<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996. Commission File Number: 0-20159
CROGHAN BANCSHARES, INC.
(Name of small business issuer in its charter)
Ohio 31-1073048
(State of Incorporation) (I.R.S. Employer Identification No.)
323 Croghan Street, Fremont, Ohio 43420
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (419) 332-7301
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Par Value $12.50 Per Share
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
The issuer's revenues for the fiscal year ended December 31, 1996 were
$22,598,706.
The aggregate market value of the voting stock held by non-affiliates was
$32,511,065 as of January 31, 1997.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date - 634,526 shares of common stock, par
value $12.50 per share (as of February 28, 1997).
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Shareholders for the fiscal year ended December 31, 1996 - PART
II of Form 10-KSB.
Proxy Statement dated March 28, 1997 for the 1997 Annual Meeting of Shareholders
- - PART III of Form 10-KSB.
This document contains 63 pages. The Exhibit Index is on pages 18 and 19.
<PAGE> 2
INDEX
PART I
Item 1. Description of business 3 - 14
Item 2. Description of property 15
Item 3. Legal proceedings 15
Item 4. Submission of matters to a vote of security holders 15
PART II
Item 5. Market for common equity and related stockholder matters 16
Item 6. Management's discussion and analysis 16
Item 7. Financial statements 16
Item 8. Changes in and disagreements with accountants on
accounting and financial disclosure 16
PART III
Item 9. Directors and executive officers 17
Item 10. Executive compensation 17
Item 11. Security ownership of certain beneficial owners
and management 17
Item 12. Certain relationships and related transactions 17
Item 13. Exhibits and reports on Form 8-K 18 - 20
Signatures 21
2
<PAGE> 3
Part I
Item 1. Description of Business
Croghan Bancshares, Inc. (the "Corporation") was organized under the laws of the
State of Ohio on September 27, 1983, and is registered as a bank holding company
under the Bank Holding Company Act of 1956, as amended. The Corporation, as the
result of a merger and reorganization effective in 1984, acquired all of the
voting shares of The Croghan Colonial Bank (the "Bank"), an Ohio chartered bank
organized in 1888. The Bank is the only subsidiary of the Corporation, and
substantially all of the Corporation's operations are conducted through the
Bank. The principal offices of both the Corporation and the Bank are located at
323 Croghan Street, Fremont, Ohio. The Bank also operates eight Ohio branch
offices: two in Bellevue, one in Clyde, three in Fremont, one in Green Springs,
and one in Monroeville. The Corporation and the Bank had total consolidated
assets of $340,168,000 at December 31, 1996.
The Corporation, through its subsidiary, the Bank, operates in one industry
segment, the commercial banking industry.
General
The Bank conducts a general banking business embracing the usual functions of
commercial, retail, and savings banking, including time, savings, money market
and demand deposits; commercial, industrial, agricultural, real estate, consumer
installment and credit card lending; safe deposit box rental; automatic teller
machines; trust department services since 1990; and other services tailored for
individual customers. The Bank makes and services secured and unsecured loans to
individuals, firms and corporations. The Bank makes direct loans to individuals
and purchases installment obligations from retailers, both with and without
recourse. The Bank makes a variety of residential, industrial, commercial and
agricultural loans secured by real estate, including interim construction
financing. The Bank has offered discount brokerage services since 1985. All
customer transactions are settled through a correspondent bank account at
National City Bank. Additionally, beginning in June 1995, investment products
bearing no FDIC insurance are offered through the Bank's Specialized Investment
Division.
On a parent company only basis, the Corporation's only source of funds is the
receipt of dividends paid by the Bank subsidiary. The ability of the Bank to pay
dividends is subject to limitations under various laws and regulations, and to
prudent and sound banking principles. Generally, subject to certain minimum
capital requirements, the Bank may declare a dividend without the approval of
the State of Ohio Division of Financial Institutions, unless the total of the
dividends in a calendar year exceeds the total of its net profits for the year
combined with its retained profits of the two preceding years. Management
believes that the future earnings of the Bank will be sufficient to support
anticipated asset growth at the Bank and at the same time provide funds to the
Corporation to service debt and continue dividends at their current level.
On August 1, 1996, the Corporation acquired all of the outstanding shares of
Union Bancshares Corp. ("Union"), the sole shareholder of The Union Bank and
Savings Company, an Ohio banking corporation, for $20,226,868 cash plus $73,038
in acquisition costs pursuant to a Plan and Agreement of Reorganization dated
February 15, 1996, and an Agreement of Merger dated March 27, 1996. The purchase
price was deemed representative of the fair market value of Union and was
subject to final adjustment based upon the results of an audit of Union's
financial statements as of July 31, 1996. The Corporation funded the acquisition
with internally-generated cash (primarily through the available undistributed
income of the Bank) and with $4,500,000 borrowed from NBD Bank. The transaction
was accounted for as a purchase with Union's assets and liabilities stated at
their fair values. The fair values of the assets acquired totalled $102,275,648
and the fair values of the liabilities assumed
3
<PAGE> 4
ITEM 1. Description of Business, Continued
totalled $91,544,465. Goodwill arising from the purchase of $9,568,723 is being
amortized on a straight-line basis over a period of 15 years.
Regulation and Supervision
The Corporation, as a registered bank holding company, is subject to regulation
by the Board of Governors of the Federal Reserve System under the Bank Holding
Company Act of 1956, as amended (the "Act"). The Act limits the activities in
which the Corporation and the Bank may engage to those activities that the
Federal Reserve Board finds, by order or regulation, to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. A
favorable determination by the Federal Reserve Board as to whether any such new
activity by the Corporation or the Bank is in the public interest, taking into
account both the likely adverse effects and the likely benefits, is also
necessary before any such activity may be engaged in. A bank holding company is
prohibited from acquiring direct or indirect ownership or control of any company
that is not a bank or bank holding company unless its business and activities
would be acceptable for the bank holding company itself. The Federal Reserve
Board, however, is empowered to differentiate between activities which are
initiated de novo by a bank holding company or a subsidiary and activities
commenced by acquisition of a going concern. The Federal Reserve Board also
possesses cease and desist powers over bank holding companies and their non-bank
subsidiaries for activities that are deemed by the Board of Governors to
constitute a serious risk to the financial safety, soundness or stability of a
bank holding company, that are inconsistent with sound banking principles or
that are in violation of law. Further, under Section 106 of the 1970 Amendments
to the Board's regulations, bank holding companies and their subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit or lease or sale of any property or the furnishing of
services.
The Act also requires every bank holding company to obtain the prior approval of
the Federal Reserve Board before acquiring all or substantially all of the
assets of any bank, or acquiring ownership or control of any voting shares of
any other bank, if after such acquisition, it would own or control such bank. In
making such determinations, the Federal Reserve Board considers the effect of
the acquisition on competition, the financial and managerial resources of the
holding company and the convenience and needs of affected communities. The Act
prohibits acquisitions relating to banks in other states unless authorized by
the laws of the other state in question. On September 29, 1994, the Act was
amended by the Interstate Banking and Branching Efficiency Act of 1994, which
authorized (i) interstate bank acquisitions anywhere in the country commencing
September 29, 1995 and (ii) interstate branching by acquisition and
consolidation commencing June 1, 1997 in those states that have not opted out by
that date.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") contains provisions that directly affect thrifts, banks, thrift
holding companies, and bank holding companies. First, FIRREA abolished the
Federal Savings and Loan Insurance Corporation and required the Federal Deposit
Insurance Corporation ("FDIC") to establish two separate funds, the Bank
Insurance Fund ("BIF") to insure banks and the Savings Association Insurance
Fund ("SAIF") to insure savings and loan associations. Second, FIRREA amended
the Bank Holding Company Act of 1956 to permit bank holding companies to acquire
thrift institutions; prior to FIRREA, bank holding companies were permitted to
acquire only failing thrift institutions. FIRREA also abolished the restrictions
on tandem operations of acquired thrift institutions and the in-state preference
for acquisitions of failing thrifts. Finally, FIRREA increased the authority of
bank regulators.
The FDIC Improvement Act of 1991, which became law on December 19, 1991, revised
sections of the Federal Deposit Insurance Act affecting bank
4
<PAGE> 5
ITEM 1. Description of Business, Continued
regulation, deposit insurance and provisions for the funding of BIF. The FDIC
Improvement Act also revised bank regulatory structures embodied in several
other federal banking statutes, linked the bank regulators' authority to
intervene to the deterioration of a bank's capital level, placed limits on real
estate lending, and increased audit requirements.
The Bank, as an Ohio chartered bank, is supervised by the State of Ohio Division
of Financial Institutions. The Bank is also a member of the Federal Reserve
System and subject to its supervision. As such, the Bank is subject to periodic
examinations by both the Ohio Division of Financial Institutions and the Federal
Reserve Board. These examinations are designed primarily for the protection of
the Bank's depositors and not for its shareholders. The Bank must file with the
Ohio Division of Financial Institutions prescribed periodic reports containing a
full and accurate statement of its affairs.
The Corporation and the Bank are subject to the Community Reinvestment Act of
1977, as amended (the "CRA"), which is designed to encourage financial
institutions to give special attention to the needs of low and moderate income
areas in meeting the credit needs of the communities in which they operate. If
the CRA regulatory evaluation of a bank's activities is less than satisfactory,
regulatory approval of proposed acquisitions, branch openings and other
applications requiring Federal Reserve Board approval may be delayed until a
satisfactory CRA evaluation is achieved. The Bank currently has a CRA regulatory
evaluation of outstanding.
Effects of Government Monetary Policy
The earnings of the Bank are affected by general and local economic conditions
and by the policies of various governmental regulatory authorities. In
particular, the Federal Reserve Board regulates money and credit conditions and
interest rates in order to influence general economic conditions, primarily
through open market acquisitions or dispositions of United States Government
securities, varying the discount rate on member bank borrowings, and setting
reserve requirements against member and nonmember bank deposits. Federal Reserve
Board monetary policies have had a significant effect on the interest income and
interest expense of commercial banks, including the Bank, and are expected to
continue to do so in the future.
Competition
The Corporation's wholly-owned subsidiary, the Bank, has active competition in
all areas in which it engages. The Bank competes for commercial and individual
deposits and/or loans with other commercial banks in Huron, Sandusky, and Seneca
counties in Northwestern Ohio, as well as with savings and loan associations in
the trade area, credit unions connected with local businesses, brokerage firms,
mutual funds, and financial units of non-local bank holding companies. The Bank
focuses on personalized service, convenience of facilities, pricing of products,
community stature, and its local ownership and control in meeting its
competition.
Employees
The Corporation has no employees and conducts its business through its
wholly-owned subsidiary, the Bank.
As of December 31, 1996, the Bank employed 167 full-time employees and 32
part-time employees to whom it provides a variety of benefits and with whom it
believes relationships are excellent.
The following pages present various statistical disclosures required for bank
holding companies. The information represents only domestic information since
the Corporation has no foreign operations or foreign loans.
5
<PAGE> 6
ITEM 1. Description of Business, Continued
Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential
The following table sets forth, for the years ended December 31, 1996, 1995 and
1994, the distribution of assets, liabilities and stockholders' equity,
including interest amounts and average rates of major categories of
interest-earning assets and interest-bearing liabilities:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------- ------------------------ -------------------------
Average Yield Average Yield Average Yield
balance Interest /rate balance Interest /rate balance Interest /rate
Assets
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) (2) $187,126 16,700 8.92% $155,253 13,860 8.93% $148,544 12,076 8.13%
Taxable investment securities 61,315 3,843 6.27% 57,542 3,526 6.13% 60,259 3,155 5.24%
Non-taxable investment securities 12,743 576 4.52% 11,202 511 4.56% 14,122 669 4.74%
Federal funds sold 3,148 166 5.27% 2,995 179 5.98% 2,044 91 4.45%
-------- ------ -------- ------ -------- ------
Total interest-earning assets 264,332 21,285 8.05% 226,992 18,076 7.96% 224,969 15,991 7.11%
-------- ------ -------- ------ -------- ------
Non-interest-earning assets:
Cash and due from banks 8,140 6,939 6,924
Bank premises and equipment, net 5,762 4,325 4,388
Other assets 7,322 2,992 3,055
Less allowance for possible loan losses (2,889) (2,489) (2,359)
-------- -------- --------
Total $282,667 21,285 $238,759 18,076 $236,977 15,991
======== ====== ======== ====== ======== ======
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Savings, NOW and Money Market deposits $ 91,385 2,161 2.36% $ 82,040 2,051 2.50% $ 87,117 2,059 2.36%
Time deposits 125,026 6,736 5.39% 99,677 5,117 5.13% 96,440 4,064 4.21%
Federal funds purchased and securities
sold under repurchase agreements 2,206 92 4.17% 1,994 65 3.26% 2,464 58 2.35%
Borrowed funds 4,129 315 7.63% 2,500 176 7.04% 1,767 125 7.07%
-------- ------ -------- ------ -------- ------
Total interest-bearing liabilities 222,746 9,304 4.18% 186,211 7,409 3.98% 187,788 6,306 3.36%
-------- ------ -------- ------ -------- ------
Non-interest-bearing liabilities:
Demand deposits 28,890 24,380 23,446
Other liabilities 2,202 1,555 1,195
-------- -------- -------
31,092 25,935 24,641
-------- -------- -------
Stockholders' equity 28,829 26,613 24,548
-------- -------- -------
Total $282,667 9,304 $238,759 7,409 $236,977 6,306
======== ======= ======== ======= ======== ======
Net interest income $11,981 $10,667 $9,685
======= ======= ======
Net yield on interest-earning assets 4.53% 4.70% 4.31%
===== ===== =====
<FN>
(1) Included in loan interest income are loan fees of $335,960 in 1996, $189,021
in 1995, and $189,866 in 1994.
(2) Non-accrual loans are included in loan totals and do not have a material
impact on the analysis presented.
</TABLE>
6
<PAGE> 7
ITEM 1. Description of Business, Continued
Changes in Interest Income and Interest Expense
Resulting from Changes in Volume and Changes in Rate
The following table sets forth, for the periods indicated, a summary of the
changes in interest income and interest expense resulting from changes in volume
and changes in rate:
<TABLE>
<CAPTION>
1996 compared to 1995 1995 compared to 1994
Increase (decrease) Increase (decrease)
due to volume/rate (1) due to volume/rate (1)
---------------------- -----------------------
Volume Rate Net Volume Rate Net
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $2,844 (4) 2,840 $ 562 1,222 1,784
Taxable investment securities 235 82 317 (133) 505 372
Non-taxable investment securities 70 (5) 65 (134) (25) (159)
Federal funds sold 10 (23) (13) 51 37 88
------ ----- ----- ------ ----- -----
Total interest-earning assets 3,159 50 3,209 346 1,739 2,085
------ ----- ----- ------ ----- -----
Interest expense:
Savings, NOW and Money Market deposits 210 (100) 110 (898) 890 (8)
Time deposits 1,355 264 1,619 140 913 1,053
Federal funds purchased and securities
sold under repurchase agreements 7 20 27 (7) 14 7
Borrowed funds 123 16 139 52 (1) 51
------ ----- ----- ------ ----- -----
Total interest-bearing liabilities 1,695 200 1,895 (713) 1,816 1,103
------ ---- ----- ------ ----- -----
Net interest income $1,464 (150) 1,314 $1,059 (77) 982
====== ==== ===== ====== ===== =====
<FN>
(1) The change in interest income and interest expense due to changes in both
volume and rate, which cannot be segregated, has been allocated
proportionately to the absolute dollar change due to volume and the change
due to rate.
</TABLE>
7
<PAGE> 8
ITEM 1. Description of Business, Continued
Investment Portfolio
The following table sets forth the carrying amount of investment securities at
December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995 1994
(dollars in thousands)
<S> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
Government agencies and corporations $57,235 56,914 55,919
Obligations of states and political subdivisions (1) 15,696 11,367 11,281
Other securities 3,550 4,670 5,101
------- ------ ------
$76,481 72,951 72,301
======= ====== ======
<FN>
(1) There are no investment securities of an "issuer" where the aggregate
carrying value of such securities exceeded ten percent of stockholders'
equity.
(2) All amounts are presented on the basis of Statement of Financial Accounting
Standards No. 115.
</TABLE>
The following table sets forth the maturities of investment securities at
December 31, 1996 and the weighted average yields of such securities:
<TABLE>
<CAPTION>
Maturing
-------------------------------------------------------------------
After one After five
Within but within but within After
one year five years ten years ten years
------------- ------------ ------------- -------------
Amount Yield Amount Yield Amount Yield Amount Yield
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
Government agencies and corporations $17,352 6.66% $31,489 5.92% $ 3,157 6.40% $ 5,237 6.81%
Obligations of states and political subdivisions (1) 5,407 7.25% 6,196 6.83% 2,786 7.04% 1,307 6.34%
Other securities (2) 999 6.92% 600 6.21% - - - -
------- ----- ------- ----- ------- ----- ------- -----
$23,758 6.81% $38,285 6.07% $ 5,943 6.70% $ 6,544 6.72%
======= ===== ======= ===== ======= ===== ======= =====
<FN>
(1) Weighted average yields on non-taxable obligations have been computed on a
fully tax-equivalent basis assuming a tax rate of 34%.
(2) Excludes equity investments of $1,951,000 which have no stated maturity.
</TABLE>
8
<PAGE> 9
ITEM 1. Description of Business, Continued
Loan Portfolio
Types of Loans
The amounts of gross loans outstanding at December 31, 1996, 1995, 1994, 1993
and 1992 are shown in the following table according to types of loans:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1996 1995 1994 1993 1992
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 33,574 24,830 24,545 23,857 25,605
Real estate - mortgage 156,846 105,484 99,612 90,352 89,682
Real estate - construction 1,239 2,585 796 757 1,126
Consumer 36,440 25,150 27,960 28,093 26,243
Credit card and other 2,548 1,921 1,948 1,997 2,059
-------- ------- ------- ------- -------
$230,647 159,970 154,861 145,056 144,715
======== ======= ======= ======= =======
</TABLE>
Commercial loans are those made for commercial, industrial, and professional
purposes to sole proprietorships, partnerships, corporations, and other business
enterprises. Financial loans are those made to banks, depository institutions,
other associations and financial intermediaries whose business is to accept
deposits and extend credit. Agricultural loans are for the purpose of financing
agricultural production, including all costs associated with growing crops or
raising livestock. These loans may be secured, other than by real estate, or
unsecured, requiring one single repayment or on an installment repayment
schedule. The loans involve certain risks relating to changes in local and
national economic conditions and the resulting effect on the borrowing entities.
Real estate - mortgage loans are made predicated upon a security interest in
real property and secured wholly or substantially by a lien on real property.
Real estate - mortgage loans generally pose less risk exposure to the Bank.
Real estate - construction loans are made to finance land development prior to
erecting new structures and the construction of new buildings or additions to
existing buildings. Real estate - construction loans pose more risk than real
estate -mortgage loans, but generally afford adequate security upon completion
of the construction project.
Consumer loans are made to individuals for household, family, and other personal
expenditures. These often include the purchase of vehicles or furniture,
educational expenses, medical expenses, taxes, or vacation expenses. Consumer
loans may be secured, other than by real estate, or unsecured, generally
requiring repayment on an installment repayment schedule. Consumer loans pose
relatively higher risk and are also influenced by local and national economic
conditions.
Credit card and other loans are made to individuals for personal expenditures
and principally arise from bank credit cards. Such loans generally pose the most
risk as they are most frequently unsecured.
There are no foreign loans and lease financing receivables were less than
$515,000 in 1996 (none in years prior to 1996).
9
<PAGE> 10
ITEM 1. Description of Business, Continued
Loan Portfolio
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table shows the amount of commercial, financial and agricultural
loans outstanding as of December 31, 1996 which, based on the contract terms for
repayments of principal, are due in the periods indicated. Also, the amounts due
after one year are classified according to their sensitivity to changes in
interest rates.
<TABLE>
<CAPTION>
Maturing
--------------------------------------------------------------
After one
Within but within After
one year five years five years Total
------------- ------------ ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $11,635 8,359 13,580 33,574
======= ===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Interest
Sensitivity
--------------------
Fixed Variable
rate rate
(dollars in thousands)
<S> <C> <C>
Due after one but within five years $ 2,483 5,876
Due after five years 1,266 12,314
------- ------
$ 3,749 18,190
======= ======
</TABLE>
The above maturity information is based on the contract terms at December 31,
1996 and does not include any possible "rollover" at maturity date. In the
normal course of business, the Bank considers and acts upon the borrower's
request for renewal of a loan at maturity. Evaluation of such a request includes
a review of the borrower's credit history, the collateral securing the loan, and
the purpose for such request.
10
<PAGE> 11
ITEM 1. Description of Business, Continued
Loan Portfolio
Risk Elements
The following table presents information concerning the amount of loans at
December 31, 1996, 1995, 1994, 1993, and 1992 which contain certain risk
elements:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1996 1995 1994 1993 1992
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis (1) $649 845 604 531 439
Loans contractually past due 90 days or more
as to principal or interest payments (2) 764 477 845 733 948
Loans whose terms have been renegotiated to
provide a reduction or deferral of interest or
principal because of a deterioration in the
financial position of the borrower (1) (3) 471 - - - -
==== === === === ===
<FN>
(1) Loans are placed on non-accrual status when, in the opinion of management,
full collection of principal and interest is unlikely. Interest is then
recognized on a cash basis where future collections of principal are
probable. The amount of interest income that would have been recorded had
all non-accrual and renegotiated (of the type specified above) loans been
current in accordance with their terms approximated $167,000 in 1996,
$89,000 in 1995, $77,000 in 1994, $50,000 in 1993, and $40,000 in 1992.
Actual interest included in income on these loans amounted to approximately
$130,000 in 1996, $27,000 in 1995, $16,000 in 1994, $8,000 in 1993, and
$28,000 in 1992.
(2) Excludes loans accounted for on a non-accrual basis.
(3) Excludes loans accounted for on a non-accrual basis and loans contractually
past due 90 days or more as to principal or interest payments.
</TABLE>
In addition to the loans identified as nonperforming above, there were
approximately $1,738,000 of potential problem loans at December 31, 1996, none
of which relate to any concentrated risk elements common to all the loans. While
these loans are all currently performing, management has serious doubts about
the ability of the borrowers to continue to comply with all of their present
loan repayment terms.
As of December 31, 1996 there was no concentration of loans that exceeded 10% of
total loans.
11
<PAGE> 12
ITEM 1. Description of Business, Continued
Summary of Loan Loss Experience
Analysis of the Allowance for Possible Loan Losses
The following table shows the daily average loan balances, for the periods
indicated, and changes in the allowance for possible loan losses for such years:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------
1996 1995 1994 1993 1992
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Daily average amount of loans, net of unearned income $187,126 155,253 148,544 142,047 143,778
======== ======= ======= ======= =======
Allowance for possible loan losses at beginning of year $ 2,614 2,357 2,238 1,924 1,957
Acquisition of Union Bancshares Corp. 711 - - - -
-------- ------- ------- ------- -------
3,325 2,357 2,238 1,924 1,957
-------- ------- ------- ------- -------
Loan charge-offs:
Commercial, financial and agricultural (97) (2) - (11) (210)
Real estate - mortgage - (25) (117) (52) (248)
Real estate - construction (198) - - - -
Consumer (116) (99) (148) (104) (75)
Credit card and other (17) (12) (7) (10) (14)
-------- ------- ------- ------- -------
(428) (138) (272) (177) (547)
-------- ------- ------- ------- -------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural 80 154 7 40 42
Real estate - mortgage - 88 11 6 31
Real estate - construction 187 - - - -
Consumer 40 32 41 22 19
Credit card and other 4 1 2 3 2
-------- ------- ------- ------- -------
311 275 61 71 94
-------- ------- ------- ------- -------
Net recoveries (charge-offs) (2) (117) 137 (211) (106) (453)
-------- ------- ------- ------- -------
Additions to allowance charged to expense (1) 160 120 330 420 420
-------- ------- ------- ------- -------
Allowance for possible loan losses at end of year $ 3,368 2,614 2,357 2,238 1,924
======== ======= ======= ======= =======
Allowance for possible loan losses as a percent of year-end loans 1.46% 1.63% 1.52% 1.54% 1.33%
==== ==== ==== ==== ====
Ratio of net charge-offs (recoveries) during the year to
average loans outstanding .06% (.09)% .14% .07% .32%
==== ==== ==== ==== ====
<FN>
(1) The determination of the balance of the allowance for possible loan losses
is based upon an analysis of the loan portfolio and reflects an amount
which, in management's judgement, is adequate to provide for possible loan
losses. Such analysis is based on the character of the loan portfolio,
current economic conditions, past loan loss experience, and such other
factors as management believes require current recognition in estimating
possible loan losses.
(2) The amount of charge-offs and recoveries fluctuates from year to year due
to factors relating to the condition of the general economy and specific
business segments. The 1992 charge-offs included one commercial loan
write-off of $125,058 and one real estate - mortgage loan write-down of
$200,000. The 1994 charge-offs included one real estate - mortgage loan
write-down of $116,946. The 1995 recoveries included one real estate -
mortgage loan recovery of $63,465 and one commercial loan recovery of
$122,700. The 1996 charge-offs included one real estate - construction loan
write-off of $197,452 and the 1996 recoveries included a $186,769 recovery
on the same real estate - construction loan.
</TABLE>
12
<PAGE> 13
ITEM 1. Description of Business, Continued
Summary of Loan Loss Experience
Allocation of Allowance for Possible Loan Losses
The following table allocates the allowance for possible loan losses for the
periods indicated to each loan category. The allowance has been allocated to
the categories of loans noted according to the amount deemed to be reasonably
necessary to provide for the possibility of losses being incurred based on
specific credit analyses and the proration of the unallocated allowance to the
loan categories based on actual loss experience:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------------- -------------------------
Percentage Percentage
of loans to of loans to
Allowance total loans Allowance total loans
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 647 14.6% $1,161 15.5%
Real estate - mortgage 1,216 68.0% 682 66.0%
Real estate - construction - .5% - 1.6%
Consumer 1,350 15.8% 682 15.7%
Credit card and other 155 1.1% 89 1.2%
------ ----- ------ -----
$3,368 100.0% $2,614 100.0%
====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
------------------------ -------------------------
Percentage Percentage
of loans to of loans to
Allowance total loans Allowance total loans
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 933 15.8% $1,065 16.4%
Real estate - mortgage 889 64.3% 711 62.3%
Real estate - construction - .5% - .5%
Consumer 482 18.1% 409 19.4%
Credit card and other 53 1.3% 53 1.4%
------ ----- ------ -----
$2,357 100.0% $2,238 100.0%
====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1992
-------------------------
Percentage
of loans to
Allowance total loans
(dollars in thousands)
<S> <C> <C>
Commercial, financial and agricultural $1,187 17.7%
Real estate - mortgage 466 62.0%
Real estate - construction - .8%
Consumer 235 18.1%
Credit card and other 36 1.4%
------ ----
$1,924 100.0%
====== =====
</TABLE>
13
<PAGE> 14
ITEM 1. Description of Business, Continued
Deposits
The average daily amount of deposits (all in domestic offices) and average rates
paid on such deposits is summarized for the years 1996, 1995 and 1994 in the
following table :
<TABLE>
<CAPTION>
1996 1995 1994
------------------- ------------------- -------------------
Average Average Average Average Average Average
balance rate paid balance rate paid balance rate paid
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand deposits $ 28,890 - % $ 24,380 - % $ 23,446 - %
Interest bearing demand deposits 25,186 2.07% 21,110 2.05% 20,978 1.92%
Savings, including Money Market deposits 66,199 2.48% 60,930 2.66% 66,139 2.50%
Time deposits 125,026 5.39% 99,677 5.13% 96,440 4.22%
-------- -------- --------
$245,301 $206,097 $207,003
======== ======== ========
</TABLE>
Maturities of time deposits of $100,000 or more outstanding at December 31, 1996
are summarized as follows (dollars in thousands):
<TABLE>
<S> <C>
3 months or less $10,898
Over 3 through 6 months 2,687
Over 6 through 12 months 2,804
Over 12 months 11,638
------
28,027
======
</TABLE>
Return on Equity and Assets
The ratio of net income to daily average total assets and average
stockholders' equity, and certain other ratios, for the periods noted are as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------
1996 1995 1994
<S> <C> <C> <C>
Percentage of net income to:
Average total assets 1.08% 1.37% 1.01%
Average stockholders' equity 10.60% 12.28% 9.72%
Percentage of cash dividends declared per common
share to net income per common share 37.38% 32.12% 34.95%
Percentage of average stockholders' equity to
average total assets 10.20% 11.15% 10.36%
</TABLE>
14
<PAGE> 15
ITEM 2. Description of Property
The Corporation neither owns nor leases any properties. The Bank maintains its
main office at 323 Croghan Street, Fremont, Ohio. In addition, the Bank operates
two branch offices in Bellevue, one in Clyde, three in Fremont, one in Green
Springs, and one in Monroeville. The Bank's operations center is also located in
Fremont, Ohio. All of such premises are owned by the Bank and are suitable for
their intended uses. Management believes all properties are in excellent
condition and are adequately covered by insurance.
ITEM 3. Legal Proceedings
Corporation management is aware of no pending or threatened litigation in which
the Corporation or its subsidiary Bank faces potential loss or exposure which
will materially affect the consolidated financial statements. The Corporation is
not aware of any proceedings that a governmental authority is contemplating.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of shareholders, through the solicitation of
proxies or otherwise, during the quarter ended December 31, 1996.
15
<PAGE> 16
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
The number of holders of record of the Corporation's common stock at December
31, 1996 is 645.
Information relating to dividend restrictions is contained on page 32 in
Financial Statement Footnote No. 13 captioned "Regulatory Matters" of the 1996
Annual Report to Shareholders of Croghan Bancshares, Inc. and is incorporated
herein by reference.
Other information required by this Item is contained on page 3 under the caption
"Market Price and Dividends on Common Stock" of the 1996 Annual Report to
Shareholders of Croghan Bancshares, Inc. and is incorporated herein by
reference.
ITEM 6. Management's Discussion and Analysis
Information required by this Item is contained on pages 5 through 12 under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" of the 1996 Annual Report to Shareholders of Croghan Bancshares,
Inc. and is incorporated herein by reference.
ITEM 7. Financial Statements
The following information required by this Item is contained on pages 13 through
36 in the 1996 Annual Report to Shareholders of Croghan Bancshares, Inc. and is
incorporated herein by reference:
Independent Auditor's Report
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Operations - Years ended December 31, 1996, 1995
and 1994
Consolidated Statements of Stockholders' Equity - Years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995 and
1994
Summary of Significant Accounting Policies
Notes to Consolidated Financial Statements
ITEM 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
There were no changes in or disagreements with accountants during the year ended
December 31, 1996.
16
<PAGE> 17
PART III
ITEM 9. Directors and Executive Officers
Information concerning Directors and Executive Officers of the Corporation is
contained on pages 1, 2, 3, and 4 under the caption "Election of Directors", and
on pages 5 and 6 under the caption "Executive Officers" in the Corporation's
Definitive Proxy Statement dated March 28, 1997, for the Annual Meeting of
Shareholders to be held on May 13, 1997, and is incorporated herein by
reference.
ITEM 10. Executive Compensation
Information concerning executive compensation is contained on page 4 under the
caption "Election of Directors", and on page 6 under the caption "Executive
Compensation" in the Corporation's Definitive Proxy Statement dated March 28,
1997, for the Annual Meeting of Shareholders to be held on May 13, 1997, and is
incorporated herein by reference.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management is contained on pages 1, 2, 3, and 4 under the captions "Voting
Securities and Principal Holders Thereof" and "Election of Directors" in the
Corporation's Definitive Proxy Statement dated March 28, 1997, for the Annual
Meeting of Shareholders to be held on May 13, 1997, and is incorporated herein
by reference.
ITEM 12. Certain Relationships and Related Transactions
Information concerning any related party transactions is contained on page 7
under the caption "Indebtedness of and Transactions with Officers and Directors"
in the Corporation's Definitive Proxy Statement dated March 28, 1997, for the
Annual Meeting of Shareholders to be held on May 13, 1997, and is incorporated
herein by reference.
17
<PAGE> 18
ITEM 13. (a) Exhibits
The following exhibits are filed with or incorporated by reference (in
accordance with Item 601 of Regulation S-B) in this filing:
Reference to Prior
Filing of Exhibit
Regulation or of the
S-B Exhibit Exhibit's Inclusion
Number Document in this Filing
3(i) Amended Articles of Incorporation of Croghan (1)
Bancshares, Inc.
3(ii) Code of Regulations of Croghan Bancshares, Inc. (2)
4.1 Certificate of Registrant's Common Stock (3)
4.2 Articles Fourth, Fifth and Eighth of (1)
Registrant's Articles of Incorporation
4.3 Articles II, III, V, VII and VIII of (2)
Registrant's Code of Regulations
10.1 Material employment contract with an executive (4)
officer
10.2 Plan and Agreement of Reorganization dated (5)
February 15, 1996 between Croghan Bancshares,
Inc. and Union Bancshares Corp.
10.3 Agreement of Merger dated March 27, 1996 (6)
between Croghan Bancshares, Inc. and Union
Bancshares Corp.
13 Annual Report to Shareholders - 1996 Included with
this filing
21 Subsidiaries of the Registrant Included with
this filing
27 Financial Data Schedule Included with
this filing
(1) Indicates the document was previously filed as Exhibit 3(i) of the Issuer's
June 30, 1996 quarterly report Form 10-QSB pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934. This document is hereby
incorporated by reference in accordance with item 601 of Regulation S-B.
(2) Indicates the document was previously filed as Exhibit 2 of the Issuer's
Form 10 registration statement pursuant to Section 12(g) of the Securities
Exchange Act of 1934. This document is hereby incorporated by reference in
accordance with item 601 of Regulation S-B.
(3) Indicates the document was previously filed as Exhibit 3 of the Issuer's
Form 10 registration statement pursuant to Section 12(g) of the Securities
Exchange Act of 1934. This document is hereby incorporated by reference in
accordance with item 601 of Regulation S-B.
18
<PAGE> 19
ITEM 13. (a) Exhibits, continued
(4) Indicates the document was previously filed as Exhibit 10 of the Issuer's
September 30, 1996 quarterly report Form 10-QSB pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934. This document is hereby
incorporated by reference in accordance with item 601 of Regulation S-B.
(5) Indicates the document was previously filed as Exhibit 1 of the Issuer's
December 31, 1995 annual report Form 10-KSB pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934. This document is hereby
incorporated by reference in accordance with item 601 of Regulation S-B.
(6) Indicates the document was previously filed as Exhibit 2.2 of the Issuer's
original August 1, 1996 Form 8-K. This document is hereby incorporated by
reference in accordance with item 601 of Regulation S-B.
19
<PAGE> 20
ITEM 13. (b) Reports on Form 8-K
Form 8-K/A was filed on October 10, 1996, amending the Form 8-K filed on August
14, 1996, which reported the Corporation's acquisition of Union Bancshares Corp.
Included in the filing were the audited Consolidated Financial Statements for
Union Bancshares Corp. for July 31, 1996 and various pro-forma schedules
relating to the acquisition.
20
<PAGE> 21
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CROGHAN BANCSHARES, INC.
Date: March 11, 1997 /s/ Thomas F. Hite
-------------- -------------------------
Thomas F. Hite, President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant in the capacities and on the date
indicated:
/s/ Allan E. Mehlow /s/ Robert H. Moyer
- --------------------------------- ---------------------------------
Allan E. Mehlow, Treasurer/ Robert H. Moyer, Director
Principal Financial Officer
/s/ Janet E. Burkett /s/ Albert C. Nichols
- --------------------------------- ---------------------------------
Janet E. Burkett, Director Albert C. Nichols, Director
/s/ Thomas F. Hite /s/ K. Brian Pugh
- ---------------------------------- ---------------------------------
Thomas F. Hite, Director/President K. Brian Pugh, Director
/s/ John P. Keller /s/ Clemens J. Szymanowski
- --------------------------------- ---------------------------------
John P. Keller, Director Clemens J. Szymanowski, Director
/s/ Stephen A. Kemper /s/ J. Terrence Wolfe
- --------------------------------- ---------------------------------
Stephen A. Kemper, Director J. Terrence Wolfe, Director
/s/ Daniel W. Lease
- --------------------------------- ---------------------------------
Daniel W. Lease, Director Claude E. Young, Director
Date: March 11, 1997 /s/ Gary L. Zimmerman
-------------- ---------------------------------
Gary L. Zimmerman, Director
21
<PAGE> 1
Exhibit 13
CROGHAN BANCSHARES, INC.
1996 ANNUAL REPORT
<PAGE> 2
CROGHAN BANCSHARES, INC.
CONTENTS
Financial Highlights 1
Letter to Shareholders 2
Description of the Corporation and Common Stock Data 3
Selected Financial Data 4
Management's Discussion and Analysis 5
Independent Auditor's Report 13
Consolidated Financial Statements 14
Directors and Officers 37
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1996 1995 Percent
Change
<S> <C> <C> <C>
For the year:
Net income $ 3,055,000 $ 3,269,000 ( 6.5) %
Income per common share 4.81 5.15 ( 6.6) %
Dividends per common share 1.80 1.655 8.8 %
Return on average assets 1.08 % 1.37 %
Return on average
stockholders' equity 10.60 % 12.28 %
At year end:
Assets $340,168,000 $245,518,000 38.6 %
Loans 230,647,000 159,970,000 44.2 %
Investment securities 76,481,000 72,951,000 4.8 %
Deposits 295,310,000 207,876,000 42.1 %
Stockholders' equity 29,640,000 27,898,000 6.2 %
Book value per common share $ 46.71 $ 43.97 6.2 %
Stockholders' equity to
total assets 8.71 % 11.36 %
Number of stockholders of record 645 631 2.2 %
Number of full-time equivalent
employees 182 142 28.2 %
</TABLE>
Amounts for 1996 reflect the August 1, 1996
purchase of Union Bancshares Corp.
1
<PAGE> 3
To Our Shareholders
For Croghan Bancshares, Inc., 1996 was a year of anticipation and challenge. The
year began with the anticipation of the acquisition of Union Bancshares Corp.,
Bellevue, Ohio. After signing agreements and the subsequent approval by Union's
shareholders, anticipation changed to challenge. The challenge was to meld an
organization with 40 plus employees and approximately $100 million in assets
into Croghan with a minimum of disruption to either organization. On August 1,
the transaction was completed with the cooperation of officers and employees
from both organizations. While the banks are officially merged, the operating
systems remain separated at year end 1996 due to contractual and other
considerations. The systems are scheduled to be merged in the third and fourth
quarters of 1997.
The Corporation's net income of $3,055,000 and the return on average assets of
1.08 percent were below the figures for 1995. A contributing factor to the net
income reduction was the many costs associated with the acquisition of Union
Bancshares Corp. and the merger of the two banks. While come redundant
operational procedures will remain during a portion of 1997, the Corporation's
Board of Directors and management remain fully confident the acquisition will be
a long-term benefit to our shareholders.
The Corporation's board voted to add two members during 1996. At the August
meeting, Stephen A. Kemper and K. Brian Pugh officially joined the board of The
Croghan Colonial Bank, the Corporation's subsidiary, and attended the September
board meeting for the first time.
The national economy was very stable during 1996. The Federal Reserve lowered
the target rate for Federal Funds in January which prompted a reduction in Wall
Street Prime of one-quarter percent to 8.25 per cent. Rates remained at that
level the remainder of the year.
The economy in the Bank's market area was mixed in 1996. Fremont experienced the
loss of three long-time businesses while noting the expansion plans of two
others. Bellevue has a new firm locating there and another completing an
expansion. Retail sales were comparable to 1995 with Christmas sales somewhat
better. The agriculture industry experienced a fair year. Weather patterns
brought rain at inopportune times, especially during spring planting and fall
harvest seasons.
We look forward to a relatively stable economy in 1997. The unemployment rate
increased at year end 1996 but indicators point to a stable employment
environment during the year. The agri-business industry should do well given
favorable weather conditions. The Bank is committed to offering financial
products and services, deposit and loan related, which will strengthen the
communities we serve. We thank our staff for its commitment, our customers for
their loyalty, and our shareholders for their confidence.
Very truly yours,
CROGHAN BANCSHARES, INC.
/s/ Thomas Hite
Thomas F. Hite
President & CEO
2
<PAGE> 4
CROGHAN BANCSHARES, INC.
DESCRIPTION OF THE CORPORATION
Croghan Bancshares, Inc. (the "Corporation" or "Croghan"), a one-bank holding
company, was incorporated in 1983 and has approximately $340,000,000 in total
assets as of December 31, 1996. Its operating subsidiary, The Croghan Colonial
Bank (the "Bank"), was incorporated in 1888 and is headquartered in Fremont,
Ohio. The Corporation purchased Union Bancshares Corp. ("Union"), with assets of
approximately $102,000,000, on August 1, 1996.
The Bank offers a diverse range of commercial and retail banking services
through its nine offices located in Bellevue, Clyde, Fremont, Green Springs, and
Monroeville, Ohio. Products are comprised of traditional banking services such
as consumer, commercial, agricultural and real estate loans, personal and
business checking accounts, savings accounts, time deposit accounts, safe
deposit box services, and trust department services. Additionally, beginning in
June 1995, investment products bearing no FDIC insurance are offered through the
Bank's Specialized Investments Division.
MARKET PRICE AND DIVIDENDS ON COMMON STOCK
There is no established public trading market for the Corporation's common
stock, although McDonald & Company of Cleveland, Ohio has functioned as a market
maker for the Corporation's stock since July 1, 1992. Solely on the basis of
transactions that have been reported to the Corporation, as adjusted for the
effect of a 2-for-1 stock split that was paid on June 2, 1995, the ranges of
transaction prices for shares of its common stock for each quarterly period
during 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
First Quarter $ 51.00 to 52.00 $ 42.00
Second Quarter 52.00 to 53.00 42.00 to 44.00
Third Quarter 52.00 to 52.50 44.00 to 49.00
Fourth Quarter 54.00 to 59.00 49.00 to 50.00
</TABLE>
Dividends declared by the Corporation on its common stock during the past two
years, as adjusted for the effect of a 2-for-1 stock split that was paid on June
2, 1995, were as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Three-months ended March 31 $ .45 $ .375
Three months ended June 30 .45 .400
Three-months ended September 30 .45 .430
Three-months ended December 31 .45 .450
---- -----
$ 1.80 $ 1.655
==== =====
</TABLE>
AVAILABILITY OF MORE INFORMATION
To obtain a copy of the Corporation's annual report (Form 10-KSB) filed with the
Securities and Exchange Commission, please write to:
James K. Walter, Secretary
Croghan Bancshares, Inc.
323 Croghan Street
Fremont, OH 43420
3
<PAGE> 5
CROGHAN BANCSHARES, INC.
FIVE YEAR SUMMARY OR SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994 1993 1992
(Dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Statements of operations:
Total interest income $ 21,285 $ 18,076 $ 15,991 $ 16,276 $ 18,609
Total interest expense 9,304 7,409 6,306 6,982 9,574
--------- --------- --------- --------- ---------
Net interest income 11,981 10,667 9,685 9,294 9,035
Provision for loan losses 160 120 330 420 420
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses 11,821 10,547 9,355 8,874 8,615
Total non-interest income 1,314 1,126 776 816 771
Total non-interest expenses 8,594 6,960 6,827 6,840 6,704
--------- --------- --------- --------- ---------
Income before federal income taxes and cumulative
effect of change in accounting principle 4,541 4,713 3,304 2,850 2,682
Federal income taxes 1,486 1,444 917 701 585
--------- --------- --------- --------- ---------
Income before cumulative effect of change in accounting
principle 3,055 3,269 2,387 2,149 2,097
Cumulative effect of change in accounting for income taxes
($.03 per share) -- -- -- 16 --
--------- --------- --------- --------- ---------
Net income $ 3,055 $ 3,269 $ 2,387 $ 2,133 $ 2,097
========= ========= ========= ========= =========
Per share of common stock:
Net income $ 4.81 $ 5.15 $ 3.76 $ 3.36 $ 3.30
Dividends 1.80 1.655 1.315 1.20 1.15
Book value 46.71 43.97 39.60 37.60 35.44
========= ========= ========= ========= =========
Average common shares outstanding 634,526 634,526 634,526 634,526 634,526
========= ========= ========= ========= =========
Year end balances:
Loans, net $ 227,279 $ 157,356 $ 152,505 $ 142,818 $ 142,791
Investment securities 76,481 72,951 72,301 80,741 75,029
Total assets 340,168 245,518 240,331 236,927 243,362
Deposits 295,310 207,876 205,789 206,073 216,482
Stockholders' equity 29,640 27,898 25,129 23,858 22,487
========= ========= ========= ========= =========
Average balances:
Loans, net $ 184,237 $ 152,764 $ 146,185 $ 139,933 $ 141,759
Investment securities 74,058 68,744 74,382 76,931 80,498
Total assets 282,667 238,759 236,977 237,793 243,195
Deposits 245,301 206,097 207,003 210,522 218,415
Stockholders' equity 28,829 26,613 24,548 23,240 21,873
========= ========= ========= ========= =========
Selected ratios:
Net yield on average interest-earnings assets 4.53% 4.70% 4.31% 4.11% 3.92%
Return on average assets 1.08 1.37 1.01 .90 .86
Return on average stockholders' equity 10.60 12.28 9.72 9.18 9.59
Net loan charge offs (recoveries) as a percent of average
outstanding net loans .06 (.09) .14 .07 .32
Allowance for possible loan losses as a percent of year-end loans 1.46 1.63 1.52 1.54 1.33
Stockholders' equity as a percent of total year-end assets 8.71 11.36 10.46 10.07 9.24
========= ========= ========= ========= =========
</TABLE>
All share data has been adjusted for the 2-for-1 stock split in 1995.
Amounts for 1996 reflect the August 1, 1996 purchase of Union Bancshares Corp.
4
<PAGE> 6
CROGHAN BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following commentary details additional information pertaining to the
financial condition and results of operations for Croghan Bancshares, Inc. This
analysis is presented to enhance the reader's understanding of the accompanying
Consolidated Financial Statements appearing on pages 13 through 36 of this
Annual Report. Where applicable, this discussion reflects Management's insights
into known events and trends that have or may be expected to have a material
effect on Croghan's operations and financial condition. As discussed below, the
impact of the purchase of Union Bancshares Corp. should be considered when
comparing 1996 amounts to prior year amounts.
COMPLETED ACQUISITION TRANSACTION
On August 1, 1996, Croghan completed its acquisition of Union Bancshares
Corp. of Bellevue, Ohio. Union was the parent holding company of The Union Bank
and Savings Company, The Farmers and Citizens Real Estate Company, Union Ohio
Leasing Corp., and Union Ohio Brokerage, Inc. The Union Bank and Savings Company
was merged with the Bank on August 1, 1996. The assets and liabilities of The
Farmers and Citizens Real Estate Company, Union Ohio Leasing Corp., and Union
Ohio Brokerage, Inc. were also transferred to the Bank effective on August 1,
1996. The remaining assets of Union were transferred to the Corporation. Union
and all of the aforementioned subsidiaries were dissolved on October 23, 1996.
The acquisition transaction was a cash purchase accounted for using the
purchase method of accounting. This resulted in Union's assets and liabilities
being recorded at their fair values as of the acquisition date. The fair value
of the assets acquired totalled $102,276,000 and the fair value of the
liabilities assumed totalled $91,545,000.
The total purchase price amounted to $20,300,000 and goodwill of $9,569,000
was created by the transaction. Goodwill is being amortized over a period of 15
years. As a result of the acquisition, Croghan now operates four additional Ohio
locations (two offices in Bellevue, an office in Clyde, and an office in
Monroeville). The following table presents pertinent details relating to the
transaction:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C> <C> <C>
Purchase price computation:
Cash paid directly to Union shareholders $20,227
Costs directly related to the acquisition 73
-------
Total purchase price 20,300
Fair value of assets acquired:
Cash and cash equivalents $ 6,213
Investment securities 30,260
Net loans 60,841
Bank premises and equipment 3,739
Other real estate owned 15
Accrued interest receivable 918
Other assets 290
-------
Total assets $102,276
Fair value of liabilities assumed:
Deposits 90,475
Accrued interest and income taxes 890
Other liabilities 180
-------
Total liabilities 91,545
--------
Net assets, at fair value 10,731
-------
Goodwill (purchase price minus net assets) $ 9,569
=======
</TABLE>
5
<PAGE> 7
PERFORMANCE SUMMARY
Croghan reported a decrease of 6.5% in net income to $3,055,000 for the
year ended December 31, 1996. This compares to net income of $3,269,000 in 1995
and $2,387,000 in 1994. Net income in 1996 was negatively impacted by costs
resulting from the Union acquisition, such as, advertising and marketing,
postage, professional and consulting fees, and stationery and supplies expenses.
Management is aware of the need to consolidate various redundant operations and
functions within the newly acquired offices and plans to accomplish specific
cost saving measures throughout 1997.
The 1996 return on average assets (a measure of how effectively Croghan's
assets are used) was 1.08%. This compares to 1.37% in 1995 and 1.01% in 1994.
Croghan's return on average stockholders' equity stood at 10.60% in 1996,
compared to 12.28% in 1995 and 9.72% in 1994.
Income per share in 1996 amounted to $4.81, compared to $5.15 in 1995 and
$3.76 in 1994. On May 9, 1995, Croghan declared a 2-for-1 stock split to those
stockholders of record as of May 22, 1995. All reported per share data contained
in the Consolidated Financial Statements has been restated to reflect the stock
split.
Total assets at 1996 year-end were $340,168,000 or a 38.6% increase over
1995's total assets of $245,518,000. Total loans were $230,647,000 at 1996
year-end, a 44.2% increase over 1995's total loans of $159,970,000. Total
deposits were $295,310,000 at December 31, 1996 or an increase of 42.1% from
1995's total deposits of $207,876,000. Total stockholders' equity at December
31, 1996 increased to $29,640,000 or 6.2% as compared to $27,898,000 in 1995.
NET INTEREST INCOME
Net interest income, which represents the revenue generated from earning
assets in excess of the interest cost of funding those assets, is Croghan's
principal source of income. Net interest income is influenced by market interest
rate levels and the volume and mix of earning assets and interest-bearing
liabilities. Many external factors affect net interest income and typically
include the strength of customer loan demand, customer preferences for
individual deposit account products, competitors' loan and deposit product
offerings, the national and local economic climates, and Federal Reserve
monetary policy. The following table demonstrates the components of net interest
income for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Average earning assets $264,332 $226,992 $224,969
Interest income 21,285 18,076 15,991
Average rate earned 8.05% 7.96% 7.11%
Average interest-bearing liabilities $222,746 $186,211 $187,788
Interest expense 9,304 7,409 6,306
Average rate paid 4.18% 3.98% 3.36%
Net interest income $ 11,981 $ 10,667 $ 9,685
Net interest yield
(net interest income divided
by average earning assets) 4.53% 4.70% 4.31%
</TABLE>
Net interest income in 1996 increased $1,314,000 to $11,981,000 or 12.3%
above 1995's level of $10,667,000. This followed an increase of $982,000 in 1995
or 10.1% over 1994's net interest income of $9,685,000. Net interest yield stood
at 4.53%, 4.70%, and 4.31% in 1996, 1995, and 1994, respectively.
During 1997 management expects the Federal Reserve Open Market Committee to
initiate slight increases in the federal funds target rate. This action would
translate into slightly higher loan and deposit rates for our customers.
PROVISION FOR LOAN LOSSES AND THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
Croghan has adopted a loan policy which establishes a framework to manage
6
<PAGE> 8
both credit risk and asset quality. In addition to detailing acceptable lending
guidelines, the policy also stipulates the use of a loan review process to
facilitate the early identification of problem loans, ensure sound credit
decisions, and aid in determining the amount of the provision for loan losses.
The monthly provisions serve to maintain the balance in the allowance for
possible loan losses at a level considered by management to be adequate for
potential future losses in the existing portfolio. The goal of Croghan's loan
policy is to minimize the uncertainties associated with the lending function.
In addition to delineated lending guidelines and the loan review process
noted above, management monitors the following factors to determine the adequacy
of the allowance for possible loan losses: delinquency trends, the status of
nonperforming loans, current and historical trends in loans charged-off,
existing local and national economic conditions, and changes in the volume and
mix of the various loan categories. Even though management uses all available
information to provide for possible loan losses, future additions to the
allowance may be required as changes occur in economic conditions and specific
borrower circumstances. Also, various regulatory agencies that periodically
review the allowance for possible loan losses may require Croghan to charge-off
specific loans or recognize additions to the allowance based on the information
available to them at the time of their examinations. The following table details
factors relating to the provision and allowance for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Provision for loan losses charged
to expense $ 160 $ 120 $ 330
Net loan charge-offs (recoveries) 117 (137) 211
Net loan charge-offs (recoveries) as a
percent of average outstanding net loans .06% (.09)% .14%
Nonaccrual loans $ 649 $ 845 $ 604
Loans contractually past due 90 days or more 764 477 845
Restructured loans 471 0 0
Potential problem loans, other than those past due
90 days or more, nonaccrual, or restructured 1,738 841 771
Allowance for possible loan losses 3,368 2,614 2,357
Allowance for possible loan losses as a percent
of year-end loans 1.46% 1.63% 1.52%
</TABLE>
The 1996 provision for loan losses appearing in the Consolidated Statements
of Operations totalled $160,000. This provision compares to $120,000 expensed in
1995 and $330,000 expensed in 1994. Nonaccrual loans decreased by $196,000 to
$649,000 at December 31, 1996. This positive trend was offset by a $287,000
increase in loans past due 90 days or more, a $471,000 increase in restructured
loans, and an $897,000 increase in other potential problem loans during 1996.
Portions of the 1996 increase, including all of the restructured loan increase
and $153,000 of the increase in potential problem loans, are attributable to
customer relationships transferred to Croghan as part of the Union acquisition.
Asset quality trends will continue to be monitored closely to ensure adequate
provisions are calculated and expensed throughout 1997.
Effective January 1, 1995, Croghan adopted the provisions of Financial
Accounting Standards Board Statement No. 114, "Accounting by Creditors for
Impairment of a Loan" (which was subsequently amended by Statement No. 118).
Statement 114 defines an impaired loan as one which, based on the most current
information available, leads Croghan to determine that it is probable the
borrower will be unable to make payments according to the contractual terms of
the loan agreement. Croghan must then measure its investment in the impaired
loan based upon the observable market price of the loan, the fair value of the
underlying collateral (if the loan is collateral dependent), or the present
value of the expected future cash flows discounted at the loan's effective
interest rate. At December 31, 1996, Croghan had a recorded investment in
7
<PAGE> 9
impaired loans of $700,000 as compared to $902,000 at December 31, 1995.
NON-INTEREST INCOME
Non-interest income in 1996 increased $188,000 to $1,314,000 or 16.7% above
1995's total of $1,126,000. This followed an increase of $350,000 in 1995 or
45.1% more than 1994's total of $776,000. The following table details
non-interest income for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Trust income $ 268 $ 242 $ 215
Service charges on deposit accounts 637 539 518
Loss on sale of investment securities (22) (50) (113)
Gain on sale of student loan portfolio - 109 -
Other operating income 431 286 156
------ ------ ------
Total non-interest income $1,314 $1,126 $ 776
====== ====== ======
</TABLE>
Trust income increased $26,000 or 10.7% in 1996 following an increase of
$27,000 or 12.6% in 1995. Service charges on deposit accounts increased $98,000
or 18.2% in 1996 following an increase of $21,000 or 4.1% in 1995.
Investment securities losses during 1996 totalled $22,000 as compared to
losses of $50,000 in 1995 and $113,000 in 1994. A substantial portion of the
1996 losses, along with all of the 1995 and 1994 losses, were realized upon the
sale of U.S. Treasury Notes with approximately one year remaining until their
maturities. Investments due in approximately two years were purchased to replace
those securities that were sold. Significant portions of the securities losses
reported in 1996, 1995, and 1994 were offset by earnings on the replacement
securities purchased, with such earnings reported as a component of total
interest income. Additionally, U.S. Government Agency securities acquired in the
1996 Union transaction were sold to provide for cash payments made to Union
shareholders and to align the portfolio with Croghan's investment philosophy.
Due to the complex regulations mandated by the Federal government and a
decreasing rate of return earned on guaranteed student loans, the portfolio was
sold to the Student Loan Funding Corporation in 1995. The sale of approximately
$3,800,000 in loans occurred in November 1995 with a gain of $109,000 realized
at the time of the sale.
Other operating income increased $145,000 or 50.7% in 1996 following an
increase of $130,000 or 83.3% in 1995. In June 1995, Croghan established the
Specialized Investments Division to market non-FDIC insured investment products
(e.g., mutual funds and annuities). The Specialized Investments Division
generated $113,000 in fees during 1996 as compared to $31,000 in 1995. In
addition to investment division fee income, other operating income includes
Master Card merchant fees, safe deposit box fees, commissions from the sale of
credit life insurance on loan products, fees from the sale of official checks
and money orders, and other miscellaneous fee income items.
NON-INTEREST EXPENSES
Non-interest expenses in 1996 increased by $1,634,000 to $8,594,000 or
23.5% above 1995's total of $6,960,000. This followed an increase of $133,000 in
1995 or 1.9% more than 1994's total of $6,827,000. The following table details
non-interest expenses for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Compensation $3,895 $3,259 $3,015
Benefits 1,007 750 723
------ ------ ------
Total personnel expense 4,902 4,009 3,738
Net occupancy expense 474 398 401
</TABLE>
8
<PAGE> 10
<TABLE>
<S> <C> <C> <C>
Equipment expense 604 439 360
State franchise and other taxes 477 385 366
Intangible amortization 266 - -
Stationery and supplies 232 171 164
Advertising and marketing 204 164 175
Postage 191 168 157
Professional and consulting services 139 49 53
Examination expense 133 94 92
Telephone 95 97 104
FDIC insurance 3 237 463
Other 874 749 754
------ ------ ------
Total non-interest expenses $8,594 $6,960 $6,827
====== ====== ======
</TABLE>
Total personnel expense increased $893,000 or 22.3% in 1996 compared to an
increase of $271,000 or 7.2% in 1995. Net occupancy expense increased $76,000 in
1996 after decreasing slightly in 1995. Equipment expense increased $165,000 or
37.6% in 1996 following an increase of $79,000 or 21.9% in 1995. Significant
portions of the 1996 and 1995 increases in equipment expense were attributable
to additional maintenance costs associated with technologically advanced
equipment which is used to deliver accurate and efficient customer service.
State franchise taxes, which are based on Croghan's capital structure, and
other taxes increased $92,000 or 23.9% in 1996 following a $19,000 or 5.2%
increase in 1995. Intangible amortization, primarily the amortization of
goodwill associated with the purchase of Union, is a new expense line item in
1996 and totalled $266,000. As previously noted, goodwill created in the Union
transaction of $9,569,000 is being amortized over a 15 year period (or
approximately $638,000 in expense on an annual basis).
Stationary and supplies expense increased $61,000 or 35.7% in 1996 after
increasing $7,000 or 4.3% in 1995. Advertising and marketing expenses increased
$40,000 or 24.4% in 1996 following a $11,000 or 6.3% decrease in 1995. A portion
of the 1996 advertising increase is the result of promotional efforts in the new
markets to acquaint existing and potential customers with Croghan.
Postage expense increased $23,000 or 13.7% in 1996 after increasing $11,000
or 7.0% in 1995. Professional and consulting expense increased $90,000 or 183.7%
in 1996 after decreasing slightly in 1995. A significant portion of the 1996
increase resulted from employee benefit plan consulting fees. Croghan elected to
curtail its defined benefit retirement plans and establish a 401(k)/profit
sharing plan effective on January 1, 1997. Actual termination of the defined
benefit retirement plans should occur in early 1997.
Examination expense increased $39,000 or 41.5% in 1996 after a slight
increase in 1995. FDIC insurance decreased $234,000 in 1996 after a similar
$226,000 decrease in 1995. The FDIC reduced premium rates by 83% effective on
June 1, 1995. Premiums are scheduled to rise modestly in 1997. Assuming there
are no changes in the anticipated premium schedule, the cost of FDIC insurance
would increase from $3,000 in 1996 to approximately $38,000 in 1997.
Other operating expenses increased $125,000 or 16.7% in 1996 after
decreasing slightly in 1995. Other operating expenses typically include Master
Card processing and franchise fees, third party computer processing fees,
miscellaneous employee expenses, fidelity and liability insurance, director and
committee fees, loan origination and collection expenses, dues and
subscriptions, ATM network fees, correspondent bank service charges, and
charitable donations.
FEDERAL INCOME TAXES
Federal income tax expense totalled $1,486,000 in 1996, compared to
$1,444,000 in 1995 and $917,000 in 1994. The effective tax rate in 1996
increased to 32.7%, compared to 30.6% in 1995 and 27.8% in 1994. The 1996
increase in tax expense and effective tax rate reflects the non-deductibility of
goodwill amortization for tax purposes. The 1995 increase in tax expense
9
<PAGE> 11
and effective tax rate can be directly attributed to Croghan's improved income
before taxes and a decrease in tax preference interest income.
INVESTMENT SECURITIES
The investment portfolio is maintained in a manner to enhance net income,
provide for liquidity, and diversify financial risk. In accordance with
Financial Accounting Standards Board Statement No. 115, Croghan classifies
securities as either held-to-maturity (those investments with the intention to
be held until maturity) or available-for-sale. Held-to-maturity securities are
reported at amortized cost, while available-for-sale securities are reported at
their fair values (with the net unrealized holding gain or loss reported as a
separate component of stockholders' equity).
Croghan's investment portfolio is comprised primarily of U.S. Treasury and
U.S. Government Agency obligations. The carrying value of such investments
totalled $57,235,000 at December 31, 1996, compared to $56,914,000 at December
31, 1995. Croghan also invests in debt obligations of political subdivisions and
domestic corporations, and in stock issues of the Federal Reserve Bank of
Cleveland and the Federal Home Loan Bank of Cincinnati. The carrying value of
these investments totalled $19,246,000 at December 31, 1996, compared to
$16,037,000 at December 31, 1995.
During 1996, Croghan received $15,307,000 in proceeds from the sale of U.S.
Treasury Notes and U.S. Government Agency obligations prior to their stated
maturities. This compares to 1995 proceeds of $6,938,000 that were derived
solely from the sale of U.S. Treasury Notes. A majority of the 1996 sales, and
all of the 1995 sales, were the result of a planned strategy to improve the
portfolio's yield without significantly increasing its average maturity.
Additionally, a portion of the 1996 sales were executed to fund payments to
Union shareholders and align the acquired portfolio with Croghan's investment
objectives.
TOTAL LOANS
Total loans at 1996 year-end increased by $70,677,000 over year-end 1995.
The following table details total loans and the percent change by major category
for the years ended December 31:
<TABLE>
<CAPTION>
Percent
1996 1995 Change
(Dollars in thousands)
<S> <C> <C> <C>
Commercial, financial and agricultural $ 33,574 $ 24,830 35.2 %
Real estate - residential mortgage 103,389 75,109 37.7 %
Real estate - non-residential mortgage 53,457 30,375 76.0 %
Real estate - construction 1,239 2,585 (52.1)%
Consumer 36,440 25,150 44.9 %
Credit card 2,548 1,921 32.6 %
-------- --------
Total loans $230,647 $159,970 44.2 %
======== ========
</TABLE>
A majority of the changes can be attributed to the acquisition of Union on
August 1, 1996. As previously noted, the fair value of the net loans acquired
totalled $60,841,000.
TOTAL DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Deposits and other interest-bearing liabilities serve as the primary source
of cash flows to fund loan demand and are summarized in the following table as
of December 31:
<TABLE>
<CAPTION>
Percent
1996 1995 Change
(Dollars in thousands)
<S> <C> <C> <C>
Demand, non-interest bearing $ 31,575 $ 24,938 26.6 %
Savings, NOW and Money Market deposits 110,664 77,622 42.6 %
Time deposits 153,071 105,316 45.3 %
-------- --------
</TABLE>
10
<PAGE> 12
<TABLE>
<S> <C> <C> <C>
Total deposits 295,310 207,876 42.1 %
Federal funds purchased 6,039 4,650 29.9 %
Securities sold under repurchase agreements 0 862 (100.0)%
Borrowed funds 6,563 2,500 162.5 %
-------- --------
Total deposits and other
interest-bearing liabilities $307,912 $215,888 42.6 %
======== ========
</TABLE>
A majority of the changes in the deposit structure can be attributed to the
acquisition of Union on August 1, 1996. As previously noted, the fair value of
the deposits acquired totalled $90,475,000.
Other interest-bearing liabilities at 1996 year-end increased by $4,590,000
from 1995. A $1,389,000 increase in federal funds purchased was partially offset
by an $862,000 decrease in securities sold under agreements to repurchase.
Included in other interest-bearing liabilities at December 31, 1996 are
$2,500,000 in funds borrowed from the Federal Home Loan Bank of Cincinnati and
$4,063,000 in funds borrowed from NBD Bank.
The proceeds from the $2,500,000 loan obtained in 1994 were used to help
manage interest rate sensitivity associated with Croghan's fixed rate real
estate loan portfolio. The funds were advanced in April 1994 and come due in
April 1999. Two loans from NBD Bank totalling $4,063,000 were obtained in 1996
to assist in funding the purchase of Union. A short-term loan with a balance of
$650,000 outstanding matures in August 1997. A long-term loan with a balance of
$3,413,000 outstanding matures in July 1999.
CAPITAL
Croghan's stockholders' equity position at December 31 is summarized in the
following table:
<TABLE>
<CAPTION>
1996 1995
(dollars in thousands)
<S> <C> <C>
Common stock $ 7,932 $ 7,932
Surplus 8,989 8,989
Retained earnings 12,622 10,709
Net unrealized gain on investment
securities available-for-sale 97 268
------- -------
Total stockholders' equity $29,640 $27,898
======= =======
</TABLE>
The Financial Accounting Standards Board's Statement No. 115 stipulates
that the net unrealized holding gain or loss on investment securities
available-for-sale be reported as a component of stockholders' equity. At year
end 1996, Croghan held $39,798,000 in available-for-sale securities with a net
unrealized holding gain of $97,000. This compares to 1995 year-end holdings of
$29,341,000 with a net unrealized holding gain of $268,000.
Croghan's capital structure is subject to minimum capital ratios
established by the Federal Reserve Board. To be considered "well capitalized" by
the regulators an institution must have a Tier I risk-based capital ratio of at
least 6% and a total risk-based capital ratio of at least 10%. At December 31,
1996, Croghan was in the "well capitalized" category with a Tier I risk-based
capital ratio of 9.4% and a total risk-based capital ratio of 10.7%.
LIQUIDITY
Croghan's primary sources of liquidity are derived from its core deposit
base and stockholders' equity position. Secondary liquidity is provided by
actively managing the investment portfolio and the ability to borrow funds from
correspondent banks under established lines of credit.
Croghan maintains a portion of its assets in liquid form to meet
anticipated customer loan demands and to fund possible customer deposit account
withdrawals. At December 31, 1996, liquid assets in the form of cash, due from
banks, and federal funds sold totalled $16,094,000 or 4.7% of total
11
<PAGE> 13
assets. These highly liquid assets, in addition to an evenly staggered
maturity schedule within the investment portfolio and cash flows from loan
repayments, provide adequate liquidity for day-to-day operations.
The liquidity needs of the Parent Company, primarily the need to pay
quarterly cash dividends to shareholders and make debt service payments to NBD
Bank, are funded by upstream-dividends from the Bank subsidiary. Dividends paid
to the Parent Company by the Bank for such purposes totalled $1,667,000 in 1996,
$987,000 in 1995, and $612,000 in 1994. Additionally, a special 1996 dividend
approved by the regulatory agencies of $15,630,000 was declared to assist in
funding the purchase of Union.
As previously noted, Croghan is indebted to NBD Bank in the amount of
$4,063,000 with $650,000 of that amount due in 1997. Management is confident
that Croghan's liquidity will be sufficient to fund its daily operating needs,
make debt service payments, and provide for future dividend payments.
INTEREST RATE SENSITIVITY
Interest rate sensitivity measures the potential net income exposure that
could result from changes in market interest rates. Croghan, as with all
financial institutions, assumes interest rate risk as an integral part of its
operations. The following table divides interest-bearing assets and liabilities
at December 31, 1996 into repricing categories. An amount, or "GAP", is then
measured between the repricing assets and repricing liabilities within each
category.
As noted in the table, Croghan is in a liability-sensitive position in the
less-than-one-year period with $98,595,000 more liabilities than assets
repricing during the period. In a rising rate environment, this negative gap
position would generally result in decreased net interest income; conversely, in
a falling rate environment, this negative gap position would generally result in
increased net interest income. Croghan has adopted an asset/liability management
policy that provides for a framework to quantify and monitor its interest rate
risk, to reduce the inherent risk associated with changing interest rates, to
provide for liquidity needs, and to maximize net income by effectively managing
net interest yield.
<TABLE>
<CAPTION>
1 year
Less than through Over
1 year 5 years 5 years
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 4,550 $ - $ -
Investment securities 25,842 39,672 9,016
Loans 104,254 67,503 58,241
-------- -------- -------
Total earning assets 134,646 107,175 67,257
Interest-bearing liabilities:
Savings, NOW and Money Market deposits 110,664 - -
Time deposits 112,475 40,488 108
Federal funds purchased 6,039 - -
Other borrowings 4,063 2,500 -
-------- -------- -------
Total interest-bearing liabilities 233,241 42,988 108
Interest sensitivity GAP (98,595) 64,187 67,149
-------- -------- -------
Cumulative GAP $(98,595) $(34,408) $32,741
======== ======== =======
Cumulative earning assets/cumulative
interest-bearing liabilities 57.7% 87.5% 111.8%
==== ==== =====
</TABLE>
12
<PAGE> 14
Clifton
Gunderson Ltd.
Certified Public Accountants & Consultants
Independent Auditor's Report
Stockholders and Board of Directors
Croghan Bancshares, Inc.
Fremont, Ohio
We have audited the accompanying consolidated balance sheets of Croghan
Bancshares, Inc. and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. The
consolidated statements of operations, stockholders' equity and cash flows of
Croghan Bancshares, Inc. and subsidiary for the year ended December 31, 1994
were audited by other auditors whose report dated January 10, 1995, expressed an
unqualified opinion on those financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1996 and 1995 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Croghan Bancshares, Inc. and subsidiary as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
As discussed in the Summary of Significant Accounting Policies and Note 2, the
Corporation changed in 1994 its method of accounting for investment securities
to adopt the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities".
/s/ CLIFTON GUNDERSON LTD.
Toledo, Ohio
January 10, 1997
Members of
NEXIA
International
American Institute
of Certified Public
Accountants
13
<PAGE> 15
CROGHAN BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
ASSETS 1996 1995
(Dollars in thousands, except par value)
<S> <C> <C>
CASH AND CASH EQUIVALENTS
Cash and due from banks $ 11,543 $ 7,819
Interest-bearing deposits in other banks 1 --
Federal funds sold 4,550 --
-------- --------
Total cash and cash equivalents 16,094 7,819
-------- --------
INVESTMENT SECURITIES
Available-for-sale, at market value 39,798 29,341
Held-to-maturity, at amortized cost, market value of
$36,716 in 1996 and $43,791 in 1995 36,683 43,610
-------- --------
Total investment securities 76,481 72,951
-------- --------
LOANS 230,647 159,970
Less: Allowance for possible loan losses 3,368 2,614
-------- --------
Net loans 227,279 157,356
-------- --------
BANK PREMISES AND EQUIPMENT, NET 7,769 4,215
ACCRUED INTEREST RECEIVABLE 2,580 2,205
GOODWILL AND OTHER INTANGIBLE ASSET 9,310 --
OTHER ASSETS 655 972
-------- --------
TOTAL ASSETS $340,168 $245,518
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand, non-interest bearing $ 31,575 $ 24,938
Savings, including NOW and Money Market Deposit accounts 110,664 77,622
Time 153,071 105,316
-------- --------
Total deposits 295,310 207,876
Federal funds purchased and securities sold under repurchase agreements 6,039 5,512
Borrowed funds 6,563 2,500
Dividends payable 285 285
Accrued interest, taxes and other expenses 2,331 1,447
-------- --------
Total liabilities
310,528 217,620
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $12.50 par value. Authorized 3,000,000 shares in 1996
and 650,000 shares in 1995; issued and outstanding 634,526 shares 7,932 7,932
Surplus 8,989 8,989
Retained earnings 12,622 10,709
Net unrealized holding gain on investment securities available-for-sale,
net of related income taxes 97 268
-------- --------
Total stockholders' equity
29,640 27,898
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $340,168 $245,518
======== ========
</TABLE>
These consolidated financial statements should be read only in connection
with the accompanying summary of significant accounting policies
and notes to consolidated financial statements.
14
<PAGE> 16
CROGHAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 16,700 $ 13,860 $ 12,076
Interest and dividends on investment securities:
U.S. Treasury securities 2,150 2,141 2,013
Obligations of U.S. Government agencies and corporations 1,395 1,034 854
Obligations of states and political subdivisions 576 511 669
Other securities 298 351 288
Interest on federal funds sold 166 179 91
-------- -------- --------
Total interest income 21,285 18,076 15,991
-------- -------- --------
INTEREST EXPENSE
Interest on deposits 8,897 7,168 6,123
Interest on other borrowings 407 241 183
-------- -------- --------
Total interest expense 9,304 7,409 6,306
-------- -------- --------
Net interest income 11,981 10,667 9,685
PROVISION FOR LOAN LOSSES 160 120 330
-------- -------- --------
Net interest income after provision for loan losses 11,821 10,547 9,355
-------- -------- --------
NON-INTEREST INCOME
Trust income 268 242 215
Service charges on deposit accounts 637 539 518
Loss on sale of investment securities (22) (50) (113)
Gain on sale of student loan portfolio -- 109 --
Other operating income 431 286 156
-------- -------- --------
Total non-interest income 1,314 1,126 776
-------- -------- --------
NON-INTEREST EXPENSES
Salaries, wages and employee benefits 4,902 4,009 3,738
Net occupancy expense of bank premises 474 398 401
Amortization of goodwill and other intangible asset 266 -- --
Other operating expenses 2,952 2,553 2,688
-------- -------- --------
Total non-interest expenses 8,594 6,960 6,827
-------- -------- --------
Income before federal income taxes
4,541 4,713 3,304
FEDERAL INCOME TAXES 1,486 1,444 917
-------- -------- --------
NET INCOME $ 3,055 $ 3,269 $ 2,387
======== ======== ========
NET INCOME PER SHARE, based on 634,526 shares $ 4.81 $ 5.15 $ 3.76
======== ======== ========
</TABLE>
These consolidated financial statements should be read only in
connection with the accompanying summary of significant accounting policies
and notes to consolidated financial statements.
15
<PAGE> 17
CROGHAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31, 1996, 1995, and 1994
Net
unrealized
Common stock Retained holding
Shares Amount Surplus earnings gain (loss)
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 317,263 $ 3,966 $ 12,955 $ 6,937 $ --
Cumulative effect at January 1, 1994 of change in accounting
for investment securities, net of related income taxes -- -- -- -- 45
Net income for 1994 -- -- -- 2,387 --
Change in net unrealized holding gain (loss) for 1994,
net of related income taxes -- -- -- -- (327)
Cash dividends declared, $1.315 per share -- -- -- (834) --
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1994 317,263 3,966 12,955 8,490 (282)
Net income for 1995 -- -- -- 3,269 --
Transfer for two-for-one stock split 317,263 3,966 (3,966) -- --
Change in net unrealized holding gain (loss) for 1995,
net of related income taxes -- -- -- -- 550
Cash dividends declared, $1.655 per share -- -- -- (1,050) --
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1995 634,526 7,932 8,989 10,709 268
Net income for 1996 -- -- -- 3,055 --
Change in net unrealized holding gain (loss) for 1996,
net of related income taxes -- -- -- -- (171)
Cash dividends declared, $1.80 per share -- -- -- (1,142) --
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1996 634,526 $ 7,932 $ 8,989 $ 12,622 $ 97
======== ======== ======== ======== ========
</TABLE>
These consolidated financial statements should be read only in connection
with the accompanying summary of significant accounting policies
and notes to consolidated financial statements.
16
<PAGE> 18
CROGHAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,055 $ 3,269 $ 2,387
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 740 342 329
Provision for loan losses 160 120 330
Deferred federal income taxes 54 14 5
FHLB stock dividends (68) (88) --
Net amortization of investment security premiums and discounts 89 130 386
Loss on sale of investment securities 22 50 113
Gain on sale of student loan portfolio -- (109) --
Loss (gain) on sale of equipment 9 (1) 1
Decrease (increase) in accrued interest receivable 543 (40) (106)
Decrease (increase) in other assets 333 (219) 160
Increase in accrued interest, taxes and other expenses 190 394 83
-------- -------- --------
Net cash provided by operating activities 5,127 3,862 3,688
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Union Bancshares Corp., net of $6,213 cash and cash equivalents acquired (14,087) -- --
Purchases of investment securities:
Available-for-sale (12,997) (13,982) (20,871)
Held-to-maturity (5,020) (18,177) (9,928)
Proceeds from maturities of investment securities 29,096 25,313 31,428
Proceeds from sales of available-for-sale investment securities 15,307 6,938 6,885
Proceeds from sale of loans 487 3,903 --
Net increase in loans (9,806) (8,766) (10,017)
Capital expenditures (309) (291) (173)
Proceeds from sale of equipment 11 2 --
-------- -------- --------
Net cash provided by (used in) investing activities 2,682 (5,060) (2,676)
-------- -------- --------
</TABLE>
17
<PAGE> 19
CROGHAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in total deposits $ (2,982) $ 2,086 $ (283)
Increase (decrease) in federal funds purchased and securities sold
under repurchase agreements 527 (125) 8
Proceeds from borrowed funds 4,063 -- 2,500
Cash dividends paid (1,142) (987) (1,009)
-------- -------- --------
Net cash provided by financing activities 466 974 1,216
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,275 (224) 2,228
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,819 8,043 5,815
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 16,094 $ 7,819 $ 8,043
======== ======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest $ 9,312 $ 7,215 $ 6,258
======== ======== ========
Federal income taxes $ 1,400 $ 1,474 $ 933
======== ======== ========
Non-cash investing activities:
Transfer of available-for-sale securities $ -- $ -- $ 21,365
======== ======== ========
Transfer of loans to other real estate $ 79 $ -- $ --
======== ======== ========
Change in net unrealized holding gain (loss) on available-for-sale securities $ (259) $ 834 $ (496)
======== ======== ========
</TABLE>
These consolidated financial statements should be read only in connection
with the accompanying summary of significant accounting policies
and notes to consolidated financial statements.
18
<PAGE> 20
CROGHAN BANCSHARES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Croghan Bancshares, Inc. (the "Corporation") was incorporated on September 27,
1983 in the State of Ohio. The Corporation is a bank holding company and has one
wholly-owned subsidiary, The Croghan Colonial Bank (the "Bank"). The
Corporation, through its subsidiary, operates in one industry segment, the
commercial banking industry. The Bank, an Ohio chartered bank organized in 1888,
has its main office in Fremont, Ohio and has branch offices located in Fremont,
Bellevue, Clyde, Green Springs, and Monroeville, Ohio. The Bank's primary source
of revenue is providing loans to customers primarily located in Sandusky County,
the Village of Green Springs, and the northwest portion of Huron County which
includes the City of Bellevue and Village of Monroeville. Such customers are
predominantly small and middle-market businesses and individuals. See Note 1
regarding the 1996 acquisition of Union Bancshares Corp.
Significant accounting policies followed by the Corporation in preparing its
consolidated financial statements are presented below.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during each reporting period. The
most significant areas involving the use of management's estimates and
assumptions are the allowance for possible loan losses, the determination and
carrying value of impaired loans, depreciation of bank premises and equipment,
and the carrying value and amortization of goodwill. Actual results could differ
from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Corporation
and its wholly-owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
The Bank established a trust department in 1990 and the assets held by the Bank
in fiduciary or agency capacities for its customers are not included in the
consolidated balance sheets as such items are not assets of the Bank.
CASH AND CASH EQUIVALENTS
The Bank is required to maintain certain daily reserve balances on hand in
accordance with Federal Reserve Board requirements. The average reserve balance
for the years ended December 31, 1996 and 1995 approximated $1,750,000 and
$1,400,000, respectively.
For purposes of the statements of cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, interest-bearing deposits in other banks
and federal funds sold which mature overnight or within three days.
INVESTMENT SECURITIES
In May, 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". Statement 115, which was effective for fiscal years
beginning after December 15, 1993, was adopted by the Bank effective January 1,
1994. Statement 115 requires the Bank's investment securities to be designated
as held-to-maturity, trading, or available-for-sale. Securities designated as
held-to-maturity are carried at their amortized cost. Trading
19
<PAGE> 21
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
securities are carried at market value and unrealized gains and losses, net of
applicable income taxes, are recognized in current income. All other securities
not included in trading or held-to-maturity are classified as
available-for-sale. Securities designated as available-for-sale are also carried
at market value, but unrealized gains and losses, net of applicable income
taxes, on such securities are recognized as a separate component of
stockholders' equity. The Bank has no investment securities classified as
trading securities.
Gains and losses on sales of investment securities are accounted for on a
completed transaction basis, using the specific identification method, and are
included in non-interest income.
In October, 1994, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments". The Bank does not hold any
"derivative financial instrument" as defined in Statement 119. The Bank does
make fixed-rate loan commitments for short periods of time during the course of
its normal operations, however, such commitments are not material at any point
in time.
LOANS
Loans are stated at their principal amount, adjusted for loan fees and costs and
net of an allowance for possible loan losses. Interest is accrued as earned
based upon the daily outstanding principal balance.
Mortgage loans held for sale in the secondary market are carried at the lower of
cost or estimated market value in the aggregate.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
in May, 1993, which addresses accounting and reporting for impaired loans. In
October, 1994, Statement 114 was amended by Statement 118. Statement 114
requires the Bank to measure its investment in an impaired loan, as defined in
Statement 114, based on one of the following three methods: the observable
market price of the loan, the fair value of the collateral if the loan is
collateral dependent, or the present value of expected future cash flows
discounted at the loan's effective interest rate. The Bank adopted Statement
114, effective January 1, 1995, and such adoption did not have a significant
effect on the consolidated financial statements.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The determination of the balance of the allowance for possible loan losses is
based on an analysis of the loan portfolio and reflects an amount which, in
management's judgment, is adequate to provide for possible loan losses. Such
analysis, which is done on a quarterly basis, is based on the character of the
loan portfolio, value of any underlying collateral, current economic conditions,
past loan loss experience, and such other factors as management believes
requires current recognition in estimating possible loan losses. Various
regulatory agencies, as part of their examination process, periodically review
the Bank's allowance for possible loan losses. Such agencies may require the
Bank to recognize additions to the allowance based on their judgments about
information available to them at the time of their examination.
20
<PAGE> 22
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NONPERFORMING ASSETS
Nonperforming assets represent loans for which the accrual of interest has been
discontinued, loans accruing interest but contractually past due ninety days or
more, loans for which the terms have been renegotiated to less than market rates
due to a serious weakening of the borrower's financial condition, and other real
estate which has been acquired primarily through foreclosure and is awaiting
disposition.
Loans are generally placed on a nonaccrual basis when, in the opinion of
management, full collection of principal and interest is unlikely. At the time a
loan is placed on nonaccrual status, interest previously accrued, but not
collected, is charged against current interest income. Income on such loans is
then recognized only to the extent that cash is received and where future
collections of principal are probable.
Other real estate owned represents property acquired through foreclosure or
deeded to the Bank in lieu of foreclosure on real estate mortgage loans on which
the borrowers have defaulted as to payment of principal and interest. Other real
estate owned is recorded at the lower of cost or fair value, less estimated
costs to sell, and any loan balance in excess of fair value is charged to the
allowance for possible loan losses. Subsequent write-downs are included in other
operating expense, as are gains or losses upon sale and expenses related to
maintenance of the properties.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost, less accumulated depreciation.
Routine maintenance and repairs are charged to expense as incurred, and
expenditures which materially increase values or extend useful lives are
capitalized. Upon the sale or disposition of the assets, the difference between
the depreciated cost and proceeds is charged or credited to income.
Depreciation is based on the estimated useful lives of the respective assets and
is computed using both accelerated and straight-line methods.
INTANGIBLE ASSETS
Goodwill
Goodwill arising from the purchase of Union Bancshares Corp. is being amortized
on a straight-line basis over a period of 15 years.
Loan Servicing
The cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated based upon quoted market prices.
ADVERTISING COSTS
All advertising costs are expensed as incurred.
FEDERAL INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected
21
<PAGE> 23
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date. The deferred tax asset is subject to a valuation allowance
provided for that portion of the asset for which it is more likely than not that
it will not be realized.
The Corporation and the Bank are not currently subject to state and local income
taxes.
PER SHARE DATA
Income per share is computed based on the weighted average number of shares of
common stock outstanding during each year, after restatement for stock
dividends. Dividends per share is based on the number of shares outstanding at
the declaration date, after restatement for stock dividends.
This information is an integral part of the accompanying
consolidated financial statements.
22
<PAGE> 24
CROGHAN BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ACQUISITION
On August 1, 1996, the Corporation acquired for cash of $20,227,000 all of the
outstanding shares of Union Bancshares Corp. ("Union"). Union's principal
subsidiary was The Union Bank and Savings Company, an Ohio banking corporation
with offices in Bellevue, Clyde, and Monroeville, Ohio. Union and its
subsidiaries were subsequently merged into the Corporation or the Bank. The
transaction was accounted for as a purchase. Accordingly, the results of
operations of Union have been included in the 1996 consolidated results of the
Corporation from the date of acquisition.
The fair value of the assets and liabilities acquired were $102,276,000 and
$91,545,000, respectively. The major assets acquired were $30,260,000 of
investment securities and $60,841,000 of loans. The major liability assumed was
$90,475,000 of deposits. The purchase price, including direct costs of the
acquisition amounting to $73,000, exceeded the fair value of the net assets
acquired by $9,569,000 and was assigned to goodwill which is being amortized
over a period of 15 years.
The following unaudited pro forma financial information combines the historical
consolidated statements of operations of the Corporation and Union as if the
acquisition had become effective at the beginning of each period prescribed. The
unaudited pro forma amounts are not necessarily indicative of what would have
occurred or will occur in the future:
<TABLE>
<CAPTION>
1996 1995
(Dollars in thousands,
except per share data)
<S> <C> <C>
Net interest income $13,682 $13,725
======= =======
Net income $ 2,775 $ 3,139
======= =======
Net income per share $ 4.37 $ 4.95
======= =======
</TABLE>
NOTE 2 - INVESTMENT SECURITIES
As of January 1, 1994, the Bank adopted the provisions of Statement 115 and as a
result investment securities with an amortized cost of $21,365,000 and a market
value of $21,433,000 were transferred from held-to-maturity to
available-for-sale, resulting in a net unrealized holding gain of $45,000, net
of federal income taxes of $23,000. At December 31, 1995, a net unrealized
holding gain of $268,000, net of federal income taxes of $138,000, was
recognized. At December 31, 1996, a net unrealized holding gain of $97,000, net
of federal income taxes of $50,000, was recognized.
The amortized cost and market value of investment securities as of December 31,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
Amortized Market Amortized Market
cost value cost value
(Dollars in thousands)
Available-for-sale:
<S> <C> <C> <C> <C>
U.S. Treasury securities $31,436 $31,548 $28,935 $29,341
Obligations of U.S. Government agencies and corporations 7,711 7,740 -- --
Obligations of states and political subdivisions 504 510 -- --
------- ------- ------- -------
Total available-for-sale 39,651 39,798 28,935 29,341
------- ------- ------- -------
Held-to- maturity:
U.S. Treasury securities 1,000 1,004 6,016 6,013
Obligations of U.S. Government agencies and corporations 16,947 16,902 21,557 21,624
Obligations of states and political subdivisions 15,186 15,248 11,367 11,438
Other securities 3,550 3,562 4,670 4,716
------- ------- ------- -------
Total held-to-maturity 36,683 36,716 43,610 43,791
------- ------- ------- -------
Total $76,334 $76,514 $72,545 $73,132
======= ======= ======= =======
</TABLE>
23
<PAGE> 25
NOTE 2 - INVESTMENT SECURITIES (CONTINUED)
A summary of unrealized gains and losses on investment securities at December
31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
Gross Gross Gross Gross
unrealized unrealized unrealized unrealized
gains losses gains losses
(Dollars in thousands)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities $154 $ 42 $406 $ -
Obligations of U.S. Government agencies and corporations 106 77 - -
Obligations of states and political subdivisions 6 - - -
---- ---- ---- ----
Total available-or-sale 266 119 406 -
---- ---- ---- ----
Held-to-maturity:
U.S. Treasury securities 4 - 17 20
Obligations of U.S. Government agencies and corporations 23 68 101 34
Obligations of states and political subdivisions 87 25 97 26
Other securities 13 1 47 1
---- ---- ---- ----
Total held-to-maturity 127 94 262 81
---- ---- ---- ----
Total $393 $213 $668 $ 81
==== ==== ==== ====
</TABLE>
The amortized cost and market value of investment securities at December 31,
1996, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available-for-sale Held-to-maturity
Amortized Market Amortized Market
cost value cost value
(Dollars in thousands)
<S> <C> <C> <C> <C>
Due in one year or less $14,486 $14,553 $ 9,205 $ 9,251
Due after one year through five years 17,279 17,395 20,890 20,897
Due after five years through ten years 2,513 2,503 3,440 3,429
Over ten years 5,373 5,347 1,197 1,188
Other securities having no maturity date -- -- 1,951 1,951
------- ------- ------- -------
Total $39,651 $39,798 $36,683 $36,716
======= ======= ======= =======
</TABLE>
Investment securities with an amortized cost of $41,476,000 at December 31, 1996
and $25,580,000 at December 31, 1995 were pledged to secure public deposits and
for other purposes as required or permitted by law.
Proceeds from sales of investment securities during 1996 amounted to $15,307,000
and related entirely from sales of available-for-sale securities, resulting in
gross realized gains and losses of $49,000 and $71,000, respectively. Proceeds
from sales of investment securities during 1995 amounted to $6,938,000 and
related entirely from sales of available-for-sale securities, resulting in gross
realized gains and losses of $6,000 and $56,000, respectively. Proceeds from
sales of investment securities during 1994 amounted to $6,885,000 and related
entirely from sales of available-for-sale securities, resulting in gross
realized losses of $113,000.
Other securities consist of corporate obligations and investments in Federal
Home Loan Bank of Cincinnati and Federal Reserve Bank of Cleveland stock. The
Bank's investment in Federal Home Loan Bank stock amounted to $1,190,000 and
$798,000 at December 31, 1996 and 1995, respectively. The investment in Federal
Reserve Bank of Cleveland stock amounted to $697,000 and $195,000 at December
31, 1996 and 1995, respectively.
24
<PAGE> 26
NOTE 3 - LOANS
Loans at December 31, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
1996 1995
(Dollars in thousands)
<S> <C> <C>
Commercial, financial and agricultural $ 33,574 $ 24,830
Real estate - residential mortgage 103,389 75,109
Real estate - non-residential mortgage 53,457 30,375
Real estate - construction 1,239 2,585
Consumer 36,440 25,150
Credit card 2,548 1,921
-------- --------
Total $230,647 $159,970
======== ========
</TABLE>
Fixed rate loans totalled $101,726,000 at December 31, 1996 and $73,995,000 at
December 31, 1995.
The Bank's investment in impaired loans totalled $700,000 at December 31, 1996
and $902,000 at December 31, 1995, including $149,000 and $155,000,
respectively, of such loans for which an allowance for possible loan losses has
been provided and $551,000 and $747,000, respectively, for which no allowance
for possible loan losses has been provided. The following is a summary of the
activity in the allowance for possible loan losses for impaired loans, which is
included in the Bank's total allowance for possible loan losses, for the years
ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of year $ 76 $ 94
Loans charged-off -- (18)
Reduction for loan pay-downs (1) --
---- ----
Balance at end of year $ 75 $ 76
==== ====
</TABLE>
The average recorded investment in impaired loans for the years ended December
31, 1996 and 1995 totalled $932,000 and $1,034,000, respectively. Interest
income on impaired loans is accrued based on the principal amounts outstanding.
The accrual of interest is discontinued when an impaired loan becomes 90 days
delinquent unless it is well collateralized and in the process of collection.
For nonaccrual loans, interest income is recorded on a cash basis as long as
future collections of principal are probable. Interest income recognized on
impaired loans for the years ended December 31, 1996 and 1995 amounted to
$98,000 and $73,000, respectively, including $92,000 and $68,000, respectively,
which was recognized on a cash basis.
The amount of loans on a nonaccrual of interest basis at December 31, 1996 and
1995 totalled $649,000 and $845,000, respectively. The impact on interest income
of such nonaccrual loans was not significant. None of the loans to directors and
executive officers at December 31, 1996 or 1995 were on a nonaccrual basis.
Certain directors and executive officers, including their immediate families and
companies in which they are principal owners, are loan customers of the Bank.
Such loans are made in the ordinary course of business in accordance with the
Bank's normal lending policies, including the interest rate charged and
collateralization, and do not represent more than a normal collection risk. Such
loans totalled $8,451,000 and $7,345,000 at December 31, 1996 and 1995,
respectively. The following is a summary of activity during 1996 and 1995 for
such loans:
<TABLE>
<CAPTION>
Balance at Balance
beginning Additions Repayments at end
(Dollars in thousands)
<S> <C> <C> <C> <C>
1996 $7,345 $9,862 $8,756 $8,451
====== ====== ====== ======
1995 $7,275 $9,713 $9,643 $7,345
====== ====== ====== ======
</TABLE>
25
<PAGE> 27
NOTE 3 - LOANS (CONTINUED)
During 1995, the Bank sold its student loan portfolio aggregating $3,794,000,
resulting in a gain from sale of $109,000.
The Bank began selling loans in 1996 in the secondary market and retaining the
servicing. Mortgage loans serviced for others, which are not included in the
consolidated balance sheet, amounted to $493,000 at December 31, 1996. The asset
relating to mortgaging servicing rights, net of amortization, amounted to $7,000
at December 31, 1996. There were no loans available for sale at December 31,
1996.
Most of the Bank's lending activity is with customers primarily located within
Sandusky County, the Village of Green Springs, and the northwest portion of
Huron County. As of December 31, 1996 and 1995, the Bank's loans from borrowers
in the agriculture industry represent the single largest industry and amounted
to $11,146,000 and $6,010,000, respectively. Agricultural loans are generally
secured by property, equipment, and crop income. Repayment is expected from cash
flow from the harvest and sale of crops. The agricultural customers are subject
to the risks of weather and market prices of crops which could have an impact on
their ability to repay their loans. Credit losses arising from the Bank's
lending experience in the agriculture industry compare favorably with the Bank's
loss experience on its loan portfolio as a whole. Credit evaluation of
agricultural lending is based on an evaluation of cash flow coverage of
principal and interest payments and the adequacy of collateral received.
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
The following represents a summary of the activity in the allowance for possible
loan losses for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 2,614 $ 2,357 $ 2,238
Provision charged to operations 160 120 330
Addition resulting from acquisition of Union 711 -- --
Loans charged-off (428) (138) (272)
Recoveries of loans charged-off 311 275 61
------- ------- -------
Balance at end of year $ 3,368 $ 2,614 $ 2,357
======= ======= =======
</TABLE>
NOTE 5 - BANK PREMISES AND EQUIPMENT
The following is a summary of bank premises and equipment at December 31, 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
(Dollars in thousands)
<S> <C> <C>
Land and improvements $ 1,028 $ 635
Buildings 7,963 4,989
Equipment 3,207 2,582
------- -------
12,198 8,206
Accumulated depreciation 4,429 3,991
------- -------
Bank premises and equipment, net $ 7,769 $ 4,215
======= =======
</TABLE>
Depreciation expense amounted to $474,000 in 1996, $342,000 in 1995 and $329,000
in 1994.
NOTE 6 - DEPOSITS
Time deposits at December 31, 1996 and 1995 include individual deposits of
$100,000 and over which amounted to $28,027,000 and $12,611,000, respectively.
Interest expense on time deposits of $100,000 or more amounted to $1,112,000 for
1996, $501,000 for 1995 and $360,000 for 1994.
26
<PAGE> 28
NOTE 6 - DEPOSITS (CONTINUED)
At December 31, 1996, the scheduled maturities of time deposits were as follows
(dollars in thousands):
<TABLE>
<S> <C>
1997 $ 79,487
1998 40,715
1999 20,869
2000 8,039
2001 2,498
2002 and after 1,463
--------
Total $153,071
========
</TABLE>
NOTE 7 - OTHER BORROWINGS
Federal funds purchased and securities sold under repurchase agreements
generally mature within one to four days from the transaction date. Such balance
amounted to $6,039,000 at December 31, 1996 and $5,512,000 at December 31, 1995.
Additional information concerning federal funds purchased and securities sold
under repurchase agreements is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
(Dollars in thousands)
<S> <C> <C>
Average balance during the year $2,206 $1,994
Average interest rate during the year 4.17% 3.26%
Maximum month-end balance during the year $6,039 $5,512
====== ======
</TABLE>
At December 31, 1996 and 1995, borrowed funds consisted of the following:
<TABLE>
<CAPTION>
1996 1995
(Dollars in thousands)
<S> <C> <C>
Federal Home Loan Bank:
Secured note, with interest at a 7.00% fixed rate $1,000 $1,000
Secured note, with interest at a 7.10% fixed rate 1,500 1,500
------ ------
2,500 2,500
------ ------
NBD Bank:
Term secured note, with interest at a 7.75% variable rate 3,413 --
Revolving secured note, with interest at a 7.75% variable rate 650 --
------ ------
4,063 --
------ ------
Total borrowed funds $6,563 $2,500
====== ======
</TABLE>
The Federal Home Loan Bank notes stipulate interest payable on a monthly basis,
with principal due in April, 1999. Stock in the Federal Home Loan Bank of
Cincinnati totalling $1,190,000 at December 31, 1996 and $798,000 at December
31, 1995, and all eligible mortgage loans, are pledged as collateral on the
notes.
The NBD Bank term note requires interest and principal payable on a quarterly
basis, with the balance of the note due in July, 1999. The NBD Bank revolving
note requires interest payable on a quarterly basis, with the balance of the
note due in August, 1997. Stock in The Croghan Colonial Bank is pledged as
collateral on the NBD Bank notes.
27
<PAGE> 29
NOTE 8 - COMMON STOCK
At the annual meeting of shareholders held on May 14, 1996, the shareholders
approved an amendment to the Corporation's Articles of Incorporation to increase
the number of authorized shares of common stock from 650,000 to 3,000,000
shares.
On May 9, 1995, the Board of Directors declared a two-for-one stock split (stock
split effected in the form of a 100% stock dividend) to shareholders of record
as of May 22, 1995, payable on June 2, 1995. Since the par value of the shares
was not adjusted, the stock dividend was recorded at the par value of the
additional 317,263 shares issued through a transfer of $3,966,000 from surplus
to common stock.
All per share amounts included in the consolidated financial statements and the
notes thereto are based on the increased number of shares giving retroactive
effect to the 1995 stock split.
NOTE 9 - OTHER OPERATING EXPENSES
The following is a summary of other operating expenses for the years ended
December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
FDIC insurance $ 3 $ 237 $ 463
Equipment 604 439 360
State franchise and other taxes 477 385 366
Postage, stationery, and supplies 423 339 321
Other 1,445 1,153 1,178
------ ------ ------
Total other operating expenses $2,952 $2,553 $2,688
====== ====== ======
</TABLE>
The reduction in the FDIC insurance expense in 1996 and 1995 reflects the action
taken by the FDIC's Board of Directors to reduce insurance premiums charged to
commercial banking institutions.
NOTE 10 - FEDERAL INCOME TAXES
Total income tax expense (benefit) for 1996, 1995 and 1994 was allocated as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Income from operations $ 1,486 $ 1,444 $ 917
Stockholders' equity (88) 283 (146)
------- ------- -------
Total $ 1,398 $ 1,727 $ 771
======= ======= =======
</TABLE>
Federal income tax expense allocated to operations consisted of the following
for 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Current expense $1,432 $1,430 $ 912
Deferred expense 54 14 5
------ ------ ------
Total $1,486 $1,444 $ 917
====== ====== ======
</TABLE>
28
<PAGE> 30
NOTE 10 - FEDERAL INCOME TAXES (CONTINUED)
Income tax expense attributable to income from operations differed from the
amounts computed by applying the U.S. federal income tax rate of 34% to income
before federal income taxes as a result of the following:
<TABLE>
<CAPTION>
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Expected tax using statutory tax rate of 34% $ 1,544 $ 1,602 $ 1,123
Increase (decrease) in tax resulting from:
Tax-exempt income on state and municipal securities and
political subdivision loans (217) (187) (241)
Interest expense associated with carrying certain state and
municipal securities and political subdivision loans 32 26 28
Amortization of goodwill 90 -- --
Other, net 37 3 7
------- ------- -------
Total $ 1,486 $ 1,444 $ 917
======= ======= =======
</TABLE>
The deferred federal income tax expense of $54,000 for 1996, $14,000 for 1995
and $5,000 for 1994 resulted from the tax effects of temporary differences.
There was no impact for changes in tax laws and rates or changes in the
valuation allowance for deferred tax assets.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996 and
1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
(Dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan losses $ 717 $ 647
Accrued health insurance claims 15 20
Accrued vacation pay 88 61
Other 17 21
------- -------
Total deferred tax assets 837 749
------- -------
Deferred tax liabilities:
Unrealized holding gain on securities available-for-sale (50) (138)
Depreciation of bank premises and equipment (183) (142)
Discount accretion on investment securities (52) (36)
Pension costs (71) (119)
Deferred loan costs (114) (56)
Purchase accounting basis difference (556) --
Other (113) (30)
------- -------
Total deferred tax liabilities (1,139) (521)
------- -------
Net deferred tax assets (liabilities) $ (302) $ 228
======= =======
</TABLE>
The net deferred tax liabilities at December 31, 1996 are included in accrued
interest, taxes and other expenses and the net deferred tax assets at December
31, 1995 are included in other assets in the consolidated balance sheets.
The Corporation believes it is more likely than not that the benefit of deferred
tax assets will be realized. Therefore, no valuation allowance for deferred tax
assets is deemed necessary as of December 31, 1996 and 1995.
29
<PAGE> 31
NOTE 11 - RETIREMENT PLANS
The Bank sponsors a noncontributory defined benefit retirement plan (the
"Croghan Plan") for all full-time employees who work 1,000 or more hours per
year, have one year of service and have attained the age of 21. Benefits under
the Plan are based on the employee's years of service and compensation during
the years immediately preceding retirement. The Bank's funding policy is to
contribute annually an amount between the minimum and maximum amount deductible
for federal income tax purposes. Contributions to the Croghan Plan were $275,000
for each of the plan years ended August 31, 1996 and 1995.
The employees of Union were also covered by a noncontributory defined benefit
retirement plan (the "Union Plan") covering substantially all employees.
Benefits under this plan are based on the employee's years of service and
compensation. Union's funding policy was to contribute annually an amount that
could be deducted for federal income tax purposes. The contribution for the plan
year beginning October 1, 1995 was $155,000. The Union Plan was assumed by the
Bank as part of the acquisition described in Note 1.
In September, 1996, the Board of Directors of the Bank authorized the
termination of both retirement plans. This action resulted in a pretax
curtailment loss of $395,000 from the Croghan Plan and a pretax curtailment gain
of $342,000 from the Union Plan. Such amounts were determined under the
provisions of Financial Accounting Standards Board Statement No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Plans and
Termination Benefits". Final settlement of both plans is expected in 1997. Also
in 1996, the Board of Directors of the Bank approved the adoption of the Croghan
Colonial Bank 401(k) Profit Sharing Plan, a defined contribution plan, to be
effective January 1, 1997.
Pension expense of $225,000, $134,000, and $117,000 was recognized in 1996, 1995
and 1994, respectively. These amounts are included in salaries, wages and
employee benefits in the accompanying consolidated statements of operations. The
components of pension expense are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 208 $ 164 $ 157
Interest cost on the projected benefit obligation 250 166 150
Actual return on plan assets (271) (329) (50)
Net curtailment loss 53 -- --
Net amortization and deferral (15) 133 (140)
----- ----- -----
Total $ 225 $ 134 $ 117
===== ===== =====
</TABLE>
The funded status of the plans and amounts recognized in the consolidated
balance sheets are as follows (1996 includes both plans; 1995 represents Croghan
Plan only):
<TABLE>
<CAPTION>
1996 1995
(Dollars in thousands)
<S> <C> <C>
Actuarial present value of projected benefit obligation:
Accumulated benefit obligation:
Vested $(4,321) $(1,827)
Nonvested -- (68)
Provision for future salary increases -- (803)
------- -------
Projected benefit obligation (4,321) (2,698)
Plan assets, at fair value (primarily corporate and government bonds and common stocks) 4,529 2,725
------- -------
Excess of plan assets over projected benefit obligation 208 27
Unrecognized net loss -- 278
Unrecognized net transition asset -- (47)
Contributions paid for plan year ending August 31, 1996 -- 275
------- -------
Prepaid pension cost, included in other assets at December 31 $ 208 $ 533
======= =======
</TABLE>
30
<PAGE> 32
NOTE 11 - RETIREMENT PLANS (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Major assumptions used:
Discount rate 7.50% 7.50%
Rate of increase in compensation levels 4.00% 4.00%
Expected long-term rate of return on plan assets 7.50% 7.50%
</TABLE>
The measurement date was August 31 for the Croghan Plan and September 30 for the
Union Plan. While Statement of Financial Accounting Standards No. 87 requires
the use of a measurement date of not more than three months prior to the date of
the Bank's financial statements (i.e., September 30), the most recent
measurements provided by the plan actuary for the Croghan Plan were as of August
31 for both 1996 and 1995. It is the opinion of the plan actuary that plan
assets and obligations would not materially differ between August 31 and
September 30 of each year.
No other postretirement benefits are offered to retirees.
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments are primarily loan commitments to extend credit and
letters of credit. These instruments involve, to varying degrees, elements of
credit risk in excess of the amounts recognized in the consolidated balance
sheets. The contract amount of these instruments reflects the extent of
involvement the Bank has in these financial instruments.
The Bank's exposure to credit loss in the event of the nonperformance by the
other party to the financial instruments for loan commitments to extend credit
and letters of credit is represented by the contractual amounts of these
instruments. The Bank uses the same credit policies in making loan commitments
as it does for on-balance sheet loans.
Financial instruments whose contract amount represents credit risk totalled the
following amounts at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Contract amount
1996 1995
(Dollars in thousands)
<S> <C> <C>
Commitments to extend credit $50,933 $37,205
======= =======
Letters of credit $ 1,580 $ 1,663
======= =======
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amount does not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained if deemed
necessary by the Bank upon extension of credit is based on management's credit
evaluation of the customer. Collateral held varies but may include accounts
receivable; inventory; property, plant, and equipment; and income-producing
commercial properties.
Letters of credit are written conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party and are reviewed for
renewal at expiration. At December 31, 1996, letters of credit totalling
$1,535,000 expire in 1997 and $45,000 expire in 1999. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loans to customers. The Bank requires collateral supporting these
commitments when deemed necessary. The extent of collateral on these commitments
at December 31, 1996 and 1995 approximates 100% of the commitments.
31
<PAGE> 33
NOTE 13 - REGULATORY MATTERS
The Corporation and Bank are subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation and Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined). Management believes, as of December 31, 1996, that
the Corporation and Bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 1996, the most recent notification from federal and state
banking agencies categorized the Corporation and Bank as "well capitalized"
under the regulatory framework for prompt corrective action. To be categorized
as "well capitalized", the Corporation and Bank must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the
table. There are no conditions or events since that notification that management
believes have changed the category.
The actual capital amounts and ratios of the Corporation and the Bank are also
presented in the following table:
<TABLE>
<CAPTION>
To be
For "well capitalized"
capital under prompt
adequacy corrective
Actual purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets):
Consolidated $22,937 10.7% $17,207 greater than or = 8.0% $21,508 greater than or = 10.0%
Bank 26,856 12.5% 17,207 8.0% 21,508 10.0%
Tier I Capital (to Risk-Weighted Assets):
Consolidated $20,240 9.4% $ 8,603 greater than or = 4.0% $12,905 greater than or = 6.0%
Bank 24,159 11.2% 8,603 4.0% 12,905 6.0%
Tier I Capital (to Average Assets):
Consolidated $20,240 6.1% $ 9,913 greater than or = 3.0% $16,522 greater than or = 5.0%
Bank 24,159 7.3% 13,218 4.0% 16,522 5.0%
</TABLE>
On a parent company only basis, the Corporation's only source of funds are
dividends paid by the Bank. The ability of the Bank to pay dividends is subject
to limitations under various laws and regulations, and to prudent and sound
banking principles. Generally, subject to certain minimum capital requirements,
the Bank may declare a dividend without the approval of the State of Ohio
Division of Financial Institutions, unless the total dividends in a calendar
year exceed the total of its net profits for the year combined with its retained
profits of the two preceding years. Under these provisions, $3,745,000 was
available for dividends on January 1, 1997, without the need to obtain the
approval of the State of Ohio Division of Financial Institutions.
The Board of Governors of the Federal Reserve System generally considers it to
be an unsafe and unsound banking practice for a bank holding company to pay
dividends except out of current operating income, although other factors such as
overall capital adequacy and projected income may also be relevant in
determining whether dividends should be paid.
32
<PAGE> 34
NOTE 14 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
A summary of condensed financial information of the parent company as of
December 31, 1996 and 1995 and for each of the years in the three-year period
ended December 31, 1996 are as follows:
<TABLE>
<CAPTION>
BALANCE SHEETS
1996 1995
(Dollars in thousands)
Assets:
<S> <C> <C>
Cash $ 97 $ 98
Dividends receivable from subsidiary 285 285
Investment in subsidiary 33,560 27,795
Other assets 99 5
------- -------
Total assets $34,041 $28,183
======= =======
Liabilities:
Borrowed funds $ 4,063 $ --
Dividends payable 285 285
Accrued interest payable 53 --
------- -------
Total liabilities
4,401 285
------- -------
Stockholders' equity:
Common stock 7,932 7,932
Surplus 8,989 8,989
Retained earnings 12,622 10,709
Net unrealized holding gain on investment securities available-for-sale,
net of related income taxes 97 268
------- -------
Total stockholders' equity 29,640 27,898
------- -------
Total liabilities and stockholders' equity $34,041 $28,183
======= =======
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Income - dividends from subsidiary $ 17,297 $ 1,050 $ 834
Expenses - professional fees and other expenses,
net of federal income tax benefit 128 9 11
-------- -------- --------
Income before equity in undistributed net income of subsidiary 17,169 1,041 823
Equity in net income of subsidiary, less dividends (14,114) 2,228 1,564
-------- -------- --------
Net income $ 3,055 $ 3,269 $ 2,387
======== ======== ========
</TABLE>
Dividends from subsidiary for 1996 include a $15,630,000 special dividend in
connection with the purchase of Union Bancshares Corp.
33
<PAGE> 35
NOTE 14 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,055 $ 3,269 $ 2,387
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in net income of subsidiary, less dividends 14,114 (2,228) (1,564)
Increase in dividends receivable -- (64) (222)
Decrease (increase) in other assets (59) 1 3
Increase in accrued interest payable 53 -- --
-------- -------- --------
Net cash provided by operating activities 17,163 978 604
-------- -------- --------
Cash flow used in investing activities -
purchase of Union Bancshares Corp., net of $215 cash
acquired (20,085) -- --
-------- -------- --------
Cash flows from financing activities:
Proceeds from borrowed funds 4,063 -- --
Cash dividends paid (1,142) (987) (1,009)
-------- -------- --------
Net cash provided by (used in) financing activities 2,921 (987) (1,009)
-------- -------- --------
Net decrease in cash (1) (9) (405)
Cash at beginning of the year 98 107 512
-------- -------- --------
Cash at end of the year $ 97 $ 98 $ 107
======== ======== ========
</TABLE>
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial Instruments",
requires that the estimated fair value of financial instruments, as defined by
the Statement, be disclosed. Statement 107 also requires disclosure of the
methods and significant assumptions used to estimate the fair value of financial
instruments.
The estimated fair values of recognized financial instruments at December 31,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
Carrying Estimated Carrying Estimated
amount value amount value
(Dollars in thousands)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents $ 16,094 $ 16,094 $ 7,819 $ 7,819
Investment securities 76,481 76,514 72,951 73,132
Loans, net 227,279 228,716 157,356 158,429
-------- -------- -------- --------
Total $319,854 $321,324 $238,126 $239,380
======== ======== ======== ========
FINANCIAL LIABILITIES
Deposits $295,310 $295,708 $207,876 $209,588
Federal funds purchased and securities sold
under repurchase agreements 6,039 6,039 5,512 5,512
Borrowed funds 6,563 6,563 2,500 2,500
-------- -------- -------- --------
Total $307,912 $308,310 $215,888 $217,600
======== ======== ======== ========
</TABLE>
34
<PAGE> 36
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The above does not include accrued interest receivable; dividends payable; and
accrued interest, taxes and other expenses 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 at December 31, 1996 and
1995. These financial instruments relate to commitments to extend credit and
letters of credit. The contract amount of such financial instruments total
$52,513,000 at December 31, 1996 and $38,868,000 at December 31, 1995. Such
amounts are also considered to be the estimated fair values.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments shown above:
Cash and cash equivalents:
Fair value is determined to be the carrying amount for these items (which
include cash on hand, due from banks, deposits in other banks, and federal funds
sold) because they represent cash or mature in 90 days or less and do not
represent unanticipated credit concerns.
Investment securities:
The fair value of investment securities (both available-for-sale and
held-to-maturity) is determined based on quoted market prices of the individual
securities or, if not available, estimated fair value was obtained by comparison
to other known securities with similar risk and maturity characteristics. Such
value does not consider possible tax ramifications or estimated transaction
costs.
Loans:
Fair value for loans was estimated for portfolios of loans with similar
financial characteristics. For adjustable rate loans, which re-price at least
annually and generally possess low risk characteristics, the carrying amount is
believed to be a reasonable estimate of fair value. For fixed rate loans the
fair value is estimated based on secondary market quotes from various dealers,
considering weighted average rates and terms of the portfolio, adjusted for
credit and interest rate risk inherent in the loans. Fair value for
nonperforming loans is based on recent appraisals or estimated discounted cash
flows. The estimated value of credit card loans is based on existing loans and
does not include the value that relates to estimated cash flows from new loans
generated from existing cardholders over the remaining life of the portfolio.
Deposit liabilities:
The fair value of core deposits, including demand deposits, savings accounts,
and certain money market deposits, is the amount payable on demand. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
offered at year end for deposits of similar remaining maturities. The estimated
fair value does not include the benefit that results from the low-cost funding
provided by the deposit liabilities compared to the cost of borrowing funds in
the marketplace.
Other financial instruments:
The fair value of commitments to extend credit and letters of credit is
determined to be the contract amount since these financial instruments generally
represent commitments at existing rates. The fair value of federal funds
purchased and securities sold under repurchase agreements is determined to be
the carrying amount since these financial instruments represent
35
<PAGE> 37
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
obligations which are due on demand. The fair value of borrowed funds is
determined to be the carrying amount since the interest rates on such borrowings
closely approximate current year end rates.
The fair value estimates of financial instruments are made at a specific point
in time based on relevant market information. These estimates do not reflect any
premium or discount that could result from offering for sale at one time the
entire holdings of a particular financial instrument over the value of
anticipated future business and the value of assets and liabilities that are not
considered financial instruments. Since no ready market exists for a significant
portion of the financial instruments, fair value estimates are largely based on
judgments after considering such factors as future expected credit losses,
current economic conditions, risk characteristics of various financial
instruments, and other factors. 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 16 - CONTINGENT LIABILITIES
In the normal course of business, the Corporation and its subsidiary may be
involved in various legal actions, but in the opinion of management and its
legal counsel, the ultimate disposition of such matters is not expected to have
a material adverse effect on the consolidated financial statements.
NOTE 17 - FUTURE CHANGE IN ACCOUNTING PRINCIPLE
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities". Statement 125 becomes
effective for transactions occurring after December 31, 1996, except that
certain provisions of Statement 125 have been deferred by Statement 127.
Statement 125 distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. A transfer of financial assets in which
the transferor surrenders control over those assets is accounted for as a sale
to the extent that consideration other than beneficial interests in the
transferred assets is received in exchange. Statement 125 also establishes
standards on the initial recognition and measurement of servicing assets and
other retained interests and servicing liabilities, and their subsequent
measurement.
Statement 125 also requires that debtors reclassify financial assets pledged as
collateral and that secured parties recognize those assets and their obligation
to return them in certain circumstances in which the secured party has taken
control of those assets. In addition, Statement 125 requires that a liability be
derecognized only if the debtor is relieved of its obligation through payment to
the creditor or by being legally released from being the primary obligor under
the liability either judicially or by the creditor.
Management does not believe the application of Statement 125 to transactions of
the Bank that have been typical in the past will materially affect the
Corporation's consolidated financial position and results of operations.
This information is an integral part of the accompanying
consolidated financial statements.
36
<PAGE> 38
DIRECTORS AND OFFICERS OF CROGHAN BANCSHARES, INC.
DIRECTORS---------------------------------------------------------------------
JANET E. BURKETT ALBERT C. NICHOLS
Secretary/Treasurer Chairman of the Board of Directors
Burkett Industries, Inc. The Croghan Colonial Bank
THOMAS F. HITE K. BRIAN PUGH
President & Chief Executive Officer President & CEO
The Croghan Colonial Bank Clyde Parts Company
JOHN P. (PHIL) KELLER CLEMENS J. SZYMANOWSKI
Vice President, Keller-Ochs-Koch Retired
Funeral Home, Inc.
STEPHEN A. KEMPER J. TERRENCE WOLFE
Owner Vice President, Robert F. Wolfe Co.
Kemper Iron & Metal Company
DANIEL W. LEASE CLAUDE E. YOUNG
President, Wahl Refractories, Inc. Chairman, Progress Plastic
Products, Inc.
ROBERT H. MOYER GARY L. ZIMMERMAN
Chairman, Mosser Construction, Inc. Vice President, Swint-Reineck
Hardware, Inc.
OFFICERS----------------------------------------------------------------------
ALBERT C. NICHOLS THOMAS F. HITE
Chairman of the Board of Directors President
JAMES K. WALTER ALLAN E. MEHLOW
Vice President, Secretary Treasurer
37
<PAGE> 39
DIRECTORS AND OFFICERS OF THE CROGHAN COLONIAL BANK
DIRECTORS --------------------------------------------------------------------
JANET E. BURKETT ALBERT C. NICHOLS
Secretary/Treasurer Chairman of the Board of Directors
Burkett Industries, Inc. The Croghan Colonial Bank
THOMAS F. HITE K. BRIAN PUGH
President & Chief Executive Officer President & CEO
The Croghan Colonial Bank Clyde Parts Company
JOHN P. (PHIL) KELLER CLEMENS J. SZYMANOWSKI
Vice President, Keller-Ochs-Koch Retired
Funeral Home, Inc.
STEPHEN A. KEMPER J. TERRENCE WOLFE
Owner Vice President, Robert F. Wolfe Co.
Kemper Iron & Metal Company
DANIEL W. LEASE CLAUDE E. YOUNG
President, Wahl Refractories, Inc. Chairman, Progress Plastic
Products, Inc.
ROBERT H. MOYER GARY L. ZIMMERMAN
Chairman, Mosser Construction, Inc. Vice President, Swint-Reineck
Hardware, Inc.
Directors Emeriti
C.C. CHRISMAN D.W. MILLER
T.L. HILTY D.B. SLESSMAN
OFFICERS----------------------------------------------------------------------
ADMINISTRATIVE
ALBERT C. NICHOLS
Chairman of the Board of Directors
THOMAS F. HITE
President & Chief Executive Officer
CHIEF LENDING OFFICER CHIEF OPERATING OFFICER
WILLIAM C. HENSLEY THOMAS F. CAMELLA
Vice President Vice President
COMMERCIAL AND REAL ESTATE LOANS CONSUMER LOANS
JAMES K. WALTER JOSEPH W. BERGER
Sr. Vice President Assistant Vice President
JAMES A. DRAEGER JACQUELINE L. LILLY
Vice President/ Assistant Vice President
Agricultural Administrator
JEFF D. WILSON
JAMES R. WALTERS Loan Officer
Vice President
MICHAEL S. WISE
JEFFREY L. GEARY Loan Officer
Assistant Vice President
GREGG C. COLEMAN
JEFFERY C. HUBER Loan Officer
Assistant Vice President
NANCY C. RODDY
Loan Officer
38
<PAGE> 40
OFFICERS----------------------------------------------------------------------
TRUST DEPARTMENT COMPLIANCE AND SECURITY
BARRY F. LUSE SANDRA S. REED
Vice President/Trust Officer Compliance/Security Officer
NORMA J. COZETTE HUMAN RESOURCE
Trust Operations Officer PAMELA J. SWINT
Human Resource Manager
AUDIT
JOHN C. HOFFMAN ACCOUNTING
Auditor ALLAN E. MEHLOW
Vice President
MARK A. LOHRBACH Chief Financial Officer
Loan Review Officer
LAWRENCE R. FULK
OPERATIONS Vice President/Controller
MICHAEL J. HARTENSTEIN
Operations Officer BALLVILLE OFFICE
JAMI L. SEVERS
DEPOSIT ADMINISTRATION Branch Manager
CATHERINE D. KWIATKOWSKI
Cashier GREEN SPRINGS OFFICE
THEODORE J. RUTHERFORD
ROBERT L. OVERMYER Branch Manager/
Assistant Vice President Agricultural Representative
MAIN OFFICE MARILYN J. HUMBERT
DAVID E. JARVIS Assistant Cashier/
Assistant Vice President/ Assistant Branch Manager
Branch Manager
BELLEVUE OFFICES
WEST SIDE OFFICE ROSEMARY L. SCHAFFER
JOSEPHINE L. WEYER Sr. Vice President
Branch Manager
BRIAN C. LINN
EAST SIDE OFFICE Vice President/Branch Manager
RONALD T. GOEHRING
Branch Manager CLYDE OFFICE
RICHARD E. LAWRIE
COLEEN O. MILLER Branch Manager
Assistant Cashier/
Assistant Branch Manager MONROEVILLE OFFICE
DAVID M. SABO
Branch Manager
39
<PAGE> 1
Exhibit 21
CROGHAN BANCSHARES, INC.
Subsidiaries of the Registrant
State of Percentage of
Subsidiary Incorporation securities owned
The Croghan Colonial Bank (1) Ohio 100%
(1) The subsidiary's principal office is located in Fremont, Ohio.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 11,543
<INT-BEARING-DEPOSITS> 1
<FED-FUNDS-SOLD> 4,550
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 39,798
<INVESTMENTS-CARRYING> 36,683
<INVESTMENTS-MARKET> 36,716
<LOANS> 230,647
<ALLOWANCE> 3,368
<TOTAL-ASSETS> 340,168
<DEPOSITS> 295,310
<SHORT-TERM> 6,039
<LIABILITIES-OTHER> 2,616
<LONG-TERM> 6,563
<COMMON> 7,932
0
0
<OTHER-SE> 21,708
<TOTAL-LIABILITIES-AND-EQUITY> 340,168
<INTEREST-LOAN> 16,700
<INTEREST-INVEST> 4,419
<INTEREST-OTHER> 166
<INTEREST-TOTAL> 21,285
<INTEREST-DEPOSIT> 8,897
<INTEREST-EXPENSE> 9,304
<INTEREST-INCOME-NET> 11,981
<LOAN-LOSSES> 160
<SECURITIES-GAINS> (22)
<EXPENSE-OTHER> 8,594
<INCOME-PRETAX> 4,541
<INCOME-PRE-EXTRAORDINARY> 3,055
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,055
<EPS-PRIMARY> 4.81
<EPS-DILUTED> 4.81
<YIELD-ACTUAL> 4.53
<LOANS-NON> 649
<LOANS-PAST> 764
<LOANS-TROUBLED> 471
<LOANS-PROBLEM> 1,738
<ALLOWANCE-OPEN> 3,325
<CHARGE-OFFS> 428
<RECOVERIES> 311
<ALLOWANCE-CLOSE> 3,368
<ALLOWANCE-DOMESTIC> 3,368
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
