Croghan Bancshares 10-Q 2008 Q3 Quarterly report

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, 2008

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. Yesþ  Noo

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 Accelerated filer o 
Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso   Noþ

1,722,273 common shares, par value $12.50 per share, of the registrant were outstanding as of October 28, 2008.

This document contains 21 pages. The Exhibit Index is on page 16 immediately preceding the filed exhibits.

CROGHAN BANCSHARES, INC.
Index

		Page(s)
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3 - 9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10 - 14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14
Item 4T.	Controls and Procedures	14
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	15
Item 1A.	Risk Factors	15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 3.	Defaults Upon Senior Securities	16
Item 4.	Submission of Matters to a Vote of Security Holders	16
Item 5.	Other Information	16
Item 6.	Exhibits	16
	Exhibit 31.1 — Rule 13a-14(a)/15d-14(a) Certification — Principal Executive Officer	19
	Exhibit 31.2 — Rule 13a-14(a)/15d-14(a) Certification — Principal Financial Officer	20
	Exhibit 32 — Section 1350 Certification — Principal Executive Officer and Principal Financial Officer	21
Signatures		17
EX-31.1
EX-31.2
EX-32

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CROGHAN BANCSHARES, INC.
Consolidated Balance Sheets (Unaudited)

	September 30			December 31
	2008			2007
	(Dollars in thousands, except par value)
ASSETS
CASH AND CASH EQUIVALENTS
Cash and due from banks	$	11,766		$	14,072
Interest-bearing deposits in other banks		114			5,977
Federal funds sold		185			5,300
Total cash and cash equivalents		12,065			25,349
SECURITIES
Available-for-sale, at fair value		65,804			47,344
Held-to-maturity, at amortized cost, fair value of $522 in 2008 and $534 in 2007		504			506
Restricted stock		3,729			3,629
Total securities		70,037			51,479
LOANS		347,689			350,514
Less: Allowance for loan losses		3,305			3,358
Net loans		344,384			347,156
Premises and equipment, net		7,425			7,653
Cash surrender value of life insurance		10,500			10,227
Goodwill		10,430			10,430
Core deposit intangible asset, net		245			288
Accrued interest receivable		2,035			1,916
Other assets		869			630
TOTAL ASSETS	$	457,990		$	455,128
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Demand, non-interest bearing	$	49,700		$	52,957
Savings, NOW and Money Market deposits		151,376			160,431
Time		151,857			149,445
Total deposits		352,933			362,833
Federal funds purchased and securities sold under repurchase agreements		13,078			11,106
Borrowed funds		34,500			24,500
Dividends payable		551			541
Other liabilities		3,008			2,860
Total liabilities		404,070			401,840
STOCKHOLDERS’ EQUITY
Common stock, $12.50 par value. Authorized 6,000,000 shares; issued 1,914,109 shares		23,926			23,926
Surplus		179			179
Retained earnings		36,742			35,292
Accumulated other comprehensive income		73			157
Treasury stock, 191,836 shares in 2008 and 168,691 shares in 2007, at cost		(7,000	)		(6,266	)
Total stockholders’ equity		53,920			53,288
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	457,990		$	455,128

See notes to consolidated financial statements.

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CROGHAN BANCSHARES, INC.
Consolidated Statements of Operations (Unaudited)

	Three months ended
	September 30
	2008		2007
	(Dollars in thousands,
	except per share data)
INTEREST INCOME
Loans, including fees	$	5,690	$	6,329
Securities:
Obligations of U.S. Government agencies and corporations		566		304
Obligations of states and political subdivisions		200		189
Other		61		66
Federal funds sold		—		99
Interest on deposits in other banks		12		—
Total interest income		6,529		6,987
INTEREST EXPENSE
Deposits		1,607		2,339
Other borrowings		368		263
Total interest expense		1,975		2,602
Net interest income		4,554		4,385
PROVISION FOR LOAN LOSSES		300		—
Net interest income, after provision for loan losses		4,254		4,385
NON-INTEREST INCOME
Trust income		231		240
Service charges on deposit accounts		396		428
Gain on sale of securities		16		—
Other		232		233
Total non-interest income		875		901
NON-INTEREST EXPENSES
Salaries, wages and employee benefits		1,892		1,775
Occupancy of premises		212		212
Amortization of core deposit intangible asset		14		14
Other operating		1,237		1,149
Total non-interest expenses		3,355		3,150
Income before federal income taxes		1,774		2,136
FEDERAL INCOME TAXES		519		649
NET INCOME	$	1,255	$	1,487
Net income per share, based on 1,725,996 shares in 2008 and 1,756,397 shares in 2007	$	0.73	$	0.85
Dividends declared per share	$	0.32	$	0.31

See notes to consolidated financial statements.

4

CROGHAN BANCSHARES, INC.
Consolidated Statements of Operations (Unaudited)

	Nine months ended
	September 30
	2008		2007
	(Dollars in thousands,
	except per share data)
INTEREST INCOME
Loans, including fees	$	17,168	$	18,947
Securities:
Obligations of U.S. Government agencies and corporations		1,486		1,003
Obligations of states and political subdivisions		606		578
Other		178		202
Federal funds sold		71		175
Interest on deposits in other banks		73		—
Total interest income		19,582		20,905
INTEREST EXPENSE
Deposits		5,325		7,047
Other borrowings		1,040		915
Total interest expense		6,365		7,962
Net interest income		13,217		12,943
PROVISION FOR LOAN LOSSES		1,150		—
Net interest income, after provision for loan losses		12,067		12,943
NON-INTEREST INCOME
Trust income		655		665
Service charges on deposit accounts		1,161		1,122
Gain on sale of securities		16		—
Other		736		692
Total non-interest income		2,568		2,479
NON-INTEREST EXPENSES
Salaries, wages and employee benefits		5,612		5,378
Occupancy of premises		675		620
Amortization of core deposit intangible asset		43		43
Other operating		3,753		3,462
Total non-interest expenses		10,083		9,503
Income before federal income taxes		4,552		5,919
FEDERAL INCOME TAXES		1,290		1,771
NET INCOME	$	3,262	$	4,148
Net income per share, based on 1,736,273 shares in 2008 and 1,767,669 shares in 2007	$	1.88	$	2.35
Dividends declared per share	$	0.96	$	0.93

See notes to consolidated financial statements.

5

CROGHAN BANCSHARES, INC.
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

	Three months ended
	September 30
	2008			2007
	(Dollars in thousands,
	except per share data)
BALANCE AT BEGINNING OF PERIOD	$	53,599		$	51,544
Comprehensive Income:
Net income		1,255			1,487
Change in net unrealized gain (loss) on securities available-for-sale, net of reclassification adjustments and related income taxes		(184	)		285
Total comprehensive income		1,071			1,772
Purchase of 7,254 treasury shares in 2008 and 1,795 shares in 2007		(199	)		(72	)
Cash dividends declared, $.32 per share in 2008 and $.31 per share in 2007		(551	)		(544	)
BALANCE AT END OF PERIOD	$	53,920		$	52,700

	Nine months ended
	September 30
	2008			2007
	(Dollars in thousands,
	except per share data)
BALANCE AT BEGINNING OF PERIOD	$	53,288		$	51,163
Cumulative effect of change in accounting principle, net of tax		(149	)		—
Comprehensive Income:
Net income		3,262			4,148
Change in net unrealized gain (loss) on securities available-for-sale, net of reclassification adjustments and related income taxes		(84	)		198
Total comprehensive income		3,178			4,346
Proceeds from issuance of treasury shares, 763 shares in 2007		—			29
Purchase of treasury shares, 23,145 shares in 2008 and 30,970 shares in 2007		(734	)		(1,199	)
Cash dividends declared, $.96 per share in 2008 and $.93 per share in 2007		(1,663	)		(1,639	)
BALANCE AT END OF PERIOD	$	53,920		$	52,700

See notes to consolidated financial statements.

6

CROGHAN BANCSHARES, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)

	Nine months ended
	September 30
	2008			2007
	(Dollars in thousands)
NET CASH FLOW FROM OPERATING ACTIVITIES	$	4,761		$	4,726
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities		8,508			13,722
Proceeds from sale of available-for-sale securities		3,649			—
Purchases of available-for-sale securities		(30,782	)		(5,114	)
Net decrease in loans		1,473			11,432
Additions to premises and equipment		(528	)		(635	)
Net cash from investing activities		(17,680	)		19,405
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits		(9,900	)		(14,533	)
Net change in federal funds purchased and securities sold under repurchase agreements		1,972			(3,729	)
Net change in borrowed funds		10,000			(2,900	)
Proceeds from issuance of treasury shares		—			29
Cash dividends paid		(1,653	)		(1,631	)
Purchase of treasury stock		(734	)		(1,199	)
Payment of deferred compensation		(50	)		(11	)
Net cash from financing activities		(365	)		(23,974	)
NET CHANGE IN CASH AND CASH EQUIVALENTS		(13,284	)		157
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		25,349			11,843
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	12,065		$	12,000
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest	$	6,347		$	8,646
Federal income taxes	$	1,440		$	1,825
Transfer of loans to other real estate owned	$	117		$	89

See notes to consolidated financial statements.

7

CROGHAN BANCSHARES, INC.
Notes to Consolidated Financial Statements
September 30, 2008
(Unaudited)

(1) Consolidated Financial Statements

The consolidated financial statements of Croghan Bancshares, Inc. (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 have been omitted. The Corporation’s Annual Report to shareholders for the year ended December 31, 2007, 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, 2008 are not necessarily indicative of the operating results for the full year.

(2) New Accounting Pronouncements

On February 15, 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 159, “The Fair Value Opinion for Financial Assets and Financial Liabilities” (FAS 159). FAS 159 permits, but does not require, entities to measure selected financial assets and liabilities at fair value. Changes in fair value are recorded through the income statement in subsequent periods. The statement provides for a one time opportunity to transfer existing assets and liabilities to fair value at the point of adoption with a cumulative effect adjustment recorded against equity. After adoption, the election to report the assets and liabilities at fair value must be made at the point of their inception. There was no impact on the consolidated financial statements of the Corporation as a result of the adoption of FAS 159 during the first quarter of 2008 since the Corporation did not elect the fair value option for any eligible items, as defined in FAS 159, as of January 1, 2008.

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (FAS 157) 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 process 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.

8

On February 12, 2008, the FASB issued Staff Position 157-2 which defers the effective date of FAS 157 for certain non-financial assets and liabilities to fiscal years beginning after November 15, 2008. All other provisions of FAS 157 are effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.

The Corporation adopted the provisions of FAS 157 for the quarter ended March 31, 2008 except for those non-financial assets and liabilities subject to deferral as a result of Staff Position 157-2. There was no impact on the March 31, 2008 consolidated financial statements of the Corporation as a result of the adoption of FAS 157.

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 balance sheets, 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 Corporation’s 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 sheets, 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 loan’s 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 EITF 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsed Split-Dollar Life Insurance Arrangements” (EITF 06-4), 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 policy’s death benefits to the insured employee’s beneficiary. EITF 06-4 is effective for fiscal years beginning after December 15, 2007. The Bank has entered into Supplemental Death Benefit Agreements with certain of its executive officers pursuant to which the Bank has agreed to pay a portion of the death benefit payable under certain life insurance policies owned by the Bank to the executives’ beneficiaries upon their death. As a result of the adoption of EITF 06-4, the Bank recognized a cumulative effect adjustment (decrease) to retained earnings of $149,000 representing the additional liability ($226,000) required to be provided under EITF 06-4 on January 1, 2008 relating to the agreements, net of deferred income taxes ($77,000).

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Where appropriate, the following discussion relating to Croghan Bancshares, Inc. (“Croghan” or the “Corporation”) contains the insights of management into known events and trends that have or may be expected to have a material effect on Croghan’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” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. 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, 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, 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, 2007.

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, 2008 totaled $457,990,000 compared to $455,128,000 at 2007 year end, an increase of $2,862,000, or .6 percent. Total cash and cash equivalents decreased $13,284,000 during the first nine months of 2008, while total loans decreased to $347,689,000 at September 30, 2008, compared to $350,514,000 at 2007 year end. Total securities increased $18,558,000, or 36.0 percent to $70,037,000 at September 30, 2008, from $51,479,000 at 2007 year end, and total deposits decreased to $352,933,000 at September 30, 2008, from $362,833,000 at 2007 year end.

Net income for the quarter ended September 30, 2008 was $1,255,000, or $.73 per common share, compared to $1,487,000, or $.85 per common share for the same period in 2007. Net income for the nine-month period ended September 30, 2008 was $3,262,000, or $1.88 per common share, compared to $4,148,000, or $2.35 per common share for the same period in 2007. As discussed below, the September 30, 2008 quarterly and year-to-date results were adversely impacted by an increase in provision for loan losses and an increase in non-interest expenses.

FINANCIAL POSITION

The following comments are based upon a comparison of Croghan’s financial position at September 30, 2008 to 2007 year end.

Total loans decreased $2,825,000, or .8 percent from year-end. The decrease in loans resulted from the continued slow economy, which has precipitated continued low loan demand in the local market area, as well as $1,290,000 of loan charge-offs in 2008 through September 30. Croghan has experienced some growth in its non-residential real estate loan portfolio during the first nine months of 2008.

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Total securities increased $18,558,000, or 36.0 percent from 2007 year-end. In response to continued soft loan demand in Croghan’s market area, coupled with improved securities rates, available funds were invested in the securities portfolio. The increase in securities during the period primarily resulted from purchases of available-for-sale securities of $30,782,000 which exceeded securities maturities and sales during the period of $8,508,000 and $3,633,000 respectively. During the third quarter of 2008, Croghan sold nine securities resulting in a gain on sale of $16,000. The proceeds of the security sales were used to repurchase bonds which extended the duration and increased the earnings rate of the securities portfolio.

Total deposits decreased $9,900,000, or 2.7 percent from 2007 year-end. The liquid deposit category (demand, savings, NOW and money market deposit accounts) decreased $12,312,000, or 5.8 percent while the time deposit category increased $2,412,000, or 1.6 percent. Competition for core deposits from both traditional sources (e.g., other banks and credit unions) and non-traditional sources (e.g., brokerage firms) continues to be very intense. Croghan continuously strives to maintain a balance between its deposit needs for funding anticipated loan demand and the necessary deposit pricing structure to maintain interest margin.

Stockholders’ equity increased to $53,920,000, or $31.31 book value per common share at September 30, 2008, compared to $53,288,000, or $30.53 book value per common share at December 31, 2007. The balance in stockholders’ equity at September 30, 2008 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, 2008, Croghan held $65,804,000 in available-for-sale securities with an unrealized gain of $73,000, net of income taxes. This compares to 2007 year-end holdings of $47,344,000 in available-for-sale securities with an unrealized gain of $157,000, net of income taxes.

Beginning in February 2002, Croghan instituted a stock buy-back program, which has subsequently been extended through February 1, 2009. Since the inception of the program, a total of 199,898 shares have been purchased as treasury shares. The 191,836 treasury shares held as of September 30, 2008 and the 168,691 shares held as of December 31, 2007 are reported at their acquired cost.

Consistent with the Corporation’s quarterly dividend policy, a cash dividend of $.32 per share was declared on September 9, 2008, payable on October 31, 2008 to shareholders of record as of October 10, 2008.

NET INTEREST INCOME

Net interest income, which represents the excess revenue generated from interest-earning assets over the interest cost of funding those assets, increased $169,000, or 3.9 percent for the quarter ended September 30, 2008 as compared to the same period in 2007. Net interest income increased $274,000, or 2.1 percent for the nine-month period ended September 30, 2008 as compared to the same period in 2007. The net interest yield (net interest income divided by average interest-earning assets) was 4.25 percent for the nine-month period ended September 30, 2008 compared to 4.20 percent for the same period in 2007.

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 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. Croghan’s loan policy, loan review

11

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			Nine months ended
	September 30, 2008			September 30, 2007
	(Dollars in thousands)
Provision for loan losses charged to expense	$	1,150		$	—
Net loan charge-offs		1,202			232
Annualized net loan charge-offs as a percent of average outstanding loans		.47	%		.09	%

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

	September 30, 2008			December 31, 2007
	(Dollars in thousands)
Nonaccrual loans		$  2,263			$  2,285
Loans contractually past due 90 days or more and still accruing interest		203			237
Restructured loans		—			—
Potential problem loans, other than those past due 90 days or more, nonaccrual, or restructured		13,173			9,405
Total potential problem and non-performing loans		$15,639			$11,927
Allowance for loan losses		$  3,305			$  3,358
Allowance for loan losses as a percent of period-end loans		.95	%		.96	%

There was a $300,000 provision for loan losses for the three-month period ended September 30, 2008 and a $1,150,000 provision for loan losses for the nine-month period ended September 30, 2008, compared to no provision for loan losses for the same periods in 2007. The 2008 provision for loan losses is attributable primarily to $916,000 of charge-offs relating to a commercial loan customer in the transportation industry. Loans to the customer were on non-accrual of interest at December 31, 2007, and the Bank provided a specific reserve relating to this credit of $800,000 in its allowance for loan losses calculation as of December 31, 2007. As evidenced in the above table, potential problem loans have increased $3,768,000, or 40.1% during the nine-month period ended September 30, 2008. The significant increase in potential problem loans, coupled with higher historic loss rates for potential problem loans from the aforementioned large loan charge-offs, have contributed to the increased provision for loan losses.

Total potential problem and non-performing loans, which are summarized in the preceding table, increased $3,712,000, or 31.1 percent to $15,639,000 at September 30, 2008, compared to $11,927,000 at December 31, 2007. Components of potential problem and non-performing loans that were favorable at September 30, 2008, as compared to December 31, 2007, included a $22,000 decrease in nonaccrual loans and a $34,000 decrease in loans contractually past due 90 days or more and still accruing interest. The aforementioned $3,768,000 increase in potential problem loans represents a significant unfavorable change. As illustrated in the tables below, $12,743,000, or 96.7 percent of total potential problem loans are less than 30 days past due, and 99.9 percent are secured with collateral.

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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,		December 31,
	2008		2007
	(Dollars in thousands)
Potential problem loans not currently past due		$  8,270		$4,888
Potential problem loans past due one day or more but less than 10 days		3,034		2,006
Potential problem loans past due 10 days or more but less than 30 days		1,439		1,215
Potential problem loans past due 30 days or more but less than 60 days		239		985
Potential problem loans past due 60 days or more but less than 90 days		191		311
Total potential problem loans		$13,173		$9,405

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

	September 30,		December 31,
	2008		2007
	(Dollars in thousands)
Collateralized by an interest in real property		$11,658		$6,790
Collateralized by an interest in assets other than real property		1,502		2,590
Unsecured		13		25
Total potential problem loans		$13,173		$9,405

The aforementioned asset quality trends will continue to be monitored throughout 2008 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 considers the allowance at September 30, 2008 to be 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 $26,000, or 2.9 percent for the quarter ended September 30, 2008 compared to the same period in 2007, and increased $89,000, or 3.6 percent for the nine-month period ended September 30, 2008, compared to the same period in 2007. The increase for the nine-month period is primarily due to an increase in non-sufficient funds income and increases in other non-interest income categories.

NON-INTEREST EXPENSES

Total non-interest expenses increased $205,000, or 6.5 percent for the quarter ended September 30, 2008, as compared to the same period in 2007, and increased $580,000, or 6.1 percent for the nine-month period ended September 30, 2008, as compared to the same period in 2007. Salaries, wages and employee benefits increased $117,000, or 6.6 percent between comparable quarterly periods and increased $234,000, or 4.4 percent between comparable nine-month periods. Other operating expenses increased $88,000, or 7.7 percent between comparable quarterly periods and increased $291,000, or 8.4 percent between comparable nine-month periods.

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FEDERAL INCOME TAX EXPENSE

Federal income tax expense decreased $130,000, or 20.0 percent between comparable quarterly periods and $481,000, or 27.2 percent between comparable nine-month periods which is in relation to the decrease in income before federal income taxes. The Corporation’s effective tax rate for the nine months ended September 30, 2008 was 28.3 percent compared to 29.9 percent for the same period in 2007.

LIQUIDITY AND CAPITAL RESOURCES

Short-term borrowings of federal funds purchased and repurchase agreements averaged $11,050,000 for the nine-month period ended September 30, 2008. This compares to $11,808,000 for the twelve-month period ended December 31, 2007 and $11,692,000 for the nine-month period ended September 30, 2007.

Borrowed funds, principally consisting of Federal Home Loan Bank borrowings, totaled $34,500,000 at September 30, 2008, as compared to $14,500,000 at September 30, 2007 and $24,500,000 at December 31, 2007. Most of the additional borrowings were used to purchase securities.

Capital expenditures for premises and equipment totaled $528,000 for the nine-month period ended September 30, 2008, compared to $635,000 for the same period in 2007. The 2008 expenditures included the completion of the new Norwalk Banking Center which opened in January 2008.

Loan commitments, including letters of credit, as of September 30, 2008 totaled $81,729,000 compared to $69,734,000 at December 31, 2007. 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 information about market risk from the information provided in Croghan’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (the “2007 Form 10-K”).

ITEM 4T. 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

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(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, 2008, 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 an ongoing shareholder dispute regarding the inspection of the books and records of account of the Corporation and its subsidiary Bank and 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.

ITEM 1A. RISK FACTORS

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 2007 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 2007 Form 10-K.

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

(a)	Not applicable
(b)	Not applicable
(c)	The table below includes certain information regarding Croghan’s repurchase of its common shares during the quarterly period ended September 30, 2008:

					Total Number of		Maximum Number
					Shares Purchased		of Shares that May
	Total Number		Average		as Part of Publicly		Yet Be Purchased
	of Shares		Price Paid		Announced Plans		Under the Plans
Period	Purchased		per Share		or Programs		or Programs (1)
07/01/08 through 07/31/08	None		None		None			71,379
08/01/08 through 08/31/08		7,254	$	27.57		7,254		79,222
09/01/08 through 09/30/08	None		None		None			79,222

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(1) A stock buyback program was announced on January 25, 2008 pursuant to which up to 87,270 common shares of Croghan could be repurchased from February 1, 2008 through August 1, 2008 (with a total of 15,891 shares being purchased under such program prior to its expiration). A stock buy back program commencing August 1, 2008 and ending February 1, 2009 was approved on July 15, 2008 in which up to 86,476 shares may be repurchased (with 5,000 shares purchased on August 13, 2008, 1,307 shares purchased on August 22, 2008, and 947 shares purchased on August 29, 2008).

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

The following exhibits are filed with or incorporated by reference (in accordance with Item 601 of SEC Regulation S-K) in this filing:

EXHIBIT 31.1 — Rule 13a-14(a)/15d-14(a) Certification — Principal Executive Officer
EXHIBIT 31.2 — Rule 13a-14(a)/15d-14(a) Certification — Principal Financial Officer
EXHIBIT 32 — Section 1350 Certification — Principal Executive Officer and Principal Financial Officer

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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 28, 2008	By:	/s/ Steven C. Futrell
		Steven C. Futrell, President and CEO
		(Principal Executive Officer)
Date: October 28, 2008	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

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