Codification (Codification) will become the source of authoritative U.S. GAAP recognized
by the FASB to be applied by non-governmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (SEC) under authority of federal securities laws are also
sources of authoritative U.S. GAAP for SEC registrants. This statement is effective for financial
statements issued for interim and annual periods ending after September 15, 2009 and, on that date,
the Codification will supersede all then-existing non-SEC accounting and reporting standards. In
the FASBs view, the issuance of this Statement and Codification does not change U.S. GAAP and, as
a result, the adoption of this statement, did not have a significant impact on the consolidated
financial statements.
12
NOTE 3 SECURITIES
Amortized cost and fair value of available-for-sale securities as of September 30, 2009 and
December 31, 2008 follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
cost
|
|
|
value
|
|
|
cost
|
|
|
value
|
|
Obligations of U.S. Government
agencies and corporations
|
|
$
|
54,303
|
|
|
$
|
55,554
|
|
|
$
|
45,928
|
|
|
$
|
46,481
|
|
|
Obligations of states and
political subdivisions
|
|
|
33,442
|
|
|
|
35,027
|
|
|
|
21,757
|
|
|
|
21,917
|
|
|
Other
|
|
|
350
|
|
|
|
350
|
|
|
|
350
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale
|
|
|
88,095
|
|
|
|
90,931
|
|
|
|
68,035
|
|
|
|
68,748
|
|
|
Held-to-maturity corporate
debt obligation
|
|
|
502
|
|
|
|
532
|
|
|
|
504
|
|
|
|
512
|
|
|
Restricted stock
|
|
|
3,729
|
|
|
|
3,729
|
|
|
|
3,729
|
|
|
|
3,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
92,326
|
|
|
$
|
95,192
|
|
|
$
|
72,268
|
|
|
$
|
72,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized gains and losses on available-for-sale securities at September 30, 2009 and
December 31, 2008 follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Gross
|
|
|
Gross
|
|
|
|
unrealized gains
|
|
|
unrealized losses
|
|
|
unrealized gains
|
|
|
unrealized losses
|
|
|
Obligations of U.S. Government
agencies and corporations
|
|
$
|
1,291
|
|
|
$
|
40
|
|
|
$
|
588
|
|
|
$
|
35
|
|
|
Obligations of states and
political subdivisions
|
|
|
1,595
|
|
|
|
10
|
|
|
|
440
|
|
|
|
280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale
|
|
|
2,886
|
|
|
|
50
|
|
|
|
1,028
|
|
|
|
315
|
|
|
Held-to-maturity corporate
debt obligation
|
|
|
30
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,916
|
|
|
$
|
50
|
|
|
$
|
1,036
|
|
|
$
|
315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
NOTE 4 OTHER COMPREHENSIVE INCOME
The components of other comprehensive income and related tax effects follows for the nine-month
period ended September 30, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Unrealized gains on available-for-sale securities
|
|
$
|
2,836
|
|
|
$
|
111
|
|
|
Reclassification adjustment for securities gains
realized in income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains
|
|
|
2,836
|
|
|
|
111
|
|
|
Tax effect
|
|
|
964
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
Net-of-tax amount
|
|
$
|
1,872
|
|
|
$
|
73
|
|
|
|
|
|
|
|
|
14
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Where appropriate, the following discussion relating to Croghan contains the insights of management
into known events and trends that have or may be expected to have a material effect on Croghans
operations and financial condition. The information presented may also contain certain
forward-looking statements regarding future financial performance, which are not historical facts
and which involve various risks and uncertainties. When used herein, the terms anticipates,
believes, plans, intends, expects, estimates, projects, targets, will, would,
should, could, and similar expressions are intended to identify forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995, but are not the
exclusive means of identifying such statements. The Corporations actual results may differ
materially from those expressed or implied in such forward-looking statements. Risks and
uncertainties that could cause or contribute to such material differences include, but are not
limited to, changes in regional and/or national economic conditions, changes in policies by
regulatory agencies, fluctuations in interest rates, changes in FDIC insurance assessment rates,
demand for loans in the Corporations market area, and competitive conditions in the financial
services industry. Additional information concerning a number of important factors which could
cause actual results to differ materially from the forward-looking statements is available in the
Corporations filings with the Securities and Exchange Commission under the Securities Exchange Act
of 1934, as amended (the Exchange Act), including the disclosure in Item 1A. Risk Factors of
Part I of Croghans Annual Report on Form 10-K for the fiscal year ended December 31, 2008, and in
Item 1A Risk Factors of Part II of this Quarterly Report on Form 10-Q.
The Corporation cautions readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The Corporation does not undertake, and
specifically disclaims any obligation, to update any forward-looking statements to reflect
occurrences or unanticipated events or circumstances after the date of such statements, except to
the extent required by law.
PERFORMANCE SUMMARY
Assets at September 30, 2009 totaled $466,198,000 compared to $460,476,000 at December 31, 2008, an
increase of $5,722,000 (1.2 percent). Total cash and cash equivalents increased $3,660,000 during
the nine-month period to $13,792,000 at September 30, 2009, and total securities increased
$22,181,000 to $95,162,000 at September 30, 2009. Conversely, net loans decreased $20,721,000 (6.0
percent). Total deposits also increased $8,740,000 to $353,817,000 at September 30, 2009.
Net income for the three-month period ended September 30, 2009 was $371,000, or $.22 per common
share, compared to $1,255,000, or $.73 per common share, for the same period in 2008. Net income
for the nine-month period ended September 30, 2009 was $2,115,000, or $1.23 per common share,
compared to $3,262,000, or $1.88 per common share, for the same period in 2008. The 2009 results,
as compared to 2008, were adversely impacted by increases in the provision for loan losses and
non-interest expenses.
FINANCIAL POSITION
The following comments are based upon a comparison of Croghans financial position at September 30,
2009 to December 31, 2008.
15
Total cash and cash equivalents increased $3,660,000 (36.1 percent) and total securities increased
$22,181,000 (30.4 percent) during the nine-month period ended September 30, 2009. Total loans
decreased $19,372,000 (5.5 percent) to $330,061,000 at September 30, 2009, compared to $349,433,000
at December 31, 2008. During the same period, Croghans deposits increased $8,740,000 (2.5
percent) to $353,817,000 at September 30, 2009, compared to $345,077,000 at December 31, 2008. As
a result, Croghan had a significant increase in available funds which have primarily been invested
in available-for-sale securities and used to pay down Federal Home Loan Bank borrowings.
The increase in securities during the nine-month period ended September 30, 2009 primarily resulted
from purchases of available-for sale securities of $37,237,000, with maturities during the period
of $17,000,000. There were no sales of securities during the period. Securities purchases were a
direct result of the excess cash balances from the continued loan balance decline and deposit
balance increase.
The decrease in loans during the nine-month period ending September 30, 2009 is due to general
economic conditions, continued adherence to underwriting standards, seasonal reductions from
certain commercial borrowers, and continued soft demand in the Banks lending markets. Also,
during the first quarter of 2009, Croghan began selling newly originated fixed rate mortgage loans
to Freddie Mac with servicing retained.
Components of the increase in deposits include the liquid deposit category (demand, savings, NOW,
and money market deposit accounts) increasing $3,214,000 (1.7 percent) and the time deposit
category increasing $5,526,000 (3.7 percent). Croghan experienced growth in all of its deposit
categories during the first nine months of 2009. Management attributes this growth to poor
economic conditions, which has caused customers to seek liquidity and less risky investments.
Croghan continuously strives to maintain a balance between its deposit needs for funding future
loan demand and the deposit pricing structure necessary to maintain its net interest margin.
Stockholders equity increased to $56,670,000, or $32.94 book value per common share at September
30, 2009, compared to $54,819,000 or $31.86 book value per common share at December 31, 2008. The
balance in stockholders equity at September 30, 2009 included accumulated other comprehensive
income consisting of net unrealized gains on securities classified as available-for-sale, net of
related income taxes. At September 30, 2009, Croghan held $90,931,000 in available-for-sale
securities with an unrealized gain of $1,872,000, net of income taxes. This compares to 2008
year-end holdings of $68,748,000 in available-for-sale securities with an unrealized gain of
$471,000, net of income taxes.
Beginning in February 2002, Croghan instituted a stock buy-back program, which has subsequently
been extended through February 1, 2010. Since the inception of the program, a total of 201,841
shares have been purchased as treasury shares. The 193,779 treasury shares held as of September
30, 2009 and the 193,251 shares held as of December 31, 2008 are reported at their acquired cost.
A cash dividend of $.32 per share was declared on September 15, 2009, payable on October 30, 2009
to shareholders of record as of October 9, 2009.
NET INTEREST INCOME
Net interest income, which represents the excess revenue generated from interest-earning assets
over the interest cost of funding those assets, decreased $41,000 (.3 percent) for the nine-month
period ended September 30, 2009, as compared to the same period in 2008. Croghans net interest
margin decreased to 4.14 percent for the nine-month period ended September 30, 2009, compared to
4.25 percent for the same period in 2008. This decrease is attributable to the shift in
interest-earning assets from loans, which is typically the highest yielding interest-earning asset,
to available-for-sale securities. Croghan has been able to slow the decline in margin by reducing
its average cost of funds through decreases in interest-bearing deposit rates.
16
PROVISION FOR LOAN LOSSES AND THE ALLOWANCE FOR LOAN LOSSES
Croghans comprehensive loan policy provides guidelines for managing credit risk and asset quality.
The policy details acceptable lending practices, establishes loan-grading classifications, and
stipulates the use of a loan review process. Croghan directly employs two staff members
dedicated to the credit analysis function to aid in facilitating the early identification of
problem loans, to help ensure sound credit decisions and to assist in the determination of the
allowance for loan losses. Croghan also engages an outside credit review firm to supplement the
credit analysis function and to provide an independent assessment of the loan review process.
Croghans loan policy, loan review process, and credit analysis staff facilitate managements
evaluation of the credit risk inherent in the lending function.
The following table details factors relating to the provision and allowance for loan losses for the
periods noted:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
Nine months ended
|
|
|
September 30, 2009
|
|
September 30, 2008
|
|
|
(Dollars in thousands)
|
|
Provision for loan losses charged to expense
|
|
$
|
2,350
|
|
|
$
|
1,150
|
|
Net loan charge-offs
|
|
|
1,001
|
|
|
|
1,202
|
|
Annualized net loan charge-offs as a percent
of average outstanding loans
|
|
|
.40
|
%
|
|
|
.47
|
%
|
The following table details factors relating to non-performing and potential problem loans as of
the dates noted:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
6,401
|
|
|
$
|
1,845
|
|
Loans contractually past due 90 days or more
and still accruing interest
|
|
|
63
|
|
|
|
334
|
|
Restructured loans
|
|
|
|
|
|
|
|
|
Potential problem loans, other than those past due
90 days or more, nonaccrual, or restructured
|
|
|
12,555
|
|
|
|
13,140
|
|
|
|
|
|
|
|
|
Total potential problem and non-performing loans
|
|
$
|
19,019
|
|
|
$
|
15,319
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
4,636
|
|
|
$
|
3,287
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses as a percent
of period-end loans
|
|
|
1.40
|
%
|
|
|
.94
|
%
|
There was a $1,250,000 provision for loan losses for the three-month period ended September 30,
2009 and a $2,350,000 provision for loan losses for the nine-month period ended September 30, 2009,
compared to a provision of $300,000 and $1,150,000, respectively, for the same periods in 2008. The
2009 provision includes the impact of the significant increase in non-accrual loans, which
increased $4,556,000 to $6,401,000 at September 30, 2009, as well as increased historical loss
trends and charge-offs which are used to calculate the allowance for loan losses
The allowance for loan losses, as a percent of total loans, increased from .94% at December 31,
2008 to 1.40% at September 30, 2009. Croghans allowance for loan losses is determined based on a
detailed analysis of the portfolio which considers delinquency trends, the status of nonperforming
loans, current and historic trends of loan charge-offs within each loan category, existing local
and national economic conditions, and changes within the volume and mix of each loan category.
17
Total potential problem and non-performing loans increased $3,700,000 (24.2 percent) to $19,019,000
at September 30, 2009, compared to $15,319,000 at December 31, 2008. Components of potential
problem and non-performing loans that were favorable at September 30, 2009, as compared to December
31, 2008, included a $585,000 decrease in potential problem loans, other than those past due 90
days or more, nonaccrual, or restructured, and a decrease of $271,000 in loans contractually past
due 90 days or more and still accruing interest. These favorable components were more than offset
by the increase of $4,556,000 in nonaccrual loans. The increase in nonaccrual loans at September
30, 2009 included $1,394,000 of remaining outstanding loans secured by commercial and residential
real estate and business assets of a commercial customer whose operations ceased during the second
quarter of 2009. Other contributions to the increase in nonaccrual loans were a $993,000
participation loan secured by commercial real estate in Sandusky, Ohio, and a $980,000 loan secured
by commercial real estate in Toledo, Ohio. Most of the remaining loans, totaling $3,034,000, are
secured by various commercial real estate properties.
Croghan typically classifies a loan as a potential problem loan, regardless of its
collateralization or the existence of contractually obligated guarantors, when a review of the
borrowers financial statements indicates that the borrowing entity does not generate sufficient
operating cash flow to adequately service its debts. All of Croghans potential problem loans,
totaling $12,555,000, were less than 90 days past due at September 30, 2009, and a majority are
collateralized by an interest in real property.
The following table provides additional detail pertaining to the past due status of Croghans
potential problem loans as of the dates noted:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Potential problem loans not currently past due
|
|
$
|
9,855
|
|
|
$
|
10,139
|
|
Potential problem loans past due one day or more but less than 10 days
|
|
|
337
|
|
|
|
2,193
|
|
Potential problem loans past due 10 days or more but less than 30 days
|
|
|
1,911
|
|
|
|
487
|
|
Potential problem loans past due 30 days or more but less than 60 days
|
|
|
367
|
|
|
|
224
|
|
Potential problem loans past due 60 days or more but less than 90 days
|
|
|
85
|
|
|
|
97
|
|
|
|
|
|
|
|
|
Total potential problem loans
|
|
$
|
12,555
|
|
|
$
|
13,140
|
|
|
|
|
|
|
|
|
Despite the overall decrease in potential problem loans, the aggregate amount of potential problem
loans past due 10 days or more but less than 60 days increased $1,567,000. These increases are a
result of several large commercial clients becoming past due on their contractual loan obligations
during the nine months ended September 30, 2009.
The following table provides additional detail pertaining to the collateralization of Croghans
potential problem loans as of the dates noted:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Collateralized by an interest in real property
|
|
$
|
12,385
|
|
|
$
|
12,381
|
|
Collateralized by an interest in assets other than real property
|
|
|
164
|
|
|
|
747
|
|
Unsecured
|
|
|
6
|
|
|
|
12
|
|
|
|
|
|
|
|
|
Total potential problem loans
|
|
$
|
12,555
|
|
|
$
|
13,140
|
|
|
|
|
|
|
|
|
18
Management will continue to monitor asset quality trends throughout 2009 to ensure adequate
provisions for loan losses are made in a timely manner. It is Croghans policy to maintain the
allowance for loan losses at a level sufficient to provide for losses inherent in the portfolio.
Management believes the allowance for loan losses at September 30, 2009 is adequate to provide for
those losses identified as well as those losses inherent within the loan portfolio.
NON-INTEREST INCOME
Total non-interest income decreased $31,000 (3.5 percent) for the three-month period ended
September 30, 2009, compared to the same period in 2008, and increased $158,000 (6.2 percent) for
the nine-month period ended September 30, 2009, compared to the same period in 2008. During the
first quarter of 2009, Croghan commenced selling fixed-rate residential mortgage loans resulting in
gain on sale of loans of $269,000 for the nine-month period ended September 30, 2009, and $35,000
for the three months ended September 30, 2009. Included in gain on sale of loans through September
30, 2009 was capitalized mortgage servicing rights of $108,000. The increase in non-interest
income from gain on sale of loans was partially offset by a decrease in non-sufficient funds income
for both the three-month and nine-month periods ended September 30, 2009.
NON-INTEREST EXPENSES
Total non-interest expenses increased $229,000 (6.8 percent) for the three-month period ended
September 30, 2009, as compared to the same period in 2008, and $710,000 (7.0 percent) for the
nine-month period ended September 30, 2009, as compared to the same period in 2008. Most of this
increase was attributable to the Federal Deposit Insurance Corporation (FDIC) insurance expense
which increased $502,000 to $537,000 for the nine-month period ended September 30, 2009, compared
to $35,000 for the nine-month period ended September 30, 2008. This increase was due to increased
deposit premium rates as well as the FDIC Special Assessment ruling issued on May 22, 2009, which
required all insured depository institutions to pay a special assessment equal to the lesser of 5
basis points on total assets less Tier 1 capital, or 10 basis points on total deposits.
On September 29, 2009, the FDIC adopted a Notice of Proposed Rulemaking (NPR) that would mandate
that insured depository institutions prepay their quarterly risk-based assessments to the FDIC for
the fourth quarter of 2009 and for all of 2010, 2011, and 2012 on December 30, 2009 when they pay
their risk-based assessment for the third quarter of 2009. The proposed prepayment of assessments
will address the FDICs short-term liquidity needs. While the FDIC may use the prepaid premiums to
pay resolution costs, the FDIC cannot immediately include the premiums in the calculation of the
deposit insurance fund reserve. Under the proposed plan, each depository institution would record
the entire amount of its prepayment as an asset. As of December 31, 2009, each depository would
record an expense for its calculated regular quarterly assessment and a credit to the prepaid asset
until the asset is exhausted. The FDIC accepted public comment on the NPR through October 28,
2009.
Salaries, wages, and employee benefits decreased $25,000 (1.3 percent) between comparable
three-month periods and increased $112,000 (2.0 percent) between comparable nine-month periods.
Occupancy of premises expense decreased $9,000 (4.2 percent) between comparable three-month periods
and $41,000 (6.1 percent) between comparable nine-month periods, with most of this decrease related
to depreciation. Other operating expenses increased $262,000 (21.2 percent) between comparable
three-month periods and $639,000 (17.0 percent) between comparable nine-month periods. This
increase was due to an increase in loan collection expense which increased $89,000 for the
nine-month period and the aforementioned FDIC insurance expense increases.
19
FEDERAL INCOME TAX EXPENSE
Federal income tax expense decreased $484,000 between comparable three-month periods, and $646,000
between comparable nine-month periods, which is in relation to the decrease in income before
federal income taxes. The Corporations effective tax rate for the nine months ended September 30,
2009 was 23.3 percent compared to 28.3 percent for the same period in 2008.
LIQUIDITY AND CAPITAL RESOURCES
Short-term borrowings of federal funds purchased and repurchase agreements averaged $12,933,000 for
the nine-month period ended September 30, 2009. This compares to $11,294,000 for the twelve-month
period ended December 31, 2008 and $11,050,000 for the nine-month period ended September 30, 2008.
Borrowed funds, principally consisting of Federal Home Loan Bank borrowings, totaled $37,500,000 at
September 30, 2009, as compared to $34,500,000 at September 30, 2008 and $39,500,000 at December
31, 2008.
Capital expenditures for premises and equipment totaled $631,000 for the nine-month period ended
September 30, 2009, compared to $528,000 for the same period in 2008. Capital expenditures in 2009
include the purchase of land and building for the Norwalk Banking Center, which was previously
leased and opened in January 2008, equipment for branch capture, and relocation of the Banks
Customer Service Center.
Loan commitments, including letters of credit, as of September 30, 2009 totaled $77,933,000
compared to $74,079,000 at December 31, 2008. Many of these commitments are expected to expire
without being drawn upon. Therefore, the total of these commitments does not necessarily represent
future cash requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the quantitative and qualitative disclosures about market
risk from the information provided in Croghans Annual Report on Form 10-K for the fiscal year
ended December 31, 2008 (the 2008 Form 10-K).
20
ITEM 4T. CONTROLS AND PROCEDURES
EVALUATION OF CONTROLS AND PROCEDURES
With the participation of the Corporations principal executive officer and principal financial
officer, the Corporations management has evaluated the effectiveness of the Corporations
disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the
end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the
Corporations principal executive officer and principal financial officer have concluded that:
(a)
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information required to be disclosed by the Corporation in this Quarterly Report on Form 10-Q
and the other reports which the Corporation files or submits under the Exchange Act would be
accumulated and communicated to the Corporations management, including its principal executive
officer and principal financial officer, as appropriate to allow timely decisions regarding
required disclosure;
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(b)
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information required to be disclosed by the Corporation in this Quarterly Report on Form 10-Q
and the other reports which the Corporation files or submits under the Exchange Act would be
recorded, processed, summarized, and reported within the time periods specified in the SECs rules
and forms; and
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(c)
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the Corporations disclosure controls and procedures were effective as of the end of the period
covered by this Quarterly Report on Form 10-Q.
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CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in the Corporations internal control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act) that occurred during the Corporations fiscal quarter ended
September 30, 2009, that have materially affected, or are reasonably likely to materially affect,
the Corporations internal control over financial reporting.
21
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Management is not aware of any pending legal proceedings, except for routine legal proceedings to
which the Corporations subsidiary Bank is a party incidental to its banking business. Management
considers none of those proceedings to be material.
ITEM 1A. RISK FACTORS
There are certain risks and uncertainties in our business that could cause our actual results to
differ materially from those anticipated. A detailed discussion of our risk factors is included in
Item 1A. Risk Factors of Part I of the 2008 Form 10-K. The following information updates certain
of our risk factors and should be read in conjunction with the risk factors disclosed in the 2008
Form 10-K.
INCREASES IN FDIC INSURANCE PREMIUMS MAY NEGATIVELY AFFECT PROFITABILITY.
The FDIC insures deposits at FDIC insured financial institutions, including the Bank. The FDIC
charges the insured financial institutions premiums to maintain the Deposit Insurance Fund at a
certain level. Current economic conditions have increased bank failures and expectations for
further failures, in which case the FDIC insures payment of deposits up to insured limits from the
Deposit Insurance Fund. In late 2008, the FDIC announced an increase in insurance premium rates of
seven basis points, beginning with the first quarter of 2009. Additional changes, beginning April
1, 2009, were to require riskier institutions to pay a larger share of premiums by factoring in
rate adjustments based on secured liabilities and unsecured debt levels.
On May 22, 2009, the FDIC adopted a final rule that imposed a special assessment for the second
quarter of 2009 of five basis points on each insured depository institutions assets minus its Tier
1 capital as of June 30, 2009, which was collected on September 30, 2009. The Corporation expensed
$214,000 during the second quarter for this special assessment. In its May 22, 2009 final rule,
the FDIC also announced that an additional assessment of approximately the same amount later in
2009 is probable.
In general, we are unable to control the amount of premiums that we are required to pay for FDIC
insurance. If there are additional failures of FDIC-insured institutions, we may be required to
pay even higher FDIC premiums. The announced increases and any future increases in FDIC insurance
premiums may materially adversely affect our results of operations and our ability to continue to
pay dividends on our common shares.
U.S. AND INTERNATIONAL CREDIT MARKETS AND ECONOMIC CONDITIONS AS WELL AS THE GOVERNMENTAL RESPONSE
TO THOSE MARKETS AND CONDITIONS COULD ADVERSELY AFFECT LIQUIDITY AND FINANCIAL CONDITION.
The global and U.S. economies are experiencing significantly reduced business activity as a result
of, among other factors, disruptions in the financial system during the past year. Significant
declines in the housing market during the past year, with falling home prices and increasing
foreclosures and unemployment, have resulted in significant write-downs of asset values by many
financial institutions, including government-sponsored entities and major commercial and investment
banks. These write-downs have caused many financial institutions to seek additional capital, to
merge with larger and stronger institutions and, in some cases, to fail.
22
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)
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Not applicable
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(b)
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Not applicable
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(c)
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The table below includes certain information regarding Croghans repurchase of its common shares during the quarterly period ended September 30, 2009:
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Total Number of
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Maximum Number
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Shares Purchased
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of Shares that May
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Total Number
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Average
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as Part of Publicly
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Yet Be Purchased
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of Shares
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Price Paid
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Announced Plans
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Under the Plans
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Period
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Purchased
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per Share
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or Programs
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or Programs (1)
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07/01/09
through
07/31/09
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None
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None
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None
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85,515
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08/01/09
through
08/31/09
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None
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None
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None
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86,016
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09/01/09
through
09/30/09
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None
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None
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None
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86,016
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(1)
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An extension of Croghans stock repurchase program commencing February 1, 2009 and ending
August 1, 2009 was announced on January 30, 2009, in which up to 86,043 shares may be
repurchased (with 528 shares purchased on February 26, 2009). Another extension of Croghans
stock repurchase program was approved on July 14, 2009, in which up to 86,016 shares could be
repurchased from August 1, 2009 to February 1, 2010.
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23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
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Exhibit
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Number
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Description and Exhibit Location
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3.1(a)
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Amended Articles of Incorporation of Croghan Bancshares, Inc.
(incorporated herein by reference to Exhibit 3(i) to the
Registrants Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997 (File No. 0-20159))
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3.1(b)
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Certificate of Amendment to Articles of Incorporation of Croghan
Bancshares, Inc. as filed with the Ohio Secretary of State on May
12, 2006 (incorporated herein by reference to Exhibit 3.1(b) to
the Registrants Annual Report on Form 10-K for the fiscal year
ended December 31, 2007 (File No. 0-20159))
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3.2
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Amended Code of Regulations of Croghan Bancshares, Inc.
(incorporated herein by reference to Exhibit 3(ii) to the
Registrants Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2000 (File No. 0-20159))
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31.1
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Rule 13a-14(a)/15d-14(a) Certification Principal Executive
Officer (included with this filing)
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31.2
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Rule 13a-14(a)/15d-14(a) Certification Principal Financial
Officer (included with this filing)
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32
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Section 1350 Certification Principal Executive Officer and
Principal Financial Officer (included with this filing)
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24
SIGNATURES
Pursuant to the requirements 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.
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CROGHAN BANCSHARES, INC.
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Registrant
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Date: October 30, 2009
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By:
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/s/ Steven C. Futrell
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Steven C. Futrell, President and CEO
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(Principal Executive Officer)
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Date: October 30, 2009
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By:
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/s/ Kendall W. Rieman
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Kendall W. Rieman, Treasurer
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(Principal Financial Officer)
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25
EXHIBIT INDEX
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Exhibit
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Number
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Description
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Location
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3.1(a)
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Amended Articles of
Incorporation of Croghan
Bancshares, Inc.
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Incorporated herein by reference
to Exhibit 3(i) to the
Registrants Quarterly Report on
Form 10-Q for the quarterly
period ended June 30, 1997 (File
No. 0-20159)
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3.1(b)
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Certificate of Amendment to
Articles of Incorporation
of Croghan Bancshares, Inc.
as filed with the Ohio
Secretary of State on May
12, 2006
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Incorporated herein by reference
to Exhibit 3.1(b) to the
Registrants Annual Report on
Form 10-K for the fiscal year
ended December 31, 2007 (File
No. 0-20159)
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3.2
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Amended Code of Regulations
of Croghan Bancshares, Inc.
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Incorporated herein by reference
to Exhibit 3(ii) to the
Registrants Quarterly Report on
Form 10-Q for the quarterly
period ended June 30, 2000 (File
No. 0-20159)
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31.1
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Rule 13a-14(a)/15d-14(a)
Certification Principal
Executive Officer
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Included with this filing
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31.2
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Rule 13a-14(a)/15d-14(a)
Certification Principal
Financial Officer
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Included with this filing
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32
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Section 1350 Certification
Principal Executive
Officer and Principal
Financial Officer
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Included with this filing
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26
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