CHBH Croghan Bancshares Inc (QB)

Table of Contents

 

 

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, 2012

0-20159

(Commission File Number)

 

 

CROGHAN BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Ohio		31-1073048
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
323 Croghan Street, Fremont, Ohio		43420
(Address of principal executive offices)		(Zip Code)

(419) 332-7301

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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   x     No   ¨

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		¨		Accelerated filer		¨
Non-accelerated filer		¨   (Do not check if a smaller reporting company)		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 Registrant had 1,673,380 common shares, par value $12.50 per share, outstanding as of October 26, 2012.

This document contains 41 pages. The Exhibit Index is on page 38 immediately preceding the filed exhibits.

 

 

 

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CROGHAN BANCSHARES, INC.

Index

 

PART I. FINANCIAL INFORMATION				Page(s)
Item 1.		Financial Statements		3 - 28
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		28 - 33
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		34
Item 4.		Controls and Procedures		34
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings		34
Item 1A.		Risk Factors		35
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		35
Item 3.		Defaults Upon Senior Securities		35
Item 4.		Mine Safety Disclosures		35
Item 5.		Other Information		35
Item 6.		Exhibits		36
Signatures				37

 

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CROGHAN BANCSHARES, INC.

Consolidated Balance Sheets (Unaudited)

 

ASSETS		September 30 2012				December 31 2011
CASH AND CASH EQUIVALENTS		(Dollars in thousands, except par value)
Cash and due from banks		$	9,016			$	21,787
Interest-bearing deposits in other banks			232				38,306
Total cash and cash equivalents			9,248				60,093
SECURITIES
Available-for-sale, at fair value			249,241				225,282
Restricted stock			4,174				3,844
Total securities			253,415				229,126
LOANS			316,521				301,965
Less: Allowance for loan losses			4,343				4,778
Net loans			312,178				297,187
Premises and equipment, net			7,655				8,215
Cash surrender value of life insurance			11,029				10,766
Goodwill			14,629				14,675
Core deposit intangible asset, net			1,027				1,327
Accrued interest receivable			2,986				2,485
Other real estate owned			1,362				1,877
Other assets			2,670				3,900
TOTAL ASSETS		$	616,199			$	629,651
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Demand, non-interest bearing		$	89,223			$	77,056
Savings, NOW, and Money Market deposits			245,712				231,182
Time			172,142				193,599
Total deposits			507,077				501,837
Federal funds purchased and securities sold under repurchase agreements			19,126				40,861
Borrowed funds			17,973				18,500
Dividends payable			535				535
Other liabilities			4,722				5,035
Total liabilities			549,433				566,768
STOCKHOLDERS’ EQUITY
Common stock, $12.50 par value. Authorized 6,000,000 shares; issued 1,914,109 shares			23,926				23,926
Surplus			248				179
Retained earnings			44,645				42,662
Accumulated other comprehensive income			6,172				4,341
Treasury stock, 240,729 shares in 2012 and 2011, at cost			(8,225	)			(8,225	)
Total stockholders’ equity			66,766				62,883
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	616,199			$	629,651

See notes to consolidated financial statements.

 

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CROGHAN BANCSHARES, INC.

Consolidated Statements of Operations (Unaudited)

 

		Three months ended September 30
		2012				2011
		(Dollars in thousands, except per share data)
INTEREST INCOME
Loans, including fees		$	4,280			$	4,313
Securities:
Obligations of U.S. Government agencies and corporations			198				649
Obligations of states and political subdivisions			757				571
Other			51				45
Interest on deposits in other banks			4				5
Total interest income			5,290				5,583
INTEREST EXPENSE
Deposits			532				583
Other borrowings			190				176
Total interest expense			722				759
Net interest income			4,568				4,824
PROVISION FOR LOAN LOSSES			150				(100	)
Net interest income, after provision for loan losses			4,418				4,924
NON-INTEREST INCOME
Gain on sale of securities			0				149
Gain on sale of loans			62				25
Loss on write down of securities			0				(283	)
Trust income			300				260
Service charges on deposit accounts			448				386
Other			272				251
Total non-interest income			1,082				788
NON-INTEREST EXPENSES
Salaries, wages, and employee benefits			2,129				2,058
Occupancy of premises			235				216
Amortization of core deposit intangible asset			100				14
Other operating			1,466				1,408
Total non-interest expenses			3,930				3,696
Income before federal income taxes			1,570				2,016
FEDERAL INCOME TAXES			286				475
NET INCOME		$	1,284			$	1,541
Net income per share, based on 1,673,380 shares in 2012 and 2011		$	0.77			$	0.92
Dividends declared per share		$	0.32			$	0.32

See notes to consolidated financial statements.

 

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CROGHAN BANCSHARES, INC.

Consolidated Statements of Operations (Unaudited)

 

		Nine months ended September 30
		2012				2011
		(Dollars in thousands, except per share data)
INTEREST INCOME
Loans, including fees		$	12,579			$	12,564
Securities:
Obligations of U.S. Government agencies and corporations			937				2,002
Obligations of states and political subdivisions			2,233				1,641
Other			145				144
Interest on deposits in other banks			17				11
Total interest income			15,911				16,362
INTEREST EXPENSE
Deposits			1,853				1,991
Other borrowings			581				587
Total interest expense			2,434				2,578
Net interest income			13,477				13,784
PROVISION FOR LOAN LOSSES			325				300
Net interest income, after provision for loan losses			13,152				13,484
NON-INTEREST INCOME
Gain on sale of securities			311				149
Gain on sale of loans			98				94
Loss on write down of securities			0				(394	)
Trust income			815				841
Service charges on deposit accounts			1,310				1,052
Other			784				710
Total non-interest income			3,318				2,452
NON-INTEREST EXPENSES
Salaries, wages, and employee benefits			6,413				6,159
Occupancy of premises			724				658
Amortization of core deposit intangible asset			300				43
Other operating			4,702				4,159
Total non-interest expenses			12,139				11,019
Income before federal income taxes			4,331				4,917
FEDERAL INCOME TAXES			742				1,069
NET INCOME		$	3,589			$	3,848
Net income per share, based on 1,673,380 shares in 2012 and 1,673,907 shares in 2011		$	2.15			$	2.30
Dividends declared per share		$	0.96			$	0.96

See notes to consolidated financial statements.

 

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CROGHAN BANCSHARES, INC.

Consolidated Statements of Comprehensive Income (Unaudited)

 

		Three months ended September 30
		2012				2011
		(Dollars in thousands)
NET INCOME		$	1,284			$	1,541
Other comprehensive income
Unrealized gains (losses) on securities:
Unrealized holding gains during period			1,737				1,782
Reclassification adjustments for (gains) losses included in net income			0				134
Other comprehensive income, before income taxes			1,737				1,916
Less: Income tax expense related to other comprehensive income			590				652
Other comprehensive income			1,147				1,264
Total comprehensive income		$	2,431			$	2,805
		Nine months ended September 30
		2012				2011
		(Dollars in thousands)
NET INCOME		$	3,589			$	3,848
Other comprehensive income
Unrealized gains (losses) on securities:
Unrealized holding gains during period			3,085				4,478
Reclassification adjustments for (gains) losses included in net income			(311	)			245
Other comprehensive income, before income taxes			2,774				4,723
Less: Income tax expense related to other comprehensive income			943				1,606
Other comprehensive income			1,831				3,117
Total comprehensive income		$	5,420			$	6,965

See notes to consolidated financial statements.

 

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CROGHAN BANCSHARES, INC.

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

 

		Three months ended September 30
		2012				2011
		(Dollars in thousands, except per share data)
BALANCE AT BEGINNING OF PERIOD		$	64,859			$	59,527
Comprehensive Income:
Net income			1,284				1,541
Change in net unrealized gain on securities available-for-sale, net of reclassification adjustments and related income taxes			1,147				1,264
Total comprehensive income			2,431				2,805
Stock based compensation			11				0
Cash dividends declared, $.32 per share in 2012 and 2011			(535	)			(535	)
BALANCE AT END OF PERIOD		$	66,766			$	61,797
		Nine months ended September 30
		2012				2011
		(Dollars in thousands, except per share data)
BALANCE AT BEGINNING OF PERIOD		$	62,883			$	56,513
Comprehensive Income:
Net income			3,589				3,848
Change in net unrealized gain on securities available-for-sale, net of reclassification adjustments and related income taxes			1,831				3,117
Total comprehensive income			5,420				6,965
Purchase of 3,000 treasury shares in 2011			0				(76	)
Stock based compensation			68				0
Cash dividends declared, $.96 per share in 2012 and 2011			(1,605	)			(1,605	)
BALANCE AT END OF PERIOD		$	66,766			$	61,797

See notes to consolidated financial statements.

 

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CROGHAN BANCSHARES, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

		Nine months ended September 30
		2012				2011
		(Dollars in thousands)
NET CASH FLOW FROM OPERATING ACTIVITIES		$	10,896			$	6,973
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale securities			61,263				26,312
Purchases of available-for-sale securities			(94,762	)			(58,991	)
Purchases of restricted stock			(330	)			0
Proceeds from sale of available-for-sale securities			7,858				4,005
Final settlement payment for branch acquisition			(1,026	)			0
Net (increase) decrease in loans			(15,528	)			14,486
Additions to premises and equipment			(177	)			(386	)
Net cash (used in) investing activities			(42,702	)			(14,574	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits			4,828				16,761
Net change in federal funds purchased and securities sold under repurchase agreements			(21,735	)			1,291
Net change in borrowed funds			(527	)			(13,000	)
Cash dividends paid			(1,605	)			(1,606	)
Purchase of treasury stock			0				(76	)
Net cash provided by (used in) financing activities			(19,039	)			3,370
NET CHANGE IN CASH AND CASH EQUIVALENTS			(50,845	)			(4,231	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			60,093				21,856
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	9,248			$	17,625
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest		$	2,415			$	2,808
Federal income taxes		$	250			$	490
NON-CASH OPERATING ACTIVITY:
Change in deferred income taxes on net unrealized gain on available-for-sale securities		$	(943	)		$	(1,606	)
NON-CASH INVESTING ACTIVITY:
Change in net unrealized gain on available-for-sale securities		$	2,774			$	4,723
NON-CASH OPERATING AND INVESTING ACTIVITY:
Transfer of loans to other real estate owned		$	1,023			$	1,393

See notes to consolidated financial statements.

 

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CROGHAN BANCSHARES, INC.

Notes to Consolidated Financial Statements

September 30, 2012

(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 Corporation’s 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 generally accepted accounting principles (GAAP) have been omitted. The Corporation’s Annual Report to Shareholders for the year ended December 31, 2011 (the “2011 Annual Report”), 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, 2012, are not necessarily indicative of the operating results for the full year.

Management evaluated subsequent events through October 26, 2012, the date the financial statements were issued. Events or transactions occurring after September 30, 2012, but prior to when the consolidated financial statements were issued, that provided additional evidence about conditions that existed at September 30, 2012, have been recognized in the consolidated financial statements for the period ended September 30, 2012. Events or transactions that provided evidence about conditions that arose before the consolidated financial statements were issued, but did not exist at September 30, 2012, have not been recognized in the consolidated financial statements for the period ended September 30, 2012.

 

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NOTE 2 – NEW ACCOUNTING PRONOUNCEMENTS

In May 2011, The Financial Accounting Standards Board (FASB) issued ASU 2011-04, Fair Value Measurement, amending ASC Topic 820 which eliminates terminology differences between U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) on the measurement of fair value and related fair value disclosures. While largely consistent with existing fair value measurement principles and disclosures, the changes were made as part of the continuing efforts to converge GAAP and IFRS. The adoption of this guidance was effective for interim and annual periods beginning after December 15, 2011, and its adoption did not have a significant impact on the Corporation’s financial statements.

In June 2011, FASB issued ASU 2011-05, Comprehensive Income , amending ASC Topic 220 to require that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, the guidance requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of stockholders’ equity was eliminated. In December 2011, FASB issued ASU 2011-12 to defer changes in ASU 2011-05 that relate to the presentation of reclassification adjustments until FASB has time to reconsider the presentation of such adjustments. The remaining portion of ASU 2011-05 was effective for annual periods beginning after December 15, 2011, and its adoption did not have a significant impact on the Corporation’s financial statements.

In December 2011, FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities , amending ASC Topic 210 requiring an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amendment is effective for the annual and interim periods beginning on or after January 1, 2013, and the Corporation has not yet determined the financial statement impact.

In July 2012, FASB issued ASU 2012-02, Intangibles – Goodwill and Other , amending ASC Topic 350 to simplify how an entity tests indefinite-lived intangible assets other than goodwill for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The amendment permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset other than goodwill is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. The amendment is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012. Management does not expect the amendment to have any effect on the Corporation’s financial statements.

 

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NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair values of recognized financial instruments were as follows:

 

		September 30, 2012								December 31, 2011
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
		(Dollars in Thousands)
Financial Assets
Cash and cash equivalents		$	9,248			$	9,248			$	60,093			$	60,093
Securities			253,415				253,415				229,126				229,126
Loans, net			312,178				319,731				297,187				302,984
Total		$	574,841			$	582,394			$	586,406			$	592,203
Financial Liabilities
Deposits		$	507,077			$	508,879			$	501,837			$	503,563
Federal Funds purchased and securities sold under repurchase agreements			19,126				19,261				40,861				39,932
Borrowed funds			17,973				19,584				18,500				19,980
Total		$	544,176			$	547,724			$	561,198			$	563,475

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 totaled $85,633,000 at September 30, 2012 and $76,793,000 at December 31, 2011. Since many of these commitments are expected to expire without being drawn upon, these contract amounts do not necessarily represent future cash requirements.

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.

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 is 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.

 

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Loans

Fair value for loans is 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 non-performing 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-rate certificates of deposit is estimated using the rates offered at period 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, securities sold under repurchase agreements, as well as borrowed funds, 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.

NOTE 4 – FAIR VALUE MEASUREMENTS

Assets and liabilities carried at fair value are required to be classified and disclosed according to this process for determining fair value. There are three levels of determining fair value:

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 – Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect the Corporation’s own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available under the circumstances, which might include the Corporation’s own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant management judgment.

 

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There were no financial instruments measured at fair value that moved to a lower level in the fair value hierarchy due to the lack of observable quotes in inactive markets for those instruments at September 30, 2012 and December 31, 2011.

The following summarizes financial assets (there were no financial liabilities) measured at fair value as of September 30, 2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

9/30/2012		Level 1 inputs				Level 2 inputs				Level 3 inputs				Total fair value
		(Dollars in Thousands)
Recurring
Securities available-for-sale:
Obligations of U.S. Government agencies and corporations		$	0			$	145,589			$	0			$	145,589
Obligations of states and political subdivisions			0				103,302				0				103,302
Other			0				350				0				350
Total		$	0			$	249,241			$	0			$	249,241
Nonrecurring
Other real estate owned		$	0			$	0			$	1,362			$	1,362
Impaired loans			0				0				13,175				13,175
Total		$	0			$	0			$	14,537			$	14,537
12/31/2011		Level 1 inputs				Level 2 inputs				Level 3 inputs				Total fair value
		(Dollars in Thousands)
Recurring
Securities available-for-sale:
Obligations of U.S. Government agencies and corporations		$	0			$	137,244			$	0			$	137,244
Obligations of states and political subdivisions			0				87,688				0				87,688
Other			0				350				0				350
Total		$	0			$	225,282			$	0			$	225,282
Nonrecurring
Other real estate owned		$	0			$	0			$	1,877			$	1,877
Impaired loans			0				0				14,681				14,681
Total		$	0			$	0			$	16,558			$	16,558

 

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A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, follows.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the corporation’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Corporation’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Corporation’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities Available-for-Sale

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would typically include certain government bonds and exchange traded equities. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include corporate and municipal bonds, mortgage-backed securities, and asset-backed securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. The Corporation did not have any securities classified as Level 1 or Level 3 at September 30, 2012 and December 31, 2011.

Impaired Loans

The Corporation does not record impaired loans at fair value on a recurring basis. However, periodically, a loan is considered impaired and is reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs, including recent appraisals and Level 3 inputs based on customized discounting criteria. Due to the significance of the Level 3 inputs, impaired loans have been classified as Level 3.

Other Real Estate Owned

The Corporation values other real estate owned at the estimated fair value of the underlying collateral less expected selling costs. Such values are estimated primarily using appraisals and reflect a market value approach. Due to the significance of the Level 3 inputs, other real estate owned has been classified as Level 3.

 

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NOTE 5 – SECURITIES

Amortized cost and fair value securities were as follows:

 

		September 30, 2012								December 31, 2011
		Amortized cost				Fair Value				Amortized cost				Fair Value
		(Dollars in Thousands)
Obligations of U.S. Government agencies and corporations		$	142,935			$	145,589			$	135,929			$	137,244
Obligations of states and political subdivisions			96,604				103,302				82,426				87,688
Other			350				350				350				350
Total available-for-sale			239,889				249,241				218,705				225,282
Restricted stock			4,174				4,174				3,844				3,844
Total		$	244,063			$	253,415			$	222,549			$	229,126
		September 30, 2012								December 31, 2011
		Gross unrealized gains				Gross unrealized losses				Gross unrealized gains				Gross unrealized losses
		(Dollars in Thousands)
Obligations of U.S. Government agencies and corporations		$	3,113			$	459			$	2,142			$	827
Obligations of states and political subdivisions			6,712				14				5,264				2
Total		$	9,825			$	473			$	7,406			$	829

 

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NOTE 6 – LOANS

The following presents the balances and activity in the allowance for loan losses for the period ended September 30, 2012 and September 30, 2011 (dollars in thousands):

 

9/30/2012		Commercial				Residential real estate				Non- residential real estate				Construction real estate				Consumer				Credit Card				Total
Balance at December 31, 2011		$	615			$	1,905			$	1,926			$	179			$	84			$	69			$	4,778
Provision charged to expense			5				547				(345	)			21				84				13				325
Losses charged off			(2	)			(451	)			(322	)			0				(61	)			(20	)			(856	)
Recoveries			11				22				46				0				12				5				96
Balance at September 30, 2012		$	629			$	2,023			$	1,305			$	200			$	119			$	67			$	4,343
9/30/2011		Commercial				Residential real estate				Non- residential real estate				Construction real estate				Consumer				Credit Card				Total
Balance at December 31, 2010		$	542			$	1,857			$	2,049			$	347			$	85			$	75			$	4,955
Provision charged to expense			(212	)			310				188				(8	)			11				11				300
Losses charged off			(56	)			(460	)			(628	)			0				(34	)			(31	)			(1209	)
Recoveries			196				72				523				0				20				7				818
Balance at September 30, 2011		$	470			$	1,779			$	2,132			$	339			$	82			$	62			$	4,864

 

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The following presents the balances in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2012 and December 31, 2011 (dollars in thousands):

 

9/30/2012		Commercial				Residential real estate				Non- residential real estate				Construction real estate				Consumer				Credit card				Total
Allowance for loan losses:
Ending Balance attributable to loans:
Individually evaluated for impairment		$	25			$	335			$	185			$	0			$	0			$	0			$	545
Collectively evaluated for impairment			604				1,688				1,120				200				119				67				3,798
Total		$	629			$	2,023			$	1,305			$	200			$	119			$	67			$	4,343
Loans individually evaluated for impairment		$	3,141			$	3,087			$	7,492			$	0			$	0			$	0			$	13,720
Loans collectively evaluated for impairment			27,249				126,246				127,794				3,663				14,930				2,919				302,801
Total		$	30,390			$	129,333			$	135,286			$	3,663			$	14,930			$	2,919			$	316,521
12/31/2011		Commercial				Residential real estate				Non- residential real estate				Construction real estate				Consumer				Credit card				Total
Allowance for loan losses:
Ending Balance attributable to loans:
Individually evaluated for impairment		$	0			$	496			$	646			$	53			$	0			$	0			$	1,195
Collectively evaluated for impairment			615				1,409				1,280				126				84				69				3,583
Total		$	615			$	1,905			$	1,926			$	179			$	84			$	69			$	4,778
Loans individually evaluated for impairment		$	685			$	2,912			$	11,220			$	1,059			$	0			$	0			$	15,876
Loans collectively evaluated for impairment			28,278				124,538				115,195				4,178				11,203				2,697				286,089
Total		$	28,963			$	127,450			$	126,415			$	5,237			$	11,203			$	2,697			$	301,965

 

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The following represents loans individually evaluated for impairment by class of loans as of September 30, 2012 and December 31, 2011 (dollars in thousands):

 

9/30/2012
With no related allowance recorded:		Unpaid principal balance				Recorded investment				Allowance for loan loss allocated
Agricultural loans		$	0			$	0			$	0
Commercial loans			3,000				3,000				0
Commercial overdraft LOC			59				59				0
Commercial non-profit/political subdivisions			0				0				0
Open-end home equity			122				122				0
1 – 4 family real estate (1 st mortgages)			1,484				1,419				0
1 – 4 family real estate (Jr. mortgages)			46				46				0
Multifamily real estate			212				212				0
Farm real estate			0				0				0
Non-farm/non-residential real estate			5,007				5,007				0
Construction real estate			0				0				0
Consumer loans – vehicle			0				0				0
Consumer overdraft LOC			0				0				0
Consumer loans – mobile home			0				0				0
Consumer loans – home improvement			0				0				0
Consumer loans – other			0				0				0
MasterCard/VISA			0				0				0
With an allowance recorded:
Agricultural loans			0				0				0
Commercial loans			82				82				25
Commercial overdraft LOC			0				0				0
Commercial non-profit/political subdivisions			0				0				0
Open-end home equity			0				0				0
1 – 4 family real estate (1 st mortgages)			1,448				1,288				335
1 – 4 family real estate (Jr. mortgages)			0				0				0
Multifamily real estate			0				0				0
Farm real estate			0				0				0
Non-farm/non-residential real estate			2,635				2,485				185
Construction real estate			0				0				0
Consumer loans – vehicle			0				0				0
Consumer overdraft LOC			0				0				0
Consumer loans – mobile home			0				0				0
Consumer loans – home improvement			0				0				0
Consumer loans – other			0				0				0
MasterCard/VISA			0				0				0
Total		$	14,095			$	13,720			$	545

 

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12/31/2011
With no related allowance recorded:		Unpaid principal balance				Recorded investment				Allowance for loan loss allocated
Agricultural loans		$	0			$	0			$	0
Commercial loans			630				630				0
Commercial overdraft LOC			55				55				0
Commercial non-profit/political subdivisions			0				0				0
Open-end home equity			19				19				0
1 – 4 family real estate (1 st mortgages)			873				863				0
1 – 4 family real estate (Jr. mortgages)			77				77				0
Multifamily real estate			0				0				0
Farm real estate			0				0				0
Non-farm/non-residential real estate			8,246				8,246				0
Construction real estate			0				0				0
Consumer loans – vehicle			0				0				0
Consumer overdraft LOC			0				0				0
Consumer loans – mobile home			0				0				0
Consumer loans – home improvement			0				0				0
Consumer loans – other			0				0				0
MasterCard/VISA			0				0				0
With an allowance recorded:
Agricultural loans			0				0				0
Commercial loans			0				0				0
Commercial overdraft LOC			0				0				0
Commercial non-profit/political subdivisions			0				0				0
Open-end home equity			0				0				0
1 – 4 family real estate (1 st mortgages)			2,097				1,818				433
1 – 4 family real estate (Jr. mortgages)			135				135				63
Multifamily real estate			0				0				0
Farm real estate			0				0				0
Non-farm/non-residential real estate			3,395				2,974				646
Construction real estate			1,059				1,059				53
Consumer loans – vehicle			0				0				0
Consumer overdraft LOC			0				0				0
Consumer loans – mobile home			0				0				0
Consumer loans – home improvement			0				0				0
Consumer loans – other			0				0				0
MasterCard/VISA			0				0				0
Total		$	16,586			$	15,876			$	1,195

 

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The Bank categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Bank uses the following definitions for risk ratings:

 

•

Special Mention – Loans classified as “special mention” possess some credit deficiency or potential weakness that deserves close attention, but do not yet warrant substandard classification. Such loans pose unwarranted financial risk that, if not corrected, could weaken the loan and increase risk of losses in the future.

 

•

Substandard – Loans classified as “substandard” are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard have well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are categorized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

•

Doubtful – Loans classified as “doubtful” have all of the weaknesses of those classified as substandard. Additionally, however, these weaknesses make collection or liquidation in full based on existing conditions improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. The following presents loans as of September 30, 2012 and December 31, 2011 that are collectively evaluated for impairment and are considered not impaired. Investments in each category found below do not include loans that are deemed impaired and analyzed individually for impairment which were presented previously (dollars in thousands):

 

9/30/2012		Pass				Special mention				Substandard				Doubtful				Not rated
Agricultural loans		$	3,365			$	0			$	0			$	0			$	0
Commercial loans			22,833				32				146				0				0
Commercial overdraft LOC			0				0				0				0				107
Commercial non-profit/political subdivisions			766				0				0				0				0
Open-end home equity			25,783				379				307				0				0
1 – 4 family real estate (1 st mortgages)			87,670				1,539				2,156				0				0
1 – 4 family real estate (Jr. mortgages)			8,102				46				264				0				0
Multifamily real estate			8,043				0				2,452				0				0
Farm real estate			8,966				295				0				0				0
Non-farm/non-residential real estate			95,079				9,960				2,999				0				0
Construction real estate			2,716				0				947				0				0
Consumer loans – vehicle			5,156				6				3				0				0
Consumer overdraft LOC			0				0				0				0				263
Consumer loans – mobile home			576				0				0				0				0
Consumer loans – home improvement			225				0				0				0				0
Consumer loans – other			8,677				8				16				0				0
MasterCard/VISA			0				0				0				0				2,919
Total		$	277,957			$	12,265			$	9,290			$	0			$	3,289

 

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12/31/2011		Pass				Special mention				Substandard				Doubtful				Not rated
Agricultural loans		$	3,207			$	0			$	0			$	0			$	0
Commercial loans			23,596				192				10				0				0
Commercial overdraft LOC			0				0				0				0				353
Commercial non-profit/political subdivisions			920				0				0				0				0
Open-end home equity			26,879				449				268				0				0
1 – 4 family real estate (1 st mortgages)			83,743				1,233				2,250				0				0
1 – 4 family real estate (Jr. mortgages)			9,416				0				300				0				0
Multifamily real estate			5,973				0				2,856				0				0
Farm real estate			8,645				47				0				0				0
Non-farm/non-residential real estate			80,391				12,279				5,004				0				0
Construction real estate			3,220				0				958				0				0
Consumer loans – vehicle			3,408				3				5				0				0
Consumer overdraft LOC			0				0				0				0				236
Consumer loans – mobile home			706				18				0				0				0
Consumer loans – home improvement			194				0				0				0				0
Consumer loans – other			6,577				36				20				0				0
MasterCard/VISA			0				0				0				0				2,697
Total		$	256,875			$	14,257			$	11,671			$	0			$	3,286

 

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The following presents the recorded investment by class of loans which are not on nonaccrual and have collectively been evaluated for impairment as of September 30, 2012 and December 31, 2011 (dollars in thousands):

 

9/30/2012		30-89 days past due				90+ days past due				Total past due				Not past due				Total
Agricultural loans		$	0			$	0			$	0			$	3,365			$	3,365
Commercial loans			1				0				1				23,010				23,011
Commercial overdraft LOC			0				0				0				107				107
Commercial non-profit/political subdivisions			0				0				0				766				766
Open-end home equity			219				103				322				26,147				26,469
1 – 4 family real estate (1 st mortgages)			2,354				281				2,635				88,730				91,365
1 – 4 family real estate (Jr. mortgages)			150				0				150				8,262				8,412
Multifamily real estate			0				0				0				10,495				10,495
Farm real estate			44				0				44				9,217				9,261
Non-farm/non-residential real estate			699				0				699				107,339				108,038
Construction real estate			0				0				0				3,663				3,663
Consumer loans – vehicle			9				0				9				5,156				5,165
Consumer overdraft LOC			8				1				9				254				263
Consumer loans – mobile home			6				0				6				570				576
Consumer loans – home improvement			0				0				0				225				225
Consumer loans – other			76				0				76				8,625				8,701
MasterCard/VISA			43				7				50				2,869				2,919
Total		$	3,609			$	392			$	4,001			$	298,800			$	302,801

 

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12/31/2011		30-89 days past due				90+ days past due				Total past due				Not past due				Total
Agricultural loans		$	0			$	0			$	0			$	3,207			$	3,207
Commercial loans			16				0				16				23,782				23,798
Commercial overdraft LOC			0				0				0				353				353
Commercial non-profit/political subdivisions			0				0				0				920				920
Open-end home equity			213				91				304				27,293				27,597
1 – 4 family real estate (1 st mortgages)			2,046				566				2,612				84,614				87,226
1 – 4 family real estate (Jr. mortgages)			48				9				57				9,658				9,715
Multifamily real estate			0				0				0				8,829				8,829
Farm real estate			38				0				38				8,655				8,693
Non-farm/non-residential real estate			616				0				616				97,057				97,673
Construction real estate			0				0				0				4,178				4,178
Consumer loans – vehicle			6				0				6				3,410				3,416
Consumer overdraft LOC			9				0				9				227				236
Consumer loans – mobile home			18				0				18				706				724
Consumer loans – home improvement			0				0				0				194				194
Consumer loans – other			41				0				41				6,592				6,633
MasterCard/VISA			30				6				36				2,661				2,697
Total		$	3,081			$	672			$	3,753			$	282,336			$	286,089

 

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The following presents the recorded investment in loans past due 90 days or more still accruing, nonaccrual, and Troubled Debt Restructurings (TDR) by class as of September 30, 2012 and December 31, 2011 (dollars in thousands):

 

9/30/2012		Loans past due 90+ and still accruing				Nonaccrual				TDR
Agricultural loans		$	0			$	0			$	0
Commercial loans			0				11				93
Commercial overdraft LOC			0				0				0
Commercial non-profit/political subdivisions			0				0				0
Open-end home equity			103				17				105
1 – 4 family real estate (1 st mortgages)			281				1,864				1043
1 – 4 family real estate (Jr. mortgages)			0				30				15
Multifamily real estate			0				212				0
Farm real estate			0				0				0
Non-farm/non-residential real estate			0				705				3,150
Construction real estate			0				—				—
Consumer loans – vehicle			0				0				0
Consumer overdraft LOC			1				0				0
Consumer loans – mobile home			0				0				0
Consumer loans – home improvement			0				0				0
Consumer loans – other			0				0				0
MasterCard/VISA			7				0				0
Total		$	392			$	2,839			$	4,406
12/31/2011		Loans past due 90+ and still accruing				Nonaccrual				TDR
Agricultural loans		$	0			$	0			$	0
Commercial loans			0				88				54
Commercial overdraft LOC			0				0				0
Commercial non-profit/political subdivisions			0				0				0
Open-end home equity			91				19				413
1 – 4 family real estate (1 st mortgages)			566				2,338				99
1 – 4 family real estate (Jr. mortgages)			9				113				0
Multifamily real estate			0				0				0
Farm real estate			0				0				0
Non-farm/non-residential real estate			0				1,054				3,569
Construction real estate			0				1,059				692
Consumer loans – vehicle			0				0				0
Consumer overdraft LOC			0				0				0
Consumer loans – mobile home			0				0				0
Consumer loans – home improvement			0				0				0
Consumer loans – other			0				0				0
MasterCard/VISA			6				0				0
Total		$	672			$	4,671			$	4,827

 

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The following presents the recorded investment in TDR loans by class, which occurred during the nine-months ended September 30, 2012 (dollars in thousands):

 

9/30/2012		Number of Contracts				Recorded investment				Allowance for loan losses allocated
Agricultural loans			0			$	0			$	0
Commercial loans			1				68				0
Commercial overdraft LOC			0				0				0
Commercial non-profit/political subdivisions			0				0				0
Open-end home equity			1				89				0
1 – 4 family real estate (1 st mortgages)			6				581				25
1 – 4 family real estate (Jr. mortgages)			2				15				0
Multifamily real estate			0				0				0
Farm real estate			0				0				0
Non-farm/non-residential real estate			0				0				0
Construction real estate			0				0				0
Consumer loans – vehicle			0				0				0
Consumer overdraft LOC			0				0				0
Consumer loans – mobile home			0				0				0
Consumer loans – home improvement			0				0				0
Consumer loans – other			0				0				0
MasterCard/VISA			0				0				0
Total			10			$	753			$	25

During the nine-month period ended September 30, 2012, there was a recorded investment of restructured loans totaling $753,000 that resulted from TDRs, of which $25,000 was added to the Allowance for Loan Losses.

Within the TDR loan portfolio, two of the loan modifications resulted in extending the maturity of each loan and a new amortization of the balance of the loan while another two loan modifications resulted in a reduced interest rate. Two modifications had an independent source bring the note current and agree to pay the payments for a period of time. Also within the TDR portfolio, two loans had a reduction of principal and interest to maturity resulting in a balloon payment at the stated maturity date, one TDR loan had its principal and interest suspended for 11 months, and one had interest only concession for six months.

 

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NOTE 7 – STOCK BASED COMPENSATION

The Corporation established a Stock Option and Incentive Plan (the “2002 Plan”) in 2002, which permitted the Corporation to award stock options and/or stock appreciation rights to directors and managerial and other key employees of the Corporation. The awards could be in the form of stock options and/or stock appreciation rights. The 2002 Plan, which provided for the issuance of up to 190,951 shares, expired in March 2012. At the 2012 Annual Meeting, the shareholders of the Corporation adopted the Croghan Bancshares Inc. 2012 Equity Incentive Plan (the “2012 Plan”), which permits the Corporation to award stock options, stock appreciation rights, restricted stock, and other stock-based and performance-based awards to directors, employees, and other eligible participants. A total of 162,082 shares are available for issuance pursuant to the 2012 Plan. As of September 30, 2012, no awards had yet been granted under the 2012 Plan.

 

Outstanding Stock Options

Exercisable Stock Options

Exercise price range

Number

Weighted average exercise price

Weighted average contractual life (years)

Number

Weighted average exercise price

Weighted average contractual life (years)

24.99

28,869

$

24.99

8

0

N/A

N/A

The following summarizes stock option activity for the first nine months of 2012:

 

Outstanding, January 1, 2012			28,869
Granted			0
Exercised			0
Outstanding, September 30, 2012			28,869
Exercisable, September 30, 2012			9,623

The fair value of options granted is estimated at the date of grant using the Black Scholes option pricing model. The following shows the weighted-average fair value of options granted and the assumptions used in calculating that value for the years indicated:

 

		2011
Weighted-average fair value of options granted		$	3.62
Average dividend yield			5	%
Expected volatility			25	%
Risk-free interest rate			2.85	%
Expected term (in years)			8

There were no new options granted during 2012; however compensation expense related to options granted in 2011, which is included in salaries and wages in the consolidated statements of income for the nine months ended September 30, 2012, amounted to $35,000. Compensation expense is recognized over the three year vesting period of the options. As of September 30, 2012, there was $32,000 of unrecognized compensation expense expected to be recognized over the vesting period.

 

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NOTE 8 - BRANCH ACQUISITION

On August 31, 2011, the Bank entered into an agreement to purchase four branch offices of The Home Savings and Loan Company of Youngstown, Ohio, (“HSL”) located in Fremont, Clyde, and Tiffin, Ohio. Under the terms of the agreement, the Bank assumed all related deposits and purchased the related branch premises and certain loans. The transaction was completed on December 16, 2011, with assets acquired and deposits assumed being recorded at their estimated fair values as follows:

 

		(Dollars in thousands)
Cash		$	83,496
Loans			21,502
Bank premises and equipment			1,801
Goodwill			4,245
Core deposit intangible asset			1,269
Other assets			71
Total assets acquired		$	112,384
Deposits assumed		$	111,072
Other liability – payable to seller			1,312
Total liabilities assumed		$	112,384

The “other liability - payable to seller” represents the changes in the amounts of certain assets acquired and liabilities assumed between the final settlement date and December 16, 2011, the actual closing (transfer) date. Under the terms of the agreement, a final closing statement was prepared by seller within 30 days after closing and received by the Bank on January 15, 2012, and the Bank made final payment to seller based on the final closing statement.

On December 16, 2011, the contractual balance of loans transferred was $21,697,000, and the contractual balance of deposits transferred was $109,970,000. Loans acquired included residential real estate and consumer loans secured by real estate and personal property that management determined to be risk graded as a pass rated loans as defined in Note 6.

The operating results of the acquired branches subsequent to the closing are included in the Corporation’s consolidated financial statements. The core deposit intangible asset is amortized on a sum of digits basis over a period of ten years, the CD market valuation is amortized on a straight-line basis over a two year period, and the discounted loan market valuation is accreted to income on a straight-line basis over a five year period.

Goodwill of $4,245,000 arose in the acquisition of the HSL branches because consideration paid effectively included amounts relating to the benefit of expected synergies, revenue growth, and future market development. These benefits are not recognized separately from goodwill because they do not meet the recognition requirement for identifiable intangible assets. All goodwill arising from this acquisition is expected to be deductible for tax purposes on a straight-line basis over a 15 year period.

 

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The excess cash in the transaction was used to increase the Bank’s investment portfolio and cash balances. Going forward, excess cash will be used in the form of continued investment growth and to fund anticipated loan growth.

On March 12, 2012, the Bank made a payment of $1,026,000 to settle differences between the final settlement statement and the draft settlement statement. The settlement amount reduced the previously reported cash, goodwill, and other liability categories. Goodwill was reduced by $46,000, as result of the final payment, reducing the related goodwill amount to $4,199,000.

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Where appropriate, the following discussion relating to the Corporation contains the insights of management into known events and trends that have or may be expected to have a material effect on the Corporation’s 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 Corporation’s 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 Corporation’s 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 Corporation’s 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 Croghan’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the “2011 Form 10-K”).

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

Net income for the three-month period ended September 30, 2012 was $1,284,000, or $.77 per common share, compared to $1,541,000, or $.92 per common share, for the same period in 2011. Net income for the nine-month period ended September 30, 2012 was $3,589,000, or $2.15 per common share, compared to $3,848,000, or $2.30 per common share, for the same period in 2011. The results for the third quarter 2012 compared to the third quarter 2011 were adversely impacted by a decrease of $256,000 in net interest income, a $250,000 increase in the provision for loan losses, and an increase of $234,000 in non-interest expenses. Results for the third quarter were positively impacted by a $294,000 increase in non-interest income and a $189,000 decrease to the provision for federal income taxes.

 

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Assets at September 30, 2012 totaled $616,199,000, compared to $629,651,000 at December 31, 2011. Total cash and cash equivalents decreased $50,844,000 to $9,248,000 during the nine-month period ended September 30, 2012, and total securities increased $24,289,000 to $253,415,000 at September 30, 2012. Total loans increased $14,556,000 to $316,521,000 at September 30, 2012, from $301,965,000 at 2011 year end. Total deposits increased $5,240,000 to $507,077,000 at September 30, 2012, from $501,837,000 at 2011 year end.

FINANCIAL POSITION

The following comments are based upon a comparison of Croghan’s financial position at September 30, 2012 to December 31, 2011.

Total cash and cash equivalents decreased $50,845,000 (84.6%) and total securities increased $24,289,000 (10.6%) during the nine-month period ended September 30, 2012. Total loans increased $14,556,000 (4.8%) to $316,521,000 at September 30, 2012, compared to $301,965,000 at December 31, 2011. During the same period, deposits increased $5,240,000 (1.0%) to $507,077,000 at September 30, 2012, compared to $501,837,000 at December 31, 2011.

The increase in securities during the nine-month period ended September 30, 2012 primarily resulted from purchases of available-for-sale securities of $94,762,000, with maturities during the period of $61,263,000. Also, during the period there were sales of securities totaling $7,858,000. The security balance increase was the result of using the excess cash from the HSL acquisition to purchase securities, as well as the continuation of investing pay downs and maturing securities back into the portfolio. Securities were sold during the second quarter to fund loan growth.

The total loan balance increased during the nine-month period ended September 30, 2012, due to the Bank being able to grow the portfolio through increased customer demand and the new markets gained from the HSL acquisition.

Components of the increase in deposits included a $26,696,000 (8.7%) increase in the liquid deposit category (demand, savings, NOW, and money market deposit accounts), which was partially offset by a $21,457,000 (11.1%) decrease in the time deposit category. Croghan strives to maintain a strong interest margin by balancing deposit needs to fund anticipated loan demand and by maintaining the necessary deposit pricing structure.

Stockholders’ equity at September 30, 2012 increased to $66,766,000, or $39.90 book value per common share, compared to $62,883,000, or $37.58 book value per common share, at December 31, 2011. Stockholders’ equity at September 30, 2012 includes accumulated other comprehensive income, consisting of net unrealized gains on securities classified as available-for-sale, net of related income taxes. At September 30, 2012, Croghan held $249,241,000 of available-for-sale securities with a net unrealized gain of $6,172,000, net of income taxes, compared to $225,282,000 in available-for-sale securities at December 31, 2011, with a net unrealized gain of $4,341,000, net of income taxes.

During the first quarter of 2012, the Board of Directors opted not to renew the stock buy-back program which began in February 2002. During the life span of the program, a total of 248,791 shares were repurchased by Croghan. The 240,729 treasury shares held as of September 30, 2012 and December 31, 2011 are reported at their acquired cost.

A cash dividend of $.32 per share was declared on September 11, 2012, payable on October 31, 2012 to shareholders of record as of October 12, 2012.

 

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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 $256,000 (5.3%) for the three-month period ended September 30, 2012 as compared to the same period in 2011. Net interest income decreased $307,000 (2.2%) for the nine-month period ended September 30, 2012, as compared to the same period in 2011. Croghan’s net interest margin decreased to 3.19 percent for the nine-month period ended September 30, 2012, compared to 4.05 percent for the same period in 2011. The increase of $110,027,000 in average interest-earning assets year-over-year was primarily due to acquisition of cash, loans, and deposits in the HSL branch acquisition. The decrease in net interest income partially resulted from the Bank recognizing interest of $206,000 during the third quarter of 2011, which resulted from the collection of a loan that had been on non-accrual. Contributing to help offset the decrease is the continued reduction in average cost of funds, and, as a result, reduced rates on interest-bearing deposits. This reduction is offset by the decrease in loan yields and the increase in available-for-sale securities which are lower yielding assets.

PROVISION FOR LOAN LOSSES AND THE ALLOWANCE FOR LOAN LOSSES

Croghan’s 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 three 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. Croghan’s loan policy, loan review process, and credit analysis staff facilitate management’s 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 September 30, 2012				Nine months ended September 30, 2011
		(Dollars in thousands)
Provision for loan losses charged to expense		$	325			$	300
Net loan charge-offs			760				391
Annualized net loan charge-offs as a percent of average outstanding loans			.33	%			.19	%

 

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The following table details factors relating to non-performing and potential problem loans as of the dates noted:

 

		September 30, 2012				December 31, 2011
		(Dollars in thousands)
Nonaccrual loans		$	2,033			$	3,376
Loans contractually past due 90 days or more and still accruing interest			392				672
TDR-accruing			3,600				3,532
TDR-non-accruing			806				1,295
Total TDR loans			4,406				4,827
Potential problem loans, other than those past due 90 days or more, nonaccrual, or restructured			9,027				18,161
Total potential problem and non-performing loans		$	15,858			$	27,036
Allowance for loan losses		$	4,343			$	4,778
Allowance for loan losses as a percent of period-end loans			1.37	%			1.58	%

During the third quarter of 2012, the Bank recognized a $150,000 provision for loan losses as compared to a negative provision of $100,000 during the same period a year ago. The negative provision in the third quarter 2011 resulted from the collection of a loan that was on nonaccrual and previously charged off. Net loan charge-offs increased $369,000 during the first nine months of 2012 compared to the same period a year ago. The 2012 third quarter provision was calculated by using average historical loss rates, as well as specific loss estimates on impaired loans, which together are used to calculate certain segments of loans and their corresponding allowance for loan losses.

Total potential problem and non-performing loans, which are summarized in the preceding table, decreased $11,178,000, or 41.3%, to $15,858,000 at September 30, 2012, compared to $27,036,000 at December 31, 2011. Favorable components included a $9,134,000 decrease in potential problem loans other than those past due 90 days or more, nonaccrual, or restructured. This decrease was partially the result of one large commercial borrower having significant financial improvement, which allowed the Bank to upgrade this credit. Other favorable components included a $1,343,000 decrease in nonaccrual loans, a $280,000 decrease in loans contractually past due 90 days or more and still accruing interest, and a $421,000 decrease in the total TDR loan category.

As illustrated in the following table, $7,968,000, or 88.3%, of total potential problem loans were less than 30 days past due and $9,022,000, or 99.9%, were secured with collateral at September 30, 2012.

Croghan typically classifies credits as potential problem loans, regardless of collateralization or the existence of contractually obligated guarantors, when a review of the borrower’s financial statements indicates that the borrowing entity does not generate sufficient operating cash flow to adequately service its debts. All of the potential problem loans at September 30, 2012, totaling $9,027,000, are currently performing loans (less than 90 days past due) and a majority are collateralized by an interest in real property.

 

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The following table provides additional detail pertaining to the past due status of Croghan’s potential problem loans as of the dates noted:

 

		September 30, 2012				December 31, 2011
		(Dollars in thousands)
Potential problem loans not currently past due		$	6,509			$	16,984
Potential problem loans past due one day or more but less than 10 days			187				91
Potential problem loans past due 10 days or more but less than 30 days			1,272				167
Potential problem loans past due 30 days or more but less than 60 days			878				342
Potential problem loans past due 60 days or more but less than 90 days			181				577
Total potential problem loans		$	9,027			$	18,161

Total potential problem loans not currently past due decreased $10,475,000 during the first nine months of 2012, which resulted primarily from one commercial borrower being upgraded. This decrease was partially offset by a $1,341,000 increase in the aggregate amount of potential problem loans in the past due categories.

The following table provides additional detail pertaining to the collateralization of Croghan’s potential problem loans as of the dates noted:

 

		September 30, 2012				December 31, 2011
		(Dollars in thousands)
Collateralized by an interest in real property		$	8,861			$	17,582
Collateralized by an interest in assets other than real property			161				575
Unsecured			5				4
Total potential problem loans		$	9,027			$	18,161

Management will continue to monitor asset quality trends throughout 2012 to ensure adequate provisions for loan losses are made in a timely manner. It is Croghan’s 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, 2012 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 increased $294,000 (37.3%) for the three-month period ended September 30, 2012, compared to the same period in 2011, and increased $866,000 (35.3%) for the nine-month period ended September 30, 2012, compared to the same period in 2011. During the third quarter of 2012, the Bank had gains on sale of loans of $62,000, which was up $37,000 compared to the third quarter of 2011; an increase of $40,000 in trust income; an increase of $62,000 in income stemming from service charges on deposit accounts; and an increase in other income of $21,000. Comparatively, during the third quarter of 2011, the Bank had gains on sale of securities of $149,000 compared to none during the third quarter of 2012. Also, during the third quarter of 2011, the Bank had an Other Than Temporarily Impaired security write down related to one security in the amount of $283,000.

 

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NON-INTEREST EXPENSES

Total non-interest expenses increased $234,000 (6.3%) for the three-month period ended September 30, 2012, as compared to the same period in 2011, and increased $1,120,000 (10.2%) for the nine-month period ended September 30, 2012, as compared to the same period in 2011. Salaries, wages, and employee benefits increased $71,000 (3.4%) between comparable three-month periods and $254,000 (4.1%) between comparable nine-month periods. Occupancy of premises expense increased $19,000 (8.8%) between comparable three-month periods and increased $66,000 (10.0%) between comparable nine-month periods. Amortization of core deposit intangible increased $86,000 between comparable three-month periods, and increased $257,000 between comparable nine-month periods due to the core deposit intangible that resulted from the HSL acquisition. Other operating expenses increased $58,000 (4.1%) between comparable three-month periods and $543,000 (13.1%) between comparable nine-month periods. These increases are a result of the HSL acquisition.

Within the other operating expense category is the FDIC insurance expense. During the nine-month period ended September 30, 2012, the FDIC insurance expense was $297,000, compared to $293,000 during the same period in 2011. The Bank prepaid the amount of $1,797,000 in December 2009 and had a remaining prepaid balance of $601,000 at September 30, 2012. This prepaid assessment amount is included in “Other assets” of the Corporation. Future quarterly assessments will be charged against the prepaid asset until such time as the prepaid asset has been full expensed, at which point the Bank will resume paying premiums to the FDIC.

FEDERAL INCOME TAX EXPENSE

Federal income tax expense decreased $189,000 (39.8%) between comparable three-month periods and $327,000 (30.6%) between comparable nine-month periods. The Corporation’s effective tax rate for the nine months ended September 30, 2012 was 17.1 percent, compared to 21.8 percent for the same period in 2011. The decrease in the effective tax rate is a result of an increase in tax exempt interest income from investment securities, as well as a decrease in income before federal income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Short-term borrowings of federal funds purchased and repurchase agreements averaged $23,724,000 for the nine-month period ended September 30, 2012. This compares to $22,514,000 for the nine-month period ended September 30, 2011, and $23,433,000 for the twelve-month period ended December 31, 2011.

Borrowings from the Federal Home Loan Bank and Great Lakes Bankers Bank totaled $17,973,000 at September 30, 2012, compared to $18,500,000 at December 31, 2011, and $12,500,000 at September 30, 2011.

Capital expenditures for premises and equipment totaled $177,000 for the nine-month period ended September 30, 2012, compared to $386,000 for the same period in 2011. The 2012 expenditures included improvements to the acquired HSL banking centers, ATM upgrades, and an air conditioning unit upgrade.

Loan commitments, including letters of credit, as of September 30, 2012, totaled $85,633,000 compared to $76,793,000 at December 31, 2011. Since many of these commitments are expected to expire without being drawn upon, these totals do not necessarily represent future cash requirements.

 

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the quantitative and qualitative information about market risk from the information provided in Croghan’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the “2011 Form 10-K”).

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF CONTROLS AND PROCEDURES

With the participation of the Corporation’s principal executive officer and principal financial officer, the Corporation’s management has evaluated the effectiveness of the Corporation’s 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 Corporation’s principal executive officer and principal financial officer have concluded that:

 

(a)

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 Corporation’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure;

 

(b)

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 SEC’s rules and forms; and

 

(c)	the Corporation’s disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in the Corporation’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Corporation’s fiscal quarter ended September 30, 2012, that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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 Corporation’s subsidiary Bank is a party incidental to its banking business. Management considers none of those proceedings to be material.

 

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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. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in “Item 1A. Risk Factors” of Part I of the 2011 Form 10-K, which could materially affect our business, financial condition, and/or operating results. There have been no material changes from those risk factors previously disclosed in “Item 1A. Risk Factors” of Part I of the 2011 Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

 

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ITEM 6. EXHIBITS

 

Exhibit Number		Description and Exhibit Location
31.1		Rule 13a-14(a)/15d-14(a) Certification – Principal Executive Officer (included with this filing)
31.2		Rule 13a-14(a)/15d-14(a) Certification – Principal Financial Officer (included with this filing)
32		Section 1350 Certification – Principal Executive Officer and Principal Financial Officer (included with this filing)
101		The following materials from Croghan Bancshares, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012, formatted in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011; (ii) the Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011 (unaudited); (iii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011 (unaudited); (iv) the Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2012 and 2011 (unaudited); (v) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 (unaudited); and (vi) the Notes to Unaudited Consolidated Financial Statements tagged as blocks of text and in detail (included with this filing)*

* Pursuant to Rule 406T of SEC Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are furnished and not deemed filed or part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those Sections.

 

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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.

 

				CROGHAN BANCSHARES, INC.
						Registrant
Date: October 26, 2012				By:		/s/ Rick M. Robertson
						Rick M. Robertson, President and CEO (Principal Executive Officer)
Date: October 26, 2012				By:		/s/ Kendall W. Rieman
						Kendall W. Rieman, Treasurer (Principal Financial Officer)

 

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EXHIBIT INDEX

 

Exhibit Number		Description		Exhibit Location
31.1		Rule 13a-14(a)/15d-14(a) Certification – Principal Executive Officer		Filed herewith
31.2		Rule 13a-14(a)/15d-14(a) Certification – Principal Financial Officer		Filed herewith
32		Section 1350 Certification – Principal Executive Officer and Principal Financial Officer		Filed herewith
101		The following materials from Croghan Bancshares, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012, formatted in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011; (ii) the Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011 (unaudited); (iii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011 (unaudited); (iv) the Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2012 and 2011 (unaudited); (v) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 (unaudited); and (vi) the Notes to Unaudited Consolidated Financial Statements tagged as blocks of text and in detail*		Filed herewith

* Pursuant to Rule 406T of SEC Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are furnished and not deemed filed or part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those Sections.

 

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