1
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 Quarter Ended September 30, 1998
0-20159
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(Commission File Number)
CROGHAN BANCSHARES, INC.
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(Exact name of registrant as specified in its charter)
Ohio 31-1073048
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
323 Croghan Street, Fremont, Ohio 43420
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(Address of principal executive offices) (Zip Code)
(419)-332-7301
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(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 [ ]
1,903,663 Common shares were outstanding as of September 30, 1998.
This document contains 12 pages.
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CROGHAN BANCSHARES, INC.
Index
PART I. Page(s)
Item 1. Financial Statements 3 - 6
Item 2. Management's Discussion and Analysis 7 - 10
Item 3. Quantitative and Qualitative Disclosures About Market
Risk - There have been no material changes from the
information provided in the December 31, 1997 Form 10-K.
PART II.
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibit 27 - Financial Data Schedule 12
(b) None
Signatures 11
3
CROGHAN BANCSHARES, INC.
Consolidated Balance Sheets (Unaudited)
September 30 December 31
ASSETS 1998 1997
(Dollars In thousands, except par value)
CASH AND CASH EQUIVALENTS
Cash and due from banks $ 10,661 $ 9,735
Interest-bearing deposits in other banks - -
Federal funds sold 3,000 -
-------- --------
Total cash and cash equivalents 13,661 9,735
-------- --------
INVESTMENT SECURITIES
Available-for-sale, at market value 34,436 34,197
Held-to-maturity, at amortized cost, market value of $39,482 in 1998
and $35,588 in 1997 39,133 35,467
-------- --------
Total investment securities 73,569 69,664
-------- --------
LOANS 232,960 239,076
Less: Allowance for possible loan losses 3,460 3,518
-------- --------
Net Loans 229,500 235,558
-------- --------
BANK PREMISES AND EQUIPMENT, NET 7,977 8,119
ACCRUED INTEREST RECEIVABLE 2,842 2,613
OTHER REAL ESTATE OWNED - 140
INTANGIBLE ASSETS 8,206 8,672
OTHER ASSETS 770 539
-------- --------
TOTAL ASSETS $336,525 $335,040
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand, non-interest bearing $ 32,342 $ 30,753
Savings, NOW and Money Market deposits 108,738 106,836
Time 150,872 151,464
-------- --------
Total deposits 291,952 289,053
Federal funds purchased and securities sold under repurchase agreements 6,915 8,663
Borrowed funds 1,775 3,200
Dividends payable 286 285
Accrued interest, taxes and other expenses 2,386 2,249
-------- --------
Total liabilities 303,314 303,450
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $12.50 par value. Authorized 3,000,000 shares; issued and
outstanding 1,903,663 shares in 1998 and 634,526 shares in 1997 23,796 7,932
Surplus 1 8,989
Retained earnings 9,176 14,587
Met unrealized holding gain (loss) on securities available-for-sale, net of
related income taxes 238 82
-------- --------
Total stockholders' equity 33,211 31,590
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $336,525 $335,040
======== ========
See notes to consolidated financial statements.
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CROGHAN BANCSHARES INC.
Consolidated Statements of Operations and Comprehensive Income (Unaudited)
Three months ended Nine months ended
September 30 September 30
1998 1997 1998 1997
(Dollars in thousands, (Dollars in thousands,
except per share data) except per share data)
INTEREST INCOME
Interest and fees on loans $ 5,182 $ 5,155 $ 15,513 $ 15,206
Interest and dividends on investment securities:
U.S. Treasury securities 443 410 1,318 1,352
Obligations of U.S. Government agencies and corporations 358 457 1,106 1,355
Obligations of states and political subdivisions 173 156 467 486
Other securities 36 53 116 160
Interest on federal funds sold 122 25 314 170
------ ------ ------- -------
Total interest income 6,314 6,256 18,834 18,729
------ ------ ------- --------
INTEREST EXPENSE
Interest on deposits 2,740 2,706 8,253 8,030
Interest on other borrowings 101 108 317 362
------ ------ ------- -------
Total Interest expense 2,841 2,814 8,570 8,392
------ ------ ------- -------
Net interest income 3,473 3,442 10,264 10,337
PROVISION FOR LOAN LOSSES 60 45 180 135
------ ------ ------- -------
Net interest income after provision for loan losses 3,413 3,397 10,084 10,202
------ ------ ------- -------
NON-INTEREST INCOME
Trust income 95 85 274 234
Service charges on deposit accounts 189 187 548 550
Gain (loss) on sale of investment securities - (23) - (31)
Gain (loss) on sale of loans 2 - 34 -
Other operating income 167 124 444 388
------ ------ ------- -------
Total non-interest income 453 373 1,300 1,141
------ ------ ------- -------
NON-INTEREST EXPENSES
Salaries, wages and employee benefits 1,392 1,305 4,191 4,143
Net occupancy expense of bank premises 178 193 499 512
Amortization of goodwill and other intangible asset 160 160 481 479
Other operating expenses 929 912 2,679 2,581
------ ------ ------- -------
Total non-interest expenses 2,659 2,570 7,850 7,715
------ ------ ------- -------
Income before federal income taxes 1,207 1,200 3,534 3,628
FEDERAL INCOME TAXES 412 411 1,215 1,236
------ ------ ------- -------
NET INCOME $ 795 $ 789 $ 2,319 $ 2,392
====== ====== ======= =======
Net income per share $ .42 $ .41 $ 1.22 $ 1.26
====== ====== ======= =======
Weighted average number of shares outstanding 1,903,611 1,903,578 1,903,589 1,903,578
========= ========= ========= =========
Dividends declared $ .15 $ .15 $ .45 $ .45
====== ====== ======= =======
COMPREHENSIVE INCOME $ 961 $ 839 $ 2,475 $ 2,384
====== ====== ======= =======
See notes to consolidated financial statements.
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CROGHAN BANCSHARES, INC.
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended
September 30
1998 1997
(Dollars In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,319 $ 2,392
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 908 813
Provision for loan losses 180 135
Deferred federal income taxes 26 (115)
FHLB stock dividend (71) (65)
Net amortization of investment security premiums and discounts 11 54
Loss (gain) on sale of investment securities - 31
Loss (gain) on sale of loans (34) -
Loss (gain) on sale of equipment 4 27
Decrease (increase) in accrued interest receivable (229) (202)
Decrease (increase) in other assets (90) 176
Increase (decrease) in accrued interest, taxes and other expenses 31 26
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Net cash provided by operating activities 3,055 3,272
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities:
Available-for-sale (8,998) (12,477)
Held-to-maturity (16,758) (9,197)
Proceeds from maturities of investment securities 22,185 23,008
Proceeds from sales of available-for-sale investment securities - 5,958
Proceeds from sale of loans 1,806 -
Net decrease (increase) in loans 4,092 (1,910)
Capital expenditures (440) (984)
Proceeds from sale of equipment 6 -
------- -------
Net cash provided by (used in) investing activities 1,893 4,398
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in total deposits 3,005 (6,281)
Increase (decrease) in federal funds purchased and securities sold under repurchase agreements (1,748) (3,516)
Repayments of borrowed funds (1,425) (2,778)
Proceeds from issuance of Common Stock 2 -
Cash dividends paid (856) (857)
------- -------
Net cash provided by (used in) financing activities (1,022) (13,432)
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,926 (5,762)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,735 16,094
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $13,661 $10,332
======= =======
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest $ 8,764 $ 8,468
======= =======
Federal income taxes $ 1,095 1,360
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Transfer of loans to other real estate $ - $ 70
======= =======
See notes to consolidated financial statements.
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CROGHAN BANCSHARES, INC.
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
(1) Consolidated Financial Statements
The consolidated financial statements have been prepared by Croghan
Bancshares, Inc. (the "Corporation") without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the Corporation's 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 results of operations for
the period ended September 30, 1998 are not necessarily indicative of
the operating results for the full year or any future interim period.
(2) Common Stock
On May 12, 1998, the Corporation announced a 3-for-1 split of its
outstanding common shares, par value $12.50 per share, for shareholders
of record May 29, 1998. As a result of the split, two additional common
shares were issued on June 5, 1998 for each share owned by shareholders
of record on May 29, 1998, resulting in the number of issued and
outstanding shares increasing from 634,526 to 1,903,578. Since the par
value of the common stock was not changed, the recording of the stock
split resulted in an increase of $15,863,000 in common stock and
decreases of $8,989,000 in surplus and $6,874,000 in retained earnings.
(3) Reporting of Comprehensive Income
The Corporation adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income, effective January 1, 1998.
Comprehensive income represents net income and "other comprehensive
income" as defined in Statement No. 130. The Corporation's only "other
comprehensive income" component is its unrealized gains on investment
securities.
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CROGHAN BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PERFORMANCE SUMMARY
Assets at September 30, 1998 totalled $336,525,000 compared to $335,040,000 at
1997 year end. Total deposits increased to $291,952,000 from $289,053,000 at
year end and total loans decreased to $232,960,000 from $239,076,000 at year
end.
Net income for the quarter ended September 30, 1998 was $795,000 or $.42 per
common share compared to $789,000 or $.41 per common share for the same period
in 1997, and net income for the nine-month period ended September 30, 1998 was
$2,319,000 or $1.22 per common share compared to $2,392,000 or $1.26 per common
share for the same period in 1997. Operating results for 1998 include increases
in the provision for loan losses and interest on deposits (primarily interest on
money market accounts as Croghan implemented a more competitive rate structure
in an effort to maintain the market share of its core deposit base).
DEPOSITS, LOANS, INVESTMENT SECURITIES, AND STOCKHOLDERS' EQUITY
Total deposits at September 30, 1998 increased $2,899,000 or 1.0 percent from
1997 year end. The liquid deposit category (demand, savings, NOW and money
market deposit accounts) increased $3,491,000 while the time deposit category
decreased $592,000. Total loans decreased $6,116,000 or 2.6 percent from 1997
year end. Total investment securities increased $3,905,000 or 5.6 percent from
1997 year end.
Stockholders' equity at September 30, 1998 increased to $33,211,000 or $17.45
book value per common share compared to $31,590,000 or $16.60 book value per
common share at December 31, 1997 (as adjusted for a 3-for-1 stock split
declared on May 12, 1998 and distributed on June 5, 1998). The balance in
stockholders' equity at September 30, 1998 included a net unrealized holding
gain on securities classified as available-for-sale of $238,000 (net of deferred
income taxes totalling $123,000). At December 31, 1997, stockholders' equity
included a net unrealized holding gain on securities classified as
available-for-sale of $82,000 (net of deferred income taxes totalling $42,000).
Consistent with the Corporation's quarterly dividend policy, a dividend of $.15
per share was declared on September 8, 1998 to be distributed on October 30,
1998.
NET INTEREST INCOME
Net interest income, which represents the excess revenue generated from earning
assets over the interest cost of funding those assets, increased $31,000 for the
quarter ended September 30, 1998 compared to the same period in 1997, and
decreased $73,000 for the nine-month period ended September 30, 1998 compared to
the same period in 1997. The net interest yield (net interest income divided by
average earning assets) was 4.47 percent for the quarter ended September 30,
1998 compared to 4.53 percent for the same period in 1997, and was 4.42 percent
for the nine-month period ended September 30, 1998 compared to 4.53 percent for
the same period in 1997.
PROVISION FOR LOAN LOSSES AND THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
The following table details factors relating to the provision and allowance for
possible loan losses for the periods noted:
Nine Months Ended Twelve Months Ended
September 30, December 31,
1998 1997
8
(Dollars in thousands)
Provision for loan losses charged
to expense $ 180 $ 180
Net loan charge-offs 239 30
Net loan charge-offs as a percent
of average outstanding net loans .10% .01%
Nonaccrual loans $ 403 $ 212
Loans past due 90 days or more 1,109 582
Potential problem loans, other than those
past due 90 days or more, nonaccrual,
or restructured 744 1,992
Allowance for possible loan losses 3,460 3,518
Allowance for possible loan losses as a
percent of period-end loans 1.49% 1.47%
The provision for loan losses for the first nine months of 1998 appearing in the
Consolidated Statements of Operations and Comprehensive Income totalled
$180,000. This provision compares to $135,000 expensed during the same period in
1997. Net loan charge offs were $239,000 for the first nine months of 1998
compared to net recoveries of $57,000 during the same period in 1997.
Nonaccrual loans totalled $403,000 at September 30, 1998 compared to $212,000 at
December 31, 1997. Loans past due 90 days or more at September 30, 1998
increased by $527,000 and other potential problem loans decreased $1,248,000
from December 31, 1997 figures. The asset quality trends are being monitored
throughout 1998 to ensure adequate provisions for loan losses are calculated and
expensed. The Corporation's allowance for possible loan losses as a percentage
of outstanding loans increased to 1.49 percent at September 30, 1998 compared to
1.47 percent at December 31, 1997.
It is the Corporation's policy to maintain the allowance for possible loan
losses at a level to provide for reasonably foreseeable losses. To accomplish
this objective, a loan review process is conducted by an outside consulting firm
which facilitates the early identification of problem loans and ensures sound
credit decisions. Management considers the balance at September 30, 1998 to be
adequate to provide for losses inherent in the loan portfolio.
NON-INTEREST INCOME
Total non-interest income increased $80,000 or 21.4 percent for the quarter
ended September 30, 1998 compared to the same period in 1997, and increased
$159,000 or 13.9 percent for the nine-month period ended September 30, 1998
compared to the same period in 1997. Included in non-interest income for the
nine-month period ended September 30, 1997 were realized losses of $31,000 on
the sale of investment securities that were classified as available-for-sale.
There were no such losses during the same period in 1998.
Trust department fee income increased $10,000 between comparable quarterly
periods and $40,000 between comparable nine-month periods. Service charges on
deposit accounts increased $2,000 between comparable quarterly periods and
decreased $2,000 between comparable nine-month periods.
Gains on the sale of loans to the Federal Home Loan Mortgage Corporation
(Freddie Mac) totalled $2,000 for the quarterly period ended September 30, 1998,
and $34,000 for the first nine months of 1998. There were no such gains during
the same periods in 1997. Other operating Income increased $43,000 between
comparable quarterly periods and $56,000 between comparable nine-month periods.
NON-INTEREST EXPENSES
Total non-interest expenses increased $89,000 or 3.5 percent for the quarter
ended September 30, 1998 compared to the same period in 1997, and increased
$135,000 or 1.7 percent for the nine-month period ended September 30, 1998
compared to the same period in 1997. Salaries, wages and employee benefits
9
increased $87,000 between comparable quarterly periods and $48,000 between
comparable nine-month periods. Net occupancy expense of bank premises decreased
$15,000 between comparable quarterly periods and $13,000 between comparable
nine-month periods. Goodwill amortization associated with the August 1, 1996
purchase of Union Bancshares Corp. was basically unchanged for the comparable
quarterly and nine-month periods while other operating expenses increased
$17,000 or 1.9 percent between quarterly periods and $98,000 or 3.8 percent
between comparable nine-month periods.
FEDERAL INCOME TAX EXPENSE
Federal income tax expense increased $1,000 or .2 percent between comparable
quarterly periods, and decreased $21,000 or 1.7 percent between comparable
nine-month periods due to lower income before taxes. The Corporation's effective
tax rate for the nine months ended September 30, 1998 increased to 34.4 percent
compared to 34.1 percent for the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Average federal funds sold positions of $8,504,000 and $7,563,000 were
maintained for the quarterly and nine-month periods, respectively, ended
September 30, 1998. Short-term borrowings of federal funds purchased and
repurchase agreements averaged $5,612,000 and $5,421,000 for the quarterly and
nine-month periods, respectively.
Borrowings due to the Federal Home Loan Bank in 1999 totalled $1,000,000 at
September 30, 1998. Remaining outstanding borrowings from NBD Bank advanced to
fund the purchase of Union Bancshares Corp. totalled $775,000 at September 30,
1998. The NBD loan is due on July 31, 1999 and is repayable in quarterly
installments of principal plus interest, with the principal payments based upon
a ten-year amortization schedule.
Capital expenditures for bank premises and equipment totalled $440,000 for the
nine-month period ended September 30, 1998. This compares to $984,000 for the
same period in 1997. Projected 1998 capital expenditures total $550,000. Of the
projected 1998 expenditure amount, approximately $200,000 was spent for the
relocation and furnishing of the Trust Department within the Main Office
complex.
YEAR 2000 PREPAREDNESS
There is considerable concern over the ability of many computer software
programs to function when the year 2000 arrives. This concern arises because
many existing programs use only the last two digits to refer to the year. As
such, programs do not recognize the difference between a year that begins with
"20" instead of the current "19".
Computer operations are a crucial part of Croghan's operating strategy and a
comprehensive program has been implemented to verify that all internal software
will operate properly. Certified Year 2000 compliant mainframe computer hardware
and software was purchased and installed in 1997. To ensure the validity of this
certification, a two-day test was conducted in October 1998. This test involved
actually changing the processing dates to December 31, 1999 and January 1, 2000.
A testing program has also been implemented to verify that all desktop personal
computers will function properly in the year 2000. Year 2000 test software and
date changing procedures have been effected on approximately 100 of the 130
personal computers located throughout the organization. The remaining personal
computers are scheduled for testing prior to November 1, 1998.
Croghan's direct exposure to embedded microchip technology is of little or no
consequence. Unlike many manufacturers which use computerized robots,
controllers, and assembly lines, Croghan has only to assess its elevators and
HVAC systems. All such systems have been evaluated and were determined to be
10
free of embedded microchip technology.
Croghan also has a vested interest in the computer processing requirements of
its vendors and customers. Many primary suppliers have been contacted to ensure
their preparedness. A tickler system was instituted to follow up with those
vendors that have not replied or possibly indicated some question as to their
commitment to readiness. These vendors will be contacted throughout the
remainder of 1998 and into 1999.
From a customer standpoint, the problem could affect our borrowers' ability to
service debts if their direct operations, vendors, or customers are impacted. To
raise the customers' level of awareness, Croghan has sponsored two Year 2000
seminars for local businesses. Additionally, the Federal Reserve Bank instituted
a Year 2000 examination process to which Croghan is subject. As a part of that
process, Croghan was required to identify those commercial customers (borrowers
and depositors) which exceeded a set threshold and prepare written Year 2000
assessment work sheets. As of September 30, 1998, approximately 75 such
assessments have been completed. A tickler system was then instituted to follow
up on those customers with a high inclination to Year 2000 risk. The Year 2000
risk assessment for Croghan's borrowers will be a factor when determining the
provision for loan losses charged to expense throughout 1999.
A majority of the cost associated with upgrading Croghan's internal hardware and
software was absorbed when the mainframe equipment was purchased in 1997.
Additional direct expenditures attributable to Year 2000 internal hardware and
software are estimated at $30,000 in 1998 and $25,000 in 1999. Costs associated
with the vendor and customer compliance portions of the Year 2000 preparedness
plan are much more difficult to quantify, but will likely total $20,000 in 1998
and 1999.
Being a bank holding company, Croghan has a well established and tested
contingency plan for mainframe and personal computer processing. The plan has
been implemented on various occasions during times of electrical and telephone
circuit interruption. Most often this has resulted in the manual processing of
customer transactions at the teller windows with mainframe processing
accomplished at the off-site disaster recovery location (the off-site location
was tested in October 1998 for Year 2000 preparedness and found satisfactory).
Croghan has strived to ensure that its contingency plan, vendor, internal
processing, and customer segments of the Year 2000 preparedness plan are being
executed.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Statement Is
effective for all fiscal quarters of years beginning after June 15, 1999. The
Corporation does not believe the adoption of Statement No. 133 will have any
material impact to the consolidated financial statements.
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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 29, 1998 /s/ Thomas Hite
------------------------ -------------------------------
Thomas F. Hite, President
Date: October 29, 1998 /s/ Allan E. Mehlow
------------------------ -------------------------------
Allan E. Mehlow, Treasurer/
Principal Financial Officer