<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997. Commission File Number: 0-20159
CROGHAN BANCSHARES, INC.
(Exact name of registrant as specified 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)
Registrant's telephone number: (419) 332-7301
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under Section 12(g) of the Act:
Common Stock, Par Value $12.50 Per Share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates was
$37,561,432 as of January 31, 1998.
The number of shares outstanding for the registrant's sole class of common
equity as of February 28, 1998 is 634,526 shares of common stock, par value
$12.50 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Shareholders for the fiscal year ended December 31, 1997 - PART
II of Form 10-K.
Proxy Statement dated March 27, 1998 for the 1998 Annual Meeting of Shareholders
- - PART III of Form 10-K.
This document contains 65 pages. The Exhibit Index is on pages 19 and 20.
<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 registrants's common equity and related
stockholder matters 16
Item 6. Selected financial data 16
Item 7. Management's discussion and analysis 16
Item 7A. Quantitative and qualitative disclosures about
market risk 16
Item 8. Financial statements and supplementary data 16
Item 9. Changes in and disagreements with accountants on
accounting and financial disclosure 17
PART III
Item 10. Directors and executive officers of the registrant 18
Item 11. Executive compensation 18
Item 12. Security ownership of certain beneficial owners
and management 18
Item 13. Certain relationships and related transactions 18
PART IV
Item 14. Exhibits, financial statement schedules, and reports
on Form 8-K 19 - 21
Signatures 22
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 $335,040,000 at December 31, 1997.
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; 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. 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 $20,227,000 cash plus $73,000
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 $102,276,000
and the fair values of the liabilities assumed totalled $91,545,000. Goodwill
arising from the purchase of $9,569,000 is being amortized on a straight-line
basis over a period of 15 years.
3
<PAGE> 4
ITEM 1. Description of Business, Continued
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 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 the affected communities.
The Federal Reserve Board 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 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.
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
4
<PAGE> 5
ITEM 1. Description of Business, Continued
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
of total and Tier I capital to risk-weighted assets, and of Tier I capital to
average assets. Management believes that the Corporation and Bank meet all
capital adequacy requirements to which they are subject.
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. 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.
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, 1997, the Bank employed 167 full-time employees and 33
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, 1997, 1996 and
1995, 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>
1997 1996 1995
------------------------ ------------------------ ------------------------
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) $227,900 20,440 8.97% $187,126 16,700 8.92% $155,253 13,860 8.93%
Taxable investment securities 58,576 3,735 6.38% 61,315 3,843 6.27% 57,542 3,526 6.13%
Non-taxable investment securities 14,187 636 4.48% 12,743 576 4.52% 11,202 511 4.56%
Federal funds sold 4,417 245 5.55% 3,148 166 5.27% 2,995 179 5.98%
------- ------ ------- ------ ------- ------
Total interest-earning assets 305,080 25,056 8.21% 264,332 21,285 8.05% 226,992 18,076 7.96%
------- ------ ------- ------ ------- ------
Non-interest-earning assets:
Cash and due from banks 9,083 8,140 6,939
Bank premises and equipment, net 7,951 5,762 4,325
Other assets 12,287 7,322 2,992
Less allowance for possible loan losses (3,522) (2,889) (2,489)
-------- -------- --------
Total $330,879 25,056 $282,667 21,285 $238,759 18,076
======== ====== ======== ====== ======== ======
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Savings, NOW and Money Market deposits $109,158 2,584 2.37% $ 91,385 2,161 2.36% $ 82,040 2,051 2.50%
Time deposits 150,976 8,169 5.41% 125,026 6,736 5.39% 99,677 5,117 5.13%
Federal funds purchased and securities
sold under repurchase agreements 3,515 136 3.88% 2,206 92 4.17% 1,994 65 3.26%
Borrowed funds 4,386 339 7.73% 4,129 315 7.63% 2,500 176 7.04%
------- ------ ------- ----- ------- -----
Total interest-bearing liabilities 268,035 11,228 4.19% 222,746 9,304 4.18% 186,211 7,409 3.98%
------- ------ ------- ----- ------- -----
Non-interest-bearing liabilities:
Demand deposits 29,745 28,890 24,380
Other liabilities 2,579 2,202 1,555
----- ----- -----
32,324 31,092 25,935
------ ------ ------
Stockholders' equity 30,520 28,829 26,613
-------- -------- --------
Total $330,879 11,228 $282,667 9,304 $238,759 7,409
======== ====== ======== ===== ======== =====
Net interest income $13,828 $11,981 $10,667
======= ======= =======
Net yield on interest-earning assets 4.53% 4.53% 4.70%
==== ==== ====
</TABLE>
(1) Included in loan interest income are loan fees of $422,894 in 1997, $335,960
in 1996, and $189,021 in 1995.
(2) Non-accrual loans are included in loan totals and do not have a material
impact on the analysis presented.
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>
1997 compared to 1996 1996 compared to 1995
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 $3,657 83 3,740 $2,844 (4) 2,840
Taxable investment securities (177) 69 (108) 235 82 317
Non-taxable investment securities 65 (5) 60 70 (5) 65
Federal funds sold 70 9 79 10 (23) (13)
------ --- ----- ----- --- -----
Total interest-earning assets 3,615 156 3,771 3,159 50 3,209
------ --- ----- ----- --- -----
Interest expense:
Savings, NOW and Money Market deposits 421 2 423 210 (100) 110
Time deposits 1,404 29 1,433 1,355 264 1,619
Federal funds purchased and securities
sold under repurchase agreements 50 (6) 44 7 20 27
Borrowed funds 20 4 24 123 16 139
------ --- ----- ----- --- -----
Total interest-bearing liabilities 1,895 29 1,924 1,695 200 1,895
------ --- ----- ----- --- -----
Net interest income $1,720 127 1,847 $1,464 (150) 1,314
====== === ===== ====== ==== =====
</TABLE>
(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.
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, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996 1995
(dollars in thousands)
<S> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
Government agencies and corporations $54,713 57,235 56,914
Obligations of states and political subdivisions (1) 12,307 15,696 11,367
Other securities 2,644 3,550 4,670
------- ------ ------
$69,664 76,481 72,951
======= ====== ======
</TABLE>
(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.
The following table sets forth the maturities of investment securities at
December 31, 1997 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 $15,502 5.70% $32,740 6.17% $ 3,627 6.60% $2,844 7.10%
Obligations of states and political subdivisions (1) 3,918 6.64% 5,616 6.90% 2,082 6.90% 691 6.84%
Other securities (2) 500 6.25% 101 5.71% -- -- -- --
------- ---- ------- ---- ------- ---- ------ ----
$19,920 5.90% $38,457 6.28% $ 5,709 6.71% $3,535 7.05%
======= ===== ======= ===== ======= ===== ====== ====
</TABLE>
(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 $2,043,000 which have no stated maturity.
8
<PAGE> 9
ITEM 1. Description of Business, Continued
Loan Portfolio
Types of Loans
The amounts of gross loans outstanding at December 31, 1997, 1996, 1995, 1994
and 1993 are shown in the following table according to types of loans:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1997 1996 1995 1994 1993
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 32,739 33,574 24,830 24,545 23,857
Real estate - mortgage 156,717 156,846 105,484 99,612 90,352
Real estate - construction 3,478 1,239 2,585 796 757
Consumer 43,609 36,440 25,150 27,960 28,093
Credit card and other 2,533 2,548 1,921 1,948 1,997
-------- ------- ------- ------- -------
$239,076 230,647 159,970 154,861 145,056
======== ======= ======= ======= =======
</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 secured wholly or substantially by a lien on
real property. Real estate - mortgage loans generally pose the least 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 $511,000 in 1997
and $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, 1997 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 $9,073 10,239 13,427 32,739
====== ====== ====== ======
</TABLE>
Interest
Sensitivity
-------------------
Fixed Variable
rate rate
(dollars in thousands)
Due after one but within five years $ 3,931 6,308
Due after five years 2,145 11,282
------- ------
$ 6,076 17,590
======= ======
The above maturity information is based on the contract terms at December 31,
1997 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, 1997, 1996, 1995, 1994, and 1993 which contain certain risk
elements:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1997 1996 1995 1994 1993
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis (1) $212 649 845 604 531
Loans contractually past due 90 days or more
as to principal or interest payments (2) 582 764 477 845 733
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 -- -- --
==== === === === ===
</TABLE>
(1) Loans are placed on nonaccrual 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 nonaccrual and renegotiated (of the type specified
above) loans been current in accordance with their terms approximated
$100,000 in 1997, $167,000 in 1996, $89,000 in 1995, $77,000 in 1994,
and $50,000 in 1993. Actual interest included in income on these loans
amounted to approximately $84,000 in 1997, $130,000 in 1996, $27,000 in
1995, $16,000 in 1994, and $8,000 in 1993.
(2) Excludes loans accounted for on a nonaccrual basis.
(3) Excludes loans accounted for on a nonaccrual basis and loans
contractually past due 90 days or more as to principal or interest
payments.
In addition to the loan amounts identified above, there were approximately
$1,992,000 of potential problem loans at December 31, 1997, 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, 1997 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,
----------------------------------------------------
1997 1996 1995 1994 1993
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Daily average amount of loans $227,900 187,126 155,253 148,544 142,047
======== ======= ======= ======= =======
Allowance for possible loan losses at beginning of year $ 3,368 2,614 2,357 2,238 1,924
Acquisition of Union Banshares Corp. -- 711 -- -- --
-------- ------ ------- ------- -------
3,368 3,325 2,357 2,238 1,924
-------- ------ ------- ------- -------
Loan charge-offs:
Commercial, financial and agricultural -- (97) (2) -- (11)
Real estate - mortgage (111) -- (25) (117) (52)
Real estate - construction -- (198) -- -- --
Consumer (159) (116) (99) (148) (104)
Credit card and other (17) (17) (12) (7) (10)
-------- ------ ------- ------- -------
(287) (428) (138) (272) (177)
-------- ------ ------- ------- -------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural 16 80 154 7 40
Real estate - mortgage 193 -- 88 11 6
Real estate - construction 1 187 -- -- --
Consumer 45 40 32 41 22
Credit card and other 2 4 1 2 3
-------- ------ ------- ------- -------
257 311 275 61 71
-------- ------ ------- ------- -------
Net recoveries (charge-offs) (2) (30) (117) 137 (211) (106)
-------- ------ ------- ------- -------
Additions to allowance charged to expense (1) 180 160 120 330 420
-------- ------ ------- ------- -------
Allowance for possible loan losses at end of year $ 3,518 3,368 2,614 2,357 2,238
======== ====== ======= ======= =======
Allowance for possible loan losses as a percent of year-end loans 1.47% 1.46% 1.63% 1.52% 1.54%
======== ====== ======= ======= =======
Ratio of net charge-offs (recoveries) during the year to
average loans outstanding .01% .06% (.09)% .14% .07%
======== ====== ======= ======= =======
</TABLE>
(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 judgment, 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 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. The 1997 real estate - mortgage recoveries included
a $191,782 recovery.
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, 1997 December 31, 1996
------------------------- -------------------------
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 $ 635 13.7% $ 647 14.6%
Real estate - mortgage 1,517 65.5% 1,216 68.0%
Real estate - construction -- 1.5% -- .5%
Consumer 1,264 18.2% 1,350 15.8%
Credit card and other 102 1.1% 155 1.1%
------ ----- ------ -----
$3,518 100.0% $3,368 100.0%
====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------------- -------------------------
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 $1,161 15.5% $ 933 15.8%
Real estate - mortgage 682 66.0% 889 64.3%
Real estate - construction -- 1.6% -- .5%
Consumer 682 15.7% 482 18.1%
Credit card and other 89 1.2% 53 1.3%
------ ----- ------ -----
$2,614 100.0% $2,357 100.0%
====== ===== ====== =====
</TABLE>
December 31, 1993
-------------------------
Percentage
of loans to
Allowance total loans
(dollars in thousands)
Commercial, financial and agricultural $1,065 16.4%
Real estate - mortgage 711 62.3%
Real estate - construction -- .5%
Consumer 409 19.4%
Credit card and other 53 1.4%
------ -----
$2,238 100.0%
====== =====
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 1997, 1996 and 1995 in the
following table:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
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 $ 29,745 - % $ 28,890 - % $ 24,380 - %
Interest-bearing demand deposits 35,034 2.02% 25,186 2.07% 21,110 2.05%
Savings, including Money Market deposits 74,124 2.53% 66,199 2.48% 60,930 2.66%
Time deposits 150,976 5.41% 125,026 5.39% 99,677 5.13%
-------- -------- --------
$289,879 $245,301 $206,097
======== ======== ========
</TABLE>
Maturities of time deposits of $100,000 or more outstanding at December 31, 1997
are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
3 months or less $ 6,362
Over 3 through 6 months 13,180
Over 6 through 12 months 2,336
Over 12 months 5,045
-------
$26,923
=======
</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,
-------------------------
1997 1996 1995
<S> <C> <C> <C>
Percentage of net income to:
Average total assets .94% 1.08% 1.37%
Average stockholders' equity 10.18% 10.60% 12.28%
Percentage of cash dividends declared per common
share to net income per common share 36.76% 37.38% 32.12%
Percentage of average stockholders' equity to
average total assets 9.22% 10.20% 11.15%
</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, are in satisfactory
condition, and are suitable for their intended use.
ITEM 3. Legal Proceedings
Corporation management is aware of no material pending or threatened litigation
in which the Corporation or its subsidiary Bank faces potential loss or exposure
which could materially affect the consolidated financial statements. The
Corporation is not aware of any proceedings involving the Corporation 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, 1997.
15
<PAGE> 16
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The number of holders of record of the Corporation's common stock at December
31, 1997 is 665.
Information relating to dividend restrictions is contained on page 34 in
Financial Statement Footnote No. 13 captioned "Regulatory Matters" of the 1997
Annual Report to Shareholders of Croghan Bancshares, Inc. and is incorporated
herein by reference.
Other information required by this Item is contained on page 4 under the caption
"Market Price and Dividends on Common Stock" of the 1997 Annual Report to
Shareholders of Croghan Bancshares, Inc. and is incorporated herein by
reference.
ITEM 6. Selected Financial Data
Information required by this Item is contained on page 5 under the caption "Five
Year Summary of Selected Financial Data" of the 1997 Annual Report to
Shareholders of Croghan Bancshares, Inc. and is incorporated herein by
reference.
ITEM 7. Management's Discussion and Analysis
Information required by this Item is contained on pages 6 through 14 under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" of the 1997 Annual Report to Shareholders of Croghan
Bancshares, Inc. and is incorporated herein by reference.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Information required by this Item is contained on pages 12 and 13 under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Interest Rate Risk " of the 1997 Annual Report to Shareholders
of Croghan Bancshares, Inc. and is incorporated herein by reference.
ITEM 8. Financial Statements
The following information required by this Item is contained on pages 15 through
37 in the 1997 Annual Report to Shareholders of Croghan Bancshares, Inc. and is
incorporated herein by reference:
Independent Auditor's Report
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Operations - Years ended December 31, 1997,
1996 and 1995
Consolidated Statements of Stockholders' Equity - Years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years ended December 31, 1997,
1996 and 1995
Summary of Significant Accounting Policies
Notes to Consolidated Financial Statements
16
<PAGE> 17
PART II
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
There were no changes in or disagreements with accountants during the years
ended December 31, 1997 or 1996.
17
<PAGE> 18
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information concerning Directors and Executive Officers of the Corporation is
contained on pages 2 and 3 under the caption "Election of Directors", and on
page 4 under the caption "Executive Officers" in the Corporation's Definitive
Proxy Statement dated March 27, 1998, for the Annual Meeting of Shareholders to
be held on May 12, 1998, and is incorporated herein by reference. Information
concerning the failure of a director of the Corporation to comply with share
beneficial ownership reporting requirements under Section 16(a) of the
Securities Exchange Act of 1934, as amended, is contained on page 7 under the
caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Corporation's Definitive Proxy Statement dated March 27, 1998, for the Annual
Meeting of Shareholders to be held on May 12, 1998, and is incorporated herein
by reference.
ITEM 11. Executive Compensation
Information concerning compensation of directors and executive compensation is
contained on page 4 under the caption "Election of Directors", on page 5 under
the captions "Executive Compensation" and "Compensation Committee Report", and
on page 6 under the caption "Performance Graph" in the Corporation's Definitive
Proxy Statement dated March 27, 1998, for the Annual Meeting of Shareholders to
be held on May 12, 1998, and is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management
Information concerning security ownership of certain beneficial owners and
management is contained on pages 1, 2, and 3 under the captions "Voting
Securities and Principal Holders Thereof" and "Election of Directors" in the
Corporation's Definitive Proxy Statement dated March 27, 1998, for the Annual
Meeting of Shareholders to be held on May 12, 1998, and is incorporated herein
by reference.
ITEM 13. Certain Relationships and Related Transactions
Information concerning related party transactions is contained on page 6 under
the caption "Indebtedness Of and Transactions with Officers and Directors" in
the Corporation's Definitive Proxy Statement dated March 27, 1998, for the
Annual Meeting of Shareholders to be held on May 12, 1998, and is incorporated
herein by reference.
18
<PAGE> 19
PART IV
ITEM 14. (a) Exhibits and Financial Statement Schedules
The following financial statements are filed as a part of this report and are
contained on pages 15 through 37 of Exhibit 13 (the 1997 Annual Report to
Shareholders of Croghan Bancshares, Inc.):
Independent Auditor's Report
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Operations - Years ended December 31, 1997, 1996
and 1995
Consolidated Statements of Stockholders' Equity - Years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996
and 1995
Summary of Significant Accounting Policies
Notes to Consolidated Financial Statements
Financial statement schedules have been omitted because they are not applicable
or because the required information is provided in the Consolidated Financial
Statements, including the Notes thereto.
The following exhibits are filed with or incorporated by reference (in
accordance with Item 601 of Regulation S-K) in this filing:
<TABLE>
<CAPTION>
Reference to Prior Filing
Regulation of Exhibit or of the
S-K Exhibit Exhibit's Inclusion
Number Document in this Filing
<S> <C> <C>
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 - 1997 Included with
this filing
21 Subsidiaries of the Registrant Included with
this filing
27 Financial Data Schedule Included with
this filing
</TABLE>
19
<PAGE> 20
ITEM 14. (a) Exhibits and Financial Statement Schedules, continued
(1) This document was previously filed as Exhibit 3(i) to the
Registrant's June 30, 1997 quarterly report on Form 10-QSB and is
incorporated herein by reference.
(2) This document was previously filed as Exhibit 2 to the Registrant's
Form 10 registration statement pursuant to Section 12(g) of the
Securities Exchange Act of 1934 and is incorporated herein by
reference.
(3) This document was previously filed as Exhibit 3 to the Registrant's
Form 10 registration statement pursuant to Section 12(g) of the
Securities Exchange Act of 1934 and is incorporated herein by
reference.
(4) This document was previously filed as Exhibit 10 to the Registrant's
September 30, 1996 quarterly report on Form 10-QSB and is
incorporated herein by reference.
(5) This document was previously filed as Exhibit 1 to the Registrant's
December 31, 1995 annual report on Form 10-KSB and is incorporated
herein by reference.
(6) This document was previously filed as Exhibit 2.2 to the Registrant's
original August 1, 1996 Form 8-K and is incorporated herein by
reference.
20
<PAGE> 21
ITEM 14. (b) Reports on Form 8-K
None were filed during the quarter ended December 31, 1997.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CROGHAN BANCSHARES, INC.
Date: March 17, 1998 /s/ THOMAS F. HITE
-------------- -------------------------
Thomas F. Hite, President
Pursuant to the requirements of the Securities Exchange Act of 1934, 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
- --------------------------------- ---------------------------------
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 17, 1998 /s/ GARY L. ZIMMERMAN
-------------- ---------------------------------
Gary L. Zimmerman, Director
22
<PAGE> 1
Exhibit 13
CROGHAN BANCSHARES, INC.
1997 ANNUAL REPORT
<PAGE> 2
CROGHAN BANCSHARES, INC.
CONTENTS
Financial Highlights 1
Letter to Shareholders 2
Description of the Corporation and Common Stock Data 4
Selected Financial Data 5
Management's Discussion and Analysis 6
Independent Auditor's Report 15
Consolidated Financial Statements 16
Directors and Officers 38
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1997 1996 Percent
Change
<S> <C> <C> <C>
For the year:
Net income $ 3,107,000 $ 3,055,000 1.7%
Income per common share 4.90 4.81 1.9%
Dividends per common share 1.80 1.80 - %
Return on average assets .94% 1.08%
Return on average
stockholders' equity 10.18% 10.60%
At year end:
Assets $335,040,000 $340,168,000 (1.5)%
Loans 239,076,000 230,647,000 3.7%
Investment securities 69,664,000 76,481,000 (8.9)%
Deposits 289,053,000 295,310,000 (2.1)%
Stockholders' equity 31,590,000 29,640,000 6.6%
Book value per common share $ 49.79 $ 46.71 6.6%
Stockholders' equity to
total assets 9.43% 8.71%
Number of stockholders of record 665 645 3.1%
Number of full-time equivalent
employees 181 182 - %
</TABLE>
Amounts for 1996 reflect the August 1, 1996
purchase of Union Bancshares Corp.
1
<PAGE> 3
To Our Shareholders
The year 1997 was a challenging period for Croghan Bancshares, Inc. and its
subsidiary, The Croghan Colonial Bank. The Corporation's net income of
$3,107,000 increased from the 1996 level. The return on average assets, however,
declined to .94 percent. A major contributing factor to the decline was
continuing expenses related to the 1996 acquisition of Union Bancshares Corp.,
Bellevue, Ohio, including maintaining two operating systems due to contractual
obligations. The operating systems were converged in October, 1997 and this
duplicate expense has been eliminated. We remain confident the acquisition will
be beneficial to our shareholders as we go forward.
The economy of the Bank's market area in 1997 was similar to previous years.
Retail sales were moderate and the Christmas season again was the key to a
successful year. Manufacturing was mixed. The down side was the closing of two
long-time operations in Fremont and the announcement of an early 1998 closing of
a third. The bright side was the movement of three companies to new, expanded
facilities, the expansion of two others and one new firm locating here. The
merger involving Norfolk and Southern and CSX railroads should bring added
activity to the Bellevue rail yards.
The beginning of the year saw the national economy heating up slightly which led
the Federal Reserve to increase the target rate for federal funds in March. That
move led to an increase of the Wall Street Prime Rate to 8.5 percent. The
national economy remained strong the remainder of the year but inflation
indicators were low which kept the Federal Reserve on the sidelines.
The Bank's balance sheet exhibited some unusual changes during 1997. Management
continued its strategy of adjusting the investment portfolio to eliminate
unwanted risk. The deposit categories declined mainly due to public fund deposit
adjustments. Meanwhile, loan demand was strong and that category increased which
raised the loan to deposit ratio. While historically high at year end, the ratio
was within the policy range set by the Board of Directors.
Retirements of personnel from the Bank are always special occasions but usually
not mentioned here. However, 1997 saw the retirement, among others, of two
long-tenured officers of the Bank. Catherine D. Kwiatkowski retired in January
after completing 46 years of service. Cathy retired as the Bank's Cashier.
Rosemary L. Schaffer retired in July after completing over 37 years of service.
Rosemary devoted most of her years to the Union Bank and Savings Company,
Bellevue, and was its President at the time of the merger. She retired as a
Senior Vice President of Croghan Colonial. We wish both of them, along with all
other retirees, a long, healthy and happy retirement.
On a sad note, 1997 saw the passing of Clarence C. "Chris" Chrisman. Chris
joined the Bank in 1959 due to the merger of the Commercial Bank of Green
Springs with Croghan Colonial. He served on the Board of Directors of the Bank
from 1959 through 1979. Chris had been designated a Director Emeritus from 1979
to his passing. Our heartfelt sympathy goes out to the Chrisman family.
As 1998 picks up speed, we look forward to the challenges and opportunities that
will be present. One of the challenges is the Year 2000 computer based problem.
The Corporation and the Bank have been diligently working on the "Y2K" situation
since early 1997. The new computer mainframe is Y2K compliant. All of our other
systems have been identified and testing will begin before the 1998 year end to
ensure workability and compatibility. We have also begun a program of awareness
and direction with our commercial customers. We expect to be prepared for
opportunities that will enable us to serve the five communities in our market
area with the financial products and services they want and need. "We're
Community People" and we want to be "In Your Corner, On Your Corner". Our staff
is committed to this goal.
We wish to thank our shareholders for their encouragement and support.
2
<PAGE> 4
CROGHAN BANCSHARES, INC.
/s/ Thomas Hite
Thomas F. Hite
President & CEO
3
<PAGE> 5
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 $335,000,000 in total
assets as of December 31, 1997. 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
$102,276,000, 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
intermediary for the Corporation's stock since July 1, 1992. Solely on the basis
of transactions that have been reported to the Corporation, the ranges of
transaction prices for shares of its common stock for each quarterly period
during 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C>
First Quarter $59.00 $ 51.00 to 52.00
Second Quarter 61.00 to 62.00 52.00 to 53.00
Third Quarter 62.00 to 63.00 52.00 to 52.50
Fourth Quarter 64.00 to 68.00 54.00 to 59.00
</TABLE>
Dividends declared by the Corporation on its common stock during the past two
years were as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Three-months ended March 31 $ .45 $ .45
Three-months ended June 30 .45 .45
Three-months ended September 30 .45 .45
Three-months ended December 31 .45 .45
---- -----
$ 1.80 $ 1.80
==== ====
</TABLE>
AVAILABILITY OF MORE INFORMATION
To obtain a copy of the Corporation's annual report (Form 10-K) filed with the
Securities and Exchange Commission, please write to:
James K. Walter, Secretary
Croghan Bancshares, Inc.
323 Croghan Street
Fremont, OH 43420
4
<PAGE> 6
\
CROGHAN BANCSHARES, INC.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995 1994 1993
(Dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Statements of operations:
Total interest income $ 25,056 $ 21,285 $ 18,076 $ 15,991 $ 16,276
Total interest expense 11,228 9,304 7,409 6,306 6,982
-------- -------- -------- -------- --------
Net interest income 13,828 11,981 10,667 9,685 9,294
Provision for loan losses 180 160 120 330 420
-------- -------- -------- -------- --------
Net interest income after provision for loan losses 13,648 11,821 10,547 9,355 8,874
Total non-interest income 1,514 1,314 1,126 776 816
Total non-interest expenses 10,446 8,594 6,960 6,827 6,840
-------- -------- -------- -------- --------
Income before federal income taxes and cumulative effect of change
in accounting principle 4,716 4,541 4,713 3,304 2,850
Federal income taxes 1,609 1,486 1,444 917 701
-------- -------- -------- -------- --------
Income before cumulative effect of change in accounting principle 3,107 3,055 3,269 2,387 2,149
Cumulative effect of change in accounting for income taxes
($.03 per share) - - - - 16
-------- -------- -------- -------- --------
Net income $ 3,107 $ 3,055 $ 3,269 $ 2,387 $ 2,133
======== ======== ======== ======== ========
Per share of common stock:
Net income $ 4.90 $ 4.81 $ 5.15 $ 3.76 $ 3.36
Dividends 1.80 1.80 1.655 1.315 1.20
Book value 49.79 46.71 43.97 39.60 37.60
======== ======== ======== ======== ========
Average common shares outstanding 634,526 634,526 634,526 634,526 634,526
======== ======== ======== ======== ========
Year end balances:
Loans, net $235,558 $227,279 $157,356 $152,505 $142,818
Investment securities 69,664 76,481 72,951 72,301 80,741
Total assets 335,040 340,168 245,518 240,331 236,927
Deposits 289,053 295,310 207,876 205,789 206,073
Stockholders' equity 31,590 29,640 27,898 25,129 23,858
======== ======== ======== ======== ========
Average balances:
Loans, net $224,378 $184,237 $152,764 $146,185 $139,933
Investment securities 72,763 74,058 68,744 74,382 76,931
Total assets 330,879 282,667 238,759 236,977 237,793
Deposits 289,879 245,301 206,097 207,003 210,522
Stockholders' equity 30,520 28,829 26,613 24,548 23,240
======== ======== ======== ======== ========
Selected ratios:
Net yield on average interest-earnings assets 4.53% 4.53% 4.70% 4.31% 4.11%
Return on average total assets .94 1.08 1.37 1.01 .90
Return on average stockholders' equity 10.18 10.60 12.28 9.72 9.18
Net loan charge offs (recoveries) as a percent of average
outstanding net loans .01 .06 (.09) .14 .07
Allowance for possible loan losses as a percent of year-end loans 1.47 1.46 1.63 1.52 1.54
Stockholders' equity as a percent of total year-end assets 9.43 8.71 11.36 10.46 10.07
======== ======== ======== ======== ========
</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.
5
<PAGE> 7
CROGHAN BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion provides additional information pertaining to
Croghan's financial condition and results of operations. This information is
presented to aid the reader in understanding the Consolidated Financial
Statements which appear on pages 16 through 37 of this Annual Report. Where
applicable, Management has noted their insights into known events and trends
that have or may be expected to have a material effect on Croghan's operations
and financial condition.
ACQUISITION OF UNION BANCSHARES CORP.
On August 1, 1996, Croghan purchased Union Bancshares Corp. and its
primary operating subsidiary, The Union Bank and Savings Company of Bellevue,
Ohio. As a result of this transaction, Croghan expanded its market presence in
northwest Ohio by acquiring two offices in Bellevue, an office in Clyde, and an
office in Monroeville.
Union stockholders were paid cash for their shares and the transaction
was recorded using the purchase method of accounting. The fair value of Union's
assets and liabilities on the acquisition date totalled $102,276,000 and
$91,545,000, respectively. The purchase price amounted to $20,300,000 and
goodwill of $9,569,000 was created and booked as a result of the transaction.
The impact of the purchase of Union Bancshares Corp. should be considered when
comparing 1997 and 1996 amounts, especially income and expense items and average
balances, to prior year amounts.
PERFORMANCE SUMMARY
Croghan's net income increased 1.7% to $3,107,000 for the year ended
December 31, 1997. This compares to net income of $3,055,000 in 1996 and
$3,269,000 in 1995. The improvement in 1997 net income was the result of
specific cost saving measures which consolidated various redundant operations
and functions within the newly acquired offices. Net income in 1996 was
negatively impacted by costs (e.g., advertising and marketing, postage,
professional and consulting fees, and stationery and supplies expenses)
incidental to the Union acquisition.
The 1997 return on average assets was .94%. This compares to 1.08% in
1996 and 1.37% in 1995. Croghan's return on average stockholders' equity
totalled 10.18% in 1997, compared to 10.60% in 1996 and 12.28% in 1995. Income
per share in 1997 amounted to $4.90, compared to $4.81 in 1996 and $5.15 in
1995.
Total assets at 1997 year-end were $335,040,000 or a 1.5% decrease from
1996's total assets of $340,168,000. Total loans were $239,076,000 at 1997
year-end, a 3.7% increase over 1996's total loans of $230,647,000. Total
deposits were $289,053,000 at December 31, 1997 or a decrease of 2.1% from
1996's total deposits of $295,310,000. Total stockholders' equity at December
31, 1997 increased to $31,590,000 or 6.6% as compared to $29,640,000 in 1996.
NET INTEREST INCOME
Net interest income, which is 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
conditions 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 preference 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>
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Average interest-earning assets $305,080 $264,332 $226,992
</TABLE>
6
<PAGE> 8
<TABLE>
<S> <C> <C> <C>
Interest income 25,056 21,285 18,076
Average rate earned 8.21% 8.05% 7.96%
Average interest-bearing liabilities $268,035 $222,746 $186,211
Interest expense 11,228 9,304 7,409
Average rate paid 4.19% 4.18% 3.98%
Net interest income $ 13,828 $ 11,981 $ 10,667
Net interest yield
(net interest income divided
by average interest-earning assets) 4.53% 4.53% 4.70%
</TABLE>
Net interest income in 1997 increased $1,847,000 to $13,828,000 or 15.4%
above 1996's level of $11,981,000. This followed an increase of $1,314,000 in
1996 or 12.3% over 1995's net interest income of $10,667,000. The net interest
yield stood at 4.53%, 4.53%, and 4.70% in 1997, 1996, and 1995, respectively.
Management believes the Federal Reserve Open Market Committee could
initiate slight decreases in the federal funds target rate early in 1998 with a
renewed bias towards "tightening" (i.e., an inclination to raise rates) later in
the year. Such action would translate into lower loan and deposit rates through
mid-to-late 1998, with possible higher rates near year end. Additionally, local
market conditions will pressure net interest income in 1998 as Croghan strives
to more aggressively compete for deposits. Initial projections indicate there
will be little or no change in 1998 net interest income from the level attained
in 1997.
PROVISION FOR LOAN LOSSES AND THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
Croghan has adopted a loan policy which establishes procedures to manage
both credit risk and asset quality. In addition to detailing acceptable lending
guidelines, the policy stipulates the use of a loan review process which aids in
determining the amount of the provision for loan losses, facilitates the early
identification of problem loans, and ensures sound credit decisions. Monthly
provisions are made to maintain the balance in the allowance for possible loan
losses at a level considered by management to be adequate for potential losses
within the portfolio. The ultimate goal of Croghan's loan policy is to minimize
the uncertainties associated with the lending function.
In addition to the comprehensive lending guidelines and 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 charged-off loans,
existing local and national economic conditions, and changes within 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>
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Provision for loan losses charged
to expense $ 180 $ 160 $ 120
Net loan charge-offs (recoveries) 30 117 (137)
Net loan charge-offs (recoveries) as a
percent of average outstanding net loans .01% .06% (.09)%
Nonaccrual loans $ 212 $ 649 $ 845
Loans contractually past due 90 days or more 582 764 477
</TABLE>
7
<PAGE> 9
<TABLE>
<S> <C> <C> <C>
Restructured loans 0 471 0
Potential problem loans, other than those past due
90 days or more, nonaccrual, or restructured 1,992 1,738 841
Allowance for possible loan losses 3,518 3,368 2,614
Allowance for possible loan losses as a percent
of year-end loans 1.47% 1.46% 1.63%
</TABLE>
The provision for loan losses appearing in the 1997 Consolidated Statement
of Operations totalled $180,000. This provision compares to $160,000 expensed in
1996 and $120,000 expensed in 1995. Positive trends in the loan portfolio at
December 31, 1997 included a $437,000 decrease in nonaccrual loans, a $182,000
decrease in loans past due 90 days or more, and a $471,000 decrease in
restructured loans. The only negative trend was a $254,000 increase in other
potential problem loans to $1,992,000 at December 31, 1997. Loan portfolio
quality remains quite manageable and will be closely monitored throughout 1998
to ensure adequate provisions are calculated and expensed.
In accordance with the provisions of Financial Accounting Standards Board
Statement No. 114, "Accounting by Creditors for Impairment of a Loan", Croghan
must determine and then measure its investment in impaired loans. An impaired
loan is one which, based on the most current information available, appears
probable that the borrower will be unable to make payments according to the
contractual terms of the loan agreement. Impaired loans must be recorded 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, 1997 Croghan had a recorded investment in impaired loans of
$257,000 as compared to $700,000 at December 31, 1996.
NON-INTEREST INCOME
Non-interest income in 1997 increased $200,000 to $1,514,000 or 15.2% above
1996's total of $1,314,000. This followed an increase of $188,000 in 1996 or
16.7% more than 1995's total of $1,126,000. The following table details
non-interest income for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Trust income $ 324 $ 268 $ 242
Service charges on deposit accounts 720 637 539
Loss on sale of investment securities (27) (22) (50)
Gain on sale of student loan portfolio - - 109
Other operating income 497 431 286
------- ------- -------
Total non-interest income $ 1,514 $ 1,314 $ 1,126
======= ======= =======
</TABLE>
Trust income increased $56,000 or 20.9% in 1997 following an increase of
$26,000 or 10.7% in 1996. Service charges on deposit accounts increased $83,000
or 13.0% in 1997 following an increase of $98,000 or 18.2% in 1996.
Investment securities losses during 1997 totalled $27,000 as compared to
losses of $22,000 in 1996 and $50,000 in 1995. A substantial portion of the 1997
and 1996 losses, along with all of the 1995 losses, were realized upon the sale
of U.S. Treasury Notes with approximately one year remaining until their
maturities. Investments due in two years were purchased to replace those
securities that were sold. Significant portions of the reported securities
losses during all three years were offset by increased investment earnings on
the replacement securities purchased, with such earnings reported as a component
of total interest income.
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.
8
<PAGE> 10
Other operating income increased $66,000 or 15.3% in 1997 following an
increase of $145,000 or 50.7% in 1996. 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 $142,000 in fees during 1997 as compared to $113,000 in 1996 and
$31,000 in 1995. In addition to investment division fee income, significant
components of other operating income include 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 1997 increased by $1,852,000 to $10,446,000 or
21.5% above 1996's total of $8,594,000. This followed an increase of $1,634,000
in 1996 or 23.5% more than 1995's total of $6,960,000. The following table
details non-interest expenses for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Compensation $4,482 $3,895 $3,259
Benefits 1,053 1,007 750
------ ------ ------
Total personnel expense 5,535 4,902 4,009
Net occupancy expense 672 474 398
Equipment expense 749 604 439
Intangible amortization 638 266 -
State franchise and other taxes 352 477 385
Third party computer processing 304 150 86
Stationery and supplies 228 232 171
Postage 224 191 168
Advertising and marketing 210 204 164
Examination expense 149 133 94
Professional and consulting services 135 139 49
Telephone 125 95 97
Other 1,125 727 900
------ ------ ------
Total non-interest expenses $10,446 $8,594 $6,960
====== ====== ======
</TABLE>
Total personnel expense increased $633,000 or 12.9% in 1997 compared to an
increase of $893,000 or 22.3% in 1996. Net occupancy expense increased $198,000
in 1997 after increasing $76,000 in 1996. Equipment expense increased $145,000
or 24.0% in 1997 following an increase of $165,000 or 37.6% in 1996. Significant
portions of the 1997 and 1996 increases in equipment expense were attributable
to the purchase and maintenance of computer equipment used to deliver accurate
and efficient customer service.
Intangible amortization, primarily from goodwill associated with the
purchase of Union, totalled $638,000 in 1997 compared to $266,000 in 1996. As
previously noted, the goodwill created in the Union transaction is being
amortized over a 15 year period.
State franchise taxes, which are based on Croghan's capital structure, and
other taxes decreased $125,000 or 26.2% in 1997 following a $92,000 or 23.9%
increase in 1996. The 1997 reduction results primarily from a lower franchise
tax rate structure enacted by the Ohio legislature.
Third party computer processing fees increased $154,000 or 102.7% in 1997
compared to a $64,000 or 74.4% increase in 1996. The significant increases in
1997 and 1996 relate to outside processing associated with the offices acquired
in the Union transaction. In October 1997 all offices were converted to a common
in-house computer processing system. As a result of this conversion, outside
computer processing expenses are expected to decline significantly in 1998.
Stationary and supplies expense decreased slightly in 1997 following an
increase of $61,000 or 35.7% in 1996. Postage expense increased $33,000 or
9
<PAGE> 11
17.3% in 1997 after increasing $23,000 or 13.7% in 1996. Advertising and
marketing expenses increased only slightly in 1997 following an increase of
$40,000 or 24.4% in 1996. A portion of the 1996 advertising increase was the
result of promotional efforts in Bellevue, Clyde, and Monroeville to acquaint
existing and potential customers with Croghan's products and services.
Examination expense increased $16,000 or 12.0% in 1997 following a $39,000
or 41.5% increase in 1996. Professional and consulting services decreased
slightly in 1997 after increasing $90,000 or 183.7% in 1996. A significant
portion of the 1996 increase was the result of employee benefit plan consulting
fees pertaining to the termination of Croghan's defined benefit retirement plans
and the establishment of a 401(k) profit sharing plan which became effective on
January 1, 1997.
Other operating expenses increased $398,000 or 54.7% in 1997 after
decreasing $173,000 or 19.2% in 1996. Major expense categories included in other
operating expenses are Master Card processing and franchise fees, miscellaneous
employee expenses, fidelity and liability insurance, director and committee
fees, loan origination and collection expenses, dues and subscriptions, ATM
network fees, software amortization costs, correspondent bank service charges,
and charitable donations.
FEDERAL INCOME TAXES
Federal income tax expense totalled $1,609,000 in 1997, compared to
$1,486,000 in 1996 and $1,444,000 in 1995. The effective tax rate in 1997
increased to 34.1%, compared to 32.7% in 1996 and 30.6% in 1995. The 1997 and
1996 increases in tax expense and effective tax rate reflect the disallowance of
any tax deduction for goodwill amortization.
INVESTMENT SECURITIES
The investment portfolio is used to enhance net income, provide liquidity,
and diversify financial risk. Croghan currently classifies its 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 $54,713,000 at December 31, 1997, compared to $57,235,000 at December
31, 1996. Croghan also invests in debt obligations of domestic corporations and
political subdivisions, 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 $14,951,000 at December 31, 1997, compared to
$19,246,000 at December 31, 1996.
During 1997, Croghan received $7,011,000 in proceeds from the sale of U.S.
Treasury Notes and U.S. Government Agency obligations prior to their stated
maturities. This compares to 1996 proceeds of $15,307,000 derived from the sale
of similar securities. A majority of the 1997 and 1996 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 1997 year-end increased by $8,429,000 over year-end 1996. The
following table details total loans and the percent change by major category as
of December 31:
<TABLE>
<CAPTION>
Percent
1997 1996 Change
(Dollars in thousands)
<S> <C> <C> <C>
Commercial, financial and agricultural $ 32,739 $ 33,574 (2.5)%
Real estate - residential mortgage 106,195 103,389 2.7 %
Real estate - nonresidential mortgage 50,522 53,457 (5.5)%
Real estate - construction 3,478 1,239 180.7 %
</TABLE>
10
<PAGE> 12
<TABLE>
<S> <C> <C> <C>
Consumer 43,609 36,440 19.7 %
Credit card 2,533 2,548 (0.6)%
-------- --------
Total loans $239,076 $230,647 3.7%
======== ========
</TABLE>
As noted in the preceding table, gains were made in consumer, residential
real estate, and construction real estate loans. Decreases were noted in
commercial, financial, and agricultural loans and nonresidential real estate
loans. Total loan growth exceeded projections and was the result of a favorable
rate environment. Croghan anticipates slower loan growth in 1998, although the
rate environment could again influence the actual results.
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
1997 1996 Change
(Dollars in thousands)
<S> <C> <C> <C>
Demand, non-interest bearing $ 30,753 $ 31,575 (2.6)%
Savings, NOW and Money Market deposits 106,836 110,664 (3.5)%
Time deposits 151,464 153,071 (1.0)%
--------- ---------
Total deposits 289,053 295,310 (2.1)%
Federal funds purchased 8,663 6,039 43.5 %
Borrowed funds 3,200 6,563 (51.2)%
--------- ---------
Total deposits and other
interest-bearing liabilities $300,916 $307,912 (2.3)%
========= =========
</TABLE>
As noted above, all deposit categories experienced slight declines in 1997.
This was the result of a rate environment which caused depositors to seek higher
yields in the equity and mutual fund markets (with a variety of more complex
risks). The largest decline occurred in the savings, NOW and Money Market
deposit category. Croghan intends to more aggressively price and promote its
money market product during 1998 to stabilize its deposit base.
Other interest-bearing liabilities at 1997 year-end decreased by $739,000
from 1996. A $3,363,000 decrease in borrowed funds was partially offset by a
$2,624,000 increase in federal funds purchased. Borrowed funds at December 31,
1997 are comprised of $1,000,000 from the Federal Home Loan Bank of Cincinnati
and $2,200,000 from NBD Bank.
The proceeds from the Federal Home Loan Bank loan were obtained in 1994 and
used to assist in managing interest rate sensitivity associated with Croghan's
fixed rate real estate loan portfolio. The proceeds from the NBD Bank loan were
obtained in 1996 to assist in funding the purchase of Union.
CAPITAL
Croghan's stockholders' equity position at December 31 is summarized in the
following table:
<TABLE>
<CAPTION>
1997 1996
(Dollars in thousands)
<S> <C> <C>
Common stock $ 7,932 $ 7,932
Surplus 8,989 8,989
Retained earnings 14,587 12,622
Net unrealized gain on investment
securities available-for-sale 82 97
-------- --------
Total stockholders' equity $31,590 $29,640
======== ========
</TABLE>
11
<PAGE> 13
As noted in the table, the net unrealized holding gain on investment
securities classified as available-for-sale is reported as a component of
stockholders' equity. At year-end 1997, Croghan held $34,197,000 in
available-for-sale securities with a net unrealized holding gain of $82,000.
This compares to 1996 year-end holdings of $39,798,000 with a net unrealized
holding gain of $97,000.
Croghan's capital structure is subject to capital standards established by
the Federal Reserve Board. To be considered "well capitalized" 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, 1997, Croghan was
considered "well capitalized" with a Tier I risk-based capital ratio of 10.6%
and a total risk-based capital ratio of 11.9%.
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 which total $13,000,000 at
December 31, 1997.
Croghan maintains a portion of its assets in liquid form to meet anticipated
customer loan demands and fund possible deposit account withdrawals. At December
31, 1997, liquid assets in the form of cash and due from banks totalled
$9,735,000 or 2.9% of total 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 Corporation, 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
Corporation by the Bank for such purposes totalled $3,102,000 in 1997,
$1,667,000 in 1996, and $987,000 in 1995. 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
$2,200,000 at December 31, 1997 with a scheduled maturity in 1999. Management is
confident that Croghan's liquidity will be sufficient to fund its daily
operating needs, make required debt service payments, and provide for future
dividend payments.
INTEREST RATE RISK
Interest rate risk is one of Croghan's most significant financial exposures.
This risk, which is common to the financial institution sector, is an integral
part of Croghan's operations and impacts the rate pricing strategy for almost
all loan and deposit product offerings.
In an effort to identify and quantify its interest rate risk, Croghan uses a
model that divides interest-earning assets and interest-bearing liabilities into
repricing categories. Their relationship at December 31, 1997 is noted in the
following table:
<TABLE>
<CAPTION>
1 year
Less than through Over
1 year 5 years 5 years
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Investment securities $ 20,583 $ 39,242 $ 7,796
Loans 98,070 69,706 71,088
--------- -------- -------
Total earning assets 118,653 108,948 78,884
Interest-bearing liabilities:
Savings, NOW and Money Market deposits 106,836 - -
Time deposits 112,345 38,563 556
Federal funds purchased 8,663 - -
Borrowed funds 2,200 1,000 -
--------- -------- -------
</TABLE>
12
<PAGE> 14
<TABLE>
<S> <C> <C> <C>
Total interest-bearing liabilities 230,044 39,563 556
Interest sensitivity GAP (111,391) 69,385 78,328
--------- -------- -------
Cumulative GAP $(111,391) $(42,006) $36,322
========= ======== =======
Cumulative earning assets/cumulative
interest-bearing liabilities 51.6% 84.4% 113.4%
==== ==== =====
</TABLE>
A calculated amount, or "GAP", is measured between the repricing assets and
repricing liabilities within each category. This rate sensitivity GAP provides
the framework to measure interest rate risk or the potential exposure to net
interest income that could result from changes in market interest rates.
Croghan strives to manage its interest rate risk by emphasizing the products
and terms of interest-earning assets and interest-bearing liabilities which
produce satisfactory earnings while limiting the potential negative effects of
changes in market interest rates. Since Croghan's primary source of revenue is
derived from its loan portfolio, a significant portion of the loans are made on
an adjustable rate basis to reduce the exposure to interest rate risk. Deposit
products, which are Croghan's principal interest-bearing liabilities, are more
troublesome to manage since customer preferences for product types and terms are
difficult to influence.
Croghan's potential exposure is typically measured based upon sudden and
sustained market rate increases and decreases of 1% and 2%. The following table
presents Croghan's projected changes in net interest income for the indicated
rate shock levels at December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
Net Interest Income
Change in Amount Percent Change
<S> <C> <C>
+ 200 basis points (+ 2%) $(1,706) (12.3)%
+ 100 basis points (+ 1%) (853) (6.2)
- 100 basis points (- 1%) 853 6.2
- 200 basis points (- 2%) 1,706 12.3
</TABLE>
As indicated in the table, the impact of an immediate 200 basis point
increase in rates would theoretically decrease net interest income by
$1,706,000. Conversely, a 200 basis point decrease in rates would theoretically
increase net interest income by $1,706,000. The preceding analysis cannot be
relied upon as indicative of the actual future impact of general interest rate
movements on Croghan's net interest income since the computations are based upon
hypothetical interest rate changes and various assumptions. The oversight of
interest rate risk is the responsibility of a committee established by Croghan's
asset/liability management policy. The policy provides a framework to quantify
and monitor the risk, to provide for liquidity needs, and to maximize net income
by effectively managing net interest yield.
YEAR 2000
There is a growing concern over the ability of many computer software
programs to function when the year 2000 arrives. Computer operations are a
crucial part of Croghan's operating strategy and management has implemented a
plan to verify that all internal software will operate properly. During 1997,
new mainframe computer hardware and software was installed and all such
equipment was certified by the vendors as year 2000 compliant. Croghan still
intends to execute a comprehensive test of its processing capabilities to ensure
readiness. Additional costs associated with the impact of the year 2000 issue,
beyond the 1997 purchase of mainframe hardware and software, should not exceed
$50,000 over the next two years.
Additionally, Croghan has a vested interest in the computer processing
requirements of its vendors and customers. Primary suppliers are being
contacted to ensure their preparedness. From a customer standpoint, the
13
<PAGE> 15
problem could affect our borrowers' ability to service debts if their direct
operations, vendors, or customers are impacted. To raise our customers' level of
awareness, Croghan recently sponsored a year 2000 seminar for many local
businesses. As we progress towards the deadline, Croghan will continue its
efforts to advise our customers concerning the potential dangers that the year
2000 could pose to their survival.
14
<PAGE> 16
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 its subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. 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.
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 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ CLIFTON GUNDERSON LTD.
Toledo, Ohio
January 13, 1998
Members of
NEXIA
International
American Institute
of Certified Public
Accountants
15
<PAGE> 17
CROGHAN BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
ASSETS 1997 1996
(Dollars in thousands, except par value)
<S> <C> <C>
CASH AND CASH EQUIVALENTS
Cash and due from banks $ 9,735 $ 11,543
Interest-bearing deposits in other banks - 1
Federal funds sold - 4,550
-------- --------
Total cash and cash equivalents 9,735 16,094
-------- --------
INVESTMENT SECURITIES
Available-for-sale, at market value 34,197 39,798
Held-to-maturity, at amortized cost, market value of
$35,588 in 1997 and $36,716 in 1996 35,467 36,683
-------- --------
Total investment securities 69,664 76,481
-------- --------
LOANS 239,076 230,647
Less: Allowance for possible loan losses 3,518 3,368
-------- --------
Net loans 235,558 227,279
-------- --------
BANK PREMISES AND EQUIPMENT, NET 8,119 7,769
ACCRUED INTEREST RECEIVABLE 2,613 2,580
OTHER REAL ESTATE OWNED 140 16
GOODWILL AND OTHER INTANGIBLE ASSET 8,672 9,310
OTHER ASSETS 539 639
-------- --------
TOTAL ASSETS $335,040 $340,168
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand, non-interest bearing $ 30,753 $ 31,575
Savings, NOW and Money Market deposits 106,836 110,664
Time 151,464 153,071
-------- --------
Total deposits 289,053 295,310
Federal funds purchased and securities sold under repurchase agreements 8,663 6,039
Borrowed funds 3,200 6,563
Dividends payable 285 285
Accrued interest, taxes and other expenses 2,249 2,331
-------- --------
Total liabilities 303,450 310,528
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $12.50 par value. Authorized 3,000,000 shares;
issued and outstanding 634,526 shares 7,932 7,932
Surplus 8,989 8,989
Retained earnings 14,587 12,622
Net unrealized holding gain on investment securities available-for-sale,
net of related income taxes 82 97
-------- --------
Total stockholders' equity 31,590 29,640
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $335,040 $340,168
======== ========
</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 OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 20,440 $ 16,700 $ 13,860
Interest and dividends on investment securities:
U.S. Treasury securities 1,752 2,150 2,141
Obligations of U.S. Government agencies and corporations 1,772 1,395 1,034
Obligations of states and political subdivisions 636 576 511
Other securities 211 298 351
Interest on federal funds sold 245 166 179
-------- -------- --------
Total interest income 25,056 21,285 18,076
-------- -------- --------
INTEREST EXPENSE
Interest on deposits 10,753 8,897 7,168
Interest on other borrowings 475 407 241
-------- -------- --------
Total interest expense 11,228 9,304 7,409
-------- -------- --------
Net interest income 13,828 11,981 10,667
PROVISION FOR LOAN LOSSES 180 160 120
-------- -------- --------
Net interest income after provision for loan losses 13,648 11,821 10,547
-------- -------- --------
NON-INTEREST INCOME
Trust income 324 268 242
Service charges on deposit accounts 720 637 539
Loss on sale of investment securities (27) (22) (50)
Gain on sale of student loan portfolio - - 109
Other operating income 497 431 286
-------- -------- --------
Total non-interest income 1,514 1,314 1,126
-------- -------- --------
NON-INTEREST EXPENSES
Salaries, wages and employee benefits 5,535 4,902 4,009
Net occupancy expense of bank premises 672 474 398
Amortization of goodwill and other intangible asset 638 266 -
Other operating expenses 3,601 2,952 2,553
-------- -------- --------
Total non-interest expenses 10,446 8,594 6,960
-------- -------- --------
Income before federal income taxes 4,716 4,541 4,713
FEDERAL INCOME TAXES 1,609 1,486 1,444
-------- -------- --------
NET INCOME $ 3,107 $ 3,055 $ 3,269
======== ======== ========
NET INCOME PER SHARE, based on 634,526 shares $ 4.90 $ 4.81 $ 5.15
======== ======== ========
</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.
17
<PAGE> 19
CROGHAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31, 1997, 1996 and 1995
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, 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
Net income for 1997 - - - 3,107 -
Change in net unrealized holding gain (loss) for 1997,
net of related income taxes - - - - (15)
Cash dividends declared, $1.80 per share - - - (1,142) -
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1997 634,526 $ 7,932 $ 8,989 $ 14,587 $ 82
======== ======== ======== ======== ========
</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.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,107 $ 3,055 $ 3,269
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,100 740 342
Provision for loan losses 180 160 120
Deferred federal income taxes (48) 54 14
FHLB stock dividends (88) (68) (88)
Net amortization of investment security premiums and discounts 66 89 130
Loss on sale of investment securities 27 22 50
Gain on sale of student loan portfolio - - (109)
Loss (gain) on sale of equipment 114 9 (1)
Decrease (increase) in accrued interest receivable (33) 543 (40)
Decrease (increase) in other assets 115 333 (219)
Increase (decrease) in accrued interest, taxes and other expenses (26) 190 394
-------- -------- --------
Net cash provided by operating activities 4,514 5,127 3,862
-------- -------- --------
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 (17,522) (12,997) (13,982)
Held-to-maturity (14,947) (5,020) (18,177)
Proceeds from maturities of investment securities 32,314 29,096 25,313
Proceeds from sales of available-for-sale investment securities 7,011 15,307 6,938
Proceeds from sale of loans - 487 3,903
Net increase in loans (8,599) (9,806) (8,766)
Capital expenditures (1,145) (309) (291)
Proceeds from sale of equipment 12 11 2
-------- -------- --------
Net cash provided by (used in) investing activities (2,876) 2,682 (5,060)
-------- -------- --------
</TABLE>
19
<PAGE> 21
CROGHAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in total deposits $ (6,116) $ (2,982) $ 2,086
Increase (decrease) in federal funds purchased and securities sold
under repurchase agreements 2,623 527 (125)
Proceeds from (repayments of) borrowed funds (3,362) 4,063 -
Cash dividends paid (1,142) (1,142) (987)
-------- -------- --------
Net cash provided by (used in) financing activities (7,997) 466 974
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,359) 8,275 (224)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 16,094 7,819 8,043
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9,735 $ 16,094 $ 7,819
======== ======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest $ 11,434 $ 9,312 $ 7,215
======== ======== ========
Federal income taxes $ 1,810 $ 1,400 $ 1,474
======== ======== ========
Non-cash operating activities:
Change in deferred income taxes on net unrealized holding gain (loss)
on available-for-sale securities $ (8) $ (88) $ 283
======== ======== ========
Non-cash investing activities:
Transfer of loans to other real estate $ 140 $ 79 $ -
======== ======== ========
Change in net unrealized holding gain (loss) on available-for-sale securities $ (23) $ (259) $ 834
======== ======== ========
</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.
20
<PAGE> 22
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 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, 1997 and 1996 approximated $2,460,000 and
$1,750,000, 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
The Bank's investment securities are designated at the time of purchase as
held-to-maturity, trading, or available-for-sale. Securities designated as
held-to-maturity are carried at their amortized cost. Trading 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,
21
<PAGE> 23
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization and accretion is included in interest
and dividends on investment 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.
The Bank does not hold any derivative financial instruments. 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 of
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.
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.
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
22
<PAGE> 24
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
(typically 20 to 40 years for buildings and 3 to 10 years for equipment) and is
computed using both accelerated and straight-line methods.
INTANGIBLE ASSETS
Goodwill
Goodwill arising from the 1996 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 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
Net income per share is computed based on the weighted average number of
shares of common stock outstanding during each year. Under Financial
Accounting Standards Board's Statement No. 128 "Earnings Per Share", which was
effective in 1997, this computation is referred to as "basic earnings per
share". The adoption of Statement No. 128 in 1997 had no impact on the
23
<PAGE> 25
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
previously reported net income per share for 1996 and 1995.
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.
24
<PAGE> 26
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 consolidated results of the
Corporation from August 1, 1996.
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
At December 31, 1997, a net unrealized holding gain of $82,000, net of federal
income taxes of $42,000, was reported with respect to reporting
available-for-sale investment securities at market value. At December 31, 1996,
such accounting resulted in a net unrealized holding gain of $97,000, net of
federal income taxes of $50,000. Such amounts are reported as a component of
stockholders' equity.
The amortized cost and market value of investment securities as of December 31,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
Amortized Market Amortized Market
cost value cost value
(Dollars in thousands)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities $28,459 $28,551 $31,436 $31,548
Obligations of U.S. Government agencies and corporations 5,108 5,136 7,711 7,740
Obligations of states and political subdivisions 505 510 504 510
------- ------- ------- -------
Total available-for-sale 34,072 34,197 39,651 39,798
------- ------- ------- -------
Held-to-maturity:
U.S. Treasury securities - - 1,000 1,004
Obligations of U.S. Government agencies and corporations 21,026 21,040 16,947 16,902
Obligations of states and political subdivisions 11,797 11,905 15,186 15,248
Other securities 2,644 2,643 3,550 3,562
------- ------- ------- -------
Total held-to-maturity 35,467 35,588 36,683 36,716
------- ------- ------- -------
Total $69,539 $69,785 $76,334 $76,514
======= ======= ======= =======
</TABLE>
25
<PAGE> 27
NOTE 2 - INVESTMENT SECURITIES (CONTINUED)
A summary of unrealized gains and losses on investment securities at December
31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
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 $101 $ 9 $154 $ 42
Obligations of U.S. Government agencies and corporations 53 25 106 77
Obligations of states and political subdivisions 5 - 6 -
---- ---- ---- ----
Total available-for-sale 159 34 266 119
---- ---- ---- ----
Held-to-maturity:
U.S. Treasury securities - - 4 -
Obligations of U.S. Government agencies and corporations 43 29 23 68
Obligations of states and political subdivisions 108 - 87 25
Other securities - 1 13 1
---- ---- ---- ----
Total held-to-maturity 151 30 127 94
---- ---- ---- ----
Total $310 $ 64 $393 $213
==== ==== ==== ====
</TABLE>
The amortized cost and market value of investment securities at December 31,
1997, by contractual maturity, are shown below. Actual maturities may 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 $10,852 $10,906 $ 9,014 $ 9,015
Due after one year through five years 17,981 18,046 20,411 20,494
Due after five years through ten years 2,317 2,292 3,417 3,451
Over ten years 2,922 2,953 582 585
Other securities having no maturity date - - 2,043 2,043
------- ------- ------- -------
Total $34,072 $34,197 $35,467 $35,588
======= ======= ======= =======
</TABLE>
Investment securities with an amortized cost of $43,394,000 at December 31, 1997
and $41,476,000 at December 31, 1996 were pledged to secure public deposits and
for other purposes as required or permitted by law.
Proceeds from sales of investment securities during 1997, 1996 and 1995 all
related to available-for-sale securities. Proceeds from such sales during 1997
amounted to $7,011,000, resulting in gross realized gains and losses of $8,000
and $35,000 respectively. Proceeds from such sales during 1996 amounted to
$15,307,000, resulting in gross realized gains and losses of $49,000 and
$71,000, respectively. Proceeds from such sales during 1995 amounted to
$6,938,000, resulting in gross realized gains and losses of $6,000 and $56,000,
respectively.
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 $1,278,000 and
$1,190,000 at December 31, 1997 and 1996, respectively. The investment in
Federal Reserve Bank of Cleveland stock amounted to $697,000 at December 31,
1997 and 1996.
NOTE 3 - LOANS
Loans at December 31, 1997 and 1996 consist of the following:
26
<PAGE> 28
NOTE 3 - LOANS (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
(Dollars in thousands)
<S> <C> <C>
Commercial, financial and agricultural $ 32,739 $ 33,574
Real estate - residential mortgage 106,195 103,389
Real estate - non-residential mortgage 50,522 53,457
Real estate - construction 3,478 1,239
Consumer 43,609 36,440
Credit card 2,533 2,548
-------- --------
Total $239,076 $230,647
======== ========
</TABLE>
Fixed rate loans totalled $121,088,000 at December 31, 1997 and $101,726,000 at
December 31, 1996.
The Bank's investment in impaired loans totalled $257,000 at December 31, 1997
and $700,000 at December 31, 1996, including $71,000 and $149,000, respectively,
of such loans for which an allowance for possible loan losses has been provided
and $186,000 and $551,000, 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, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of year $ 75 $ 76
Reduction for loan pay-downs (4) (1)
---- ----
Balance at end of year $ 71 $ 75
==== ====
</TABLE>
The average recorded investment in impaired loans for the years ended December
31, 1997 and 1996 totalled $521,000 and $932,000, 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, 1997 and 1996 amounted to
$90,000 and $98,000, respectively, including $46,000 and $92,000, respectively,
which was recognized on a cash basis.
The amount of loans on a nonaccrual of interest basis at December 31, 1997 and
1996 totalled $212,000 and $649,000, 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, 1997 or 1996 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 $8,020,000 and $8,451,000 at December 31, 1997 and 1996,
respectively. The following is a summary of activity during 1997 and 1996 for
such loans:
<TABLE>
<CAPTION>
Balance at Balance
beginning Additions Repayments at end
(Dollars in thousands)
<S> <C> <C> <C> <C>
1997 $8,451 $10,421 $10,852 $8,020
====== ======= ======= ======
1996 $7,345 $ 9,862 $ 8,756 $8,451
====== ======= ======= ======
</TABLE>
During 1995, the Bank sold its student loan portfolio aggregating $3,794,000,
resulting in a gain from sale of $109,000.
27
<PAGE> 29
NOTE 3 - LOANS (CONTINUED)
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 sheets, amounted to $489,000 and $493,000 at December 31,
1997 and 1996, respectively. The asset relating to mortgaging servicing rights,
net of amortization, amounted to $7,000 at December 31, 1997 and 1996. There
were no loans available for sale at December 31, 1997 or 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, 1997 and 1996, the Bank's loans from borrowers
in the agriculture industry represent the single largest industry and amounted
to $11,262,000 and $11,146,000, 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, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 3,368 $ 2,614 $ 2,357
Provision charged to operations 180 160 120
Addition resulting from acquisition of Union - 711 -
Loans charged-off (287) (428) (138)
Recoveries of loans charged-off 257 311 275
------- ------- -------
Balance at end of year $ 3,518 $ 3,368 $ 2,614
======= ======= =======
</TABLE>
NOTE 5 - BANK PREMISES AND EQUIPMENT
The following is a summary of bank premises and equipment at December 31, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
(Dollars in thousands)
<S> <C> <C>
Land and improvements $ 1,028 $ 1,028
Buildings 7,946 7,963
Equipment 3,418 3,207
------- -------
12,392 12,198
Accumulated depreciation 4,273 4,429
------- -------
Bank premises and equipment, net $ 8,119 $ 7,769
======= =======
</TABLE>
Depreciation expense amounted to $669,000 in 1997, $474,000 in 1996 and $342,000
in 1995.
NOTE 6 - DEPOSITS
Time deposits at December 31, 1997 and 1996 include individual deposits of
$100,000 and over which amounted to $26,923,000 and $28,027,000, respectively.
Interest expense on time deposits of $100,000 or more amounted to $1,590,000 for
1997, $1,112,000 for 1996 and $501,000 for 1995.
28
<PAGE> 30
NOTE 6 - DEPOSITS (CONTINUED)
At December 31, 1997, the scheduled maturities of time deposits were as follows
(dollars in thousands):
<TABLE>
<S> <C>
1998 $ 95,127
1999 36,631
2000 12,646
2001 5,324
2002 1,180
2003 and after 556
--------
Total $151,464
========
</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 $8,663,000 at December 31, 1997 and $6,039,000 at December 31, 1996.
Additional information concerning federal funds purchased and securities sold
under repurchase agreements is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
(Dollars in thousands)
<S> <C> <C>
Average balance during the year $3,515 $2,206
Average interest rate during the year 3.88% 4.17%
Maximum month-end balance during the year $8,663 $6,039
====== ======
</TABLE>
At December 31, 1997 and 1996, borrowed funds consisted of the following:
<TABLE>
<CAPTION>
1997 1996
(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
------ ------
1,000 2,500
------ ------
NBD Bank:
Term secured note, with interest at a variable rate (8.00% in 1997 and 7.75% in 1996) 2,200 3,413
Revolving secured note, with interest at a 7.75% variable rate - 650
------ ------
2,200 4,063
------ ------
Total borrowed funds $3,200 $6 563
====== ======
</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 $1,278,000 at December 31, 1997 and $1,190,000 at December
31, 1996, 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 required 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.
NOTE 8 - COMMON STOCK
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.
29
<PAGE> 31
NOTE 8 - COMMON STOCK (CONTINUED)
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, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
FDIC insurance $ 36 $ 3 $ 237
Equipment 749 604 439
State franchise and other taxes 352 477 385
Stationery and supplies 228 232 171
Postage 224 191 168
Other 2,012 1,445 1,153
------ ------ ------
Total other operating expenses $3,601 $2,952 $2,553
====== ====== ======
</TABLE>
The reduction in the FDIC insurance expense in 1997 and 1996 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 for 1997, 1996 and 1995 was allocated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Income from operations $ 1,609 $ 1,486 $ 1,444
Stockholders' equity (8) (88) 283
------- ------- -------
Total $ 1,601 $ 1,398 $ 1,727
======= ======= =======
</TABLE>
Federal income tax expense allocated to operations consisted of the following
for 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Current expense $1,657 $1,432 $1,430
Deferred expense (credit) (48) 54 14
------- ------- -------
Total $1,609 $1,486 $1,444
======= ======= =======
</TABLE>
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>
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Expected tax using statutory tax rate of 34% $ 1,604 $ 1,544 $ 1,602
Increase (decrease) in tax resulting from:
Tax-exempt income on state and municipal securities and
political subdivision loans (250) (217) (187)
Interest expense associated with carrying certain state and
municipal securities and political subdivision loans 37 32 26
Amortization of goodwill 217 90 -
Other, net 1 37 3
------- ------- -------
Total $ 1,609 $ 1,486 $ 1,444
======= ======= =======
</TABLE>
30
<PAGE> 32
NOTE 10 - FEDERAL INCOME TAXES (CONTINUED)
The deferred federal income tax expense (credit) of ($48,000) for 1997, $54,000
for 1996 and $14,000 for 1995 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, 1997 and
1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
(Dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan losses $ 705 $ 717
Accrued health insurance claims 53 15
Accrued vacation pay 92 88
Other 35 17
------- -------
Total deferred tax assets 885 837
------- -------
Deferred tax liabilities:
Unrealized holding gain on securities available-for-sale (42) (50)
Depreciation of bank premises and equipment (196) (183)
Discount accretion on investment securities (29) (52)
Pension costs - (71)
Deferred loan costs (143) (114)
Purchase accounting basis difference (579) (556)
Other (142) (113)
------- -------
Total deferred tax liabilities (1,131) (1,139)
------- -------
Net deferred tax liabilities $ (246) $ (302)
======= =======
</TABLE>
The net deferred tax liabilities at December 31, 1997 and 1996 are included in
accrued interest, taxes and other expenses 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, 1997 and 1996.
NOTE 11 - RETIREMENT PLANS
In September, 1996, the Board of Directors of the Bank authorized the
termination of its two retirement plans (Croghan Plan and Union Plan). 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
recorded in 1996 and 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 occurred in 1997 and resulted in a pretax gain of
$37,000.
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. This plan includes both a profit sharing and
employer matching contribution. The Bank's profit sharing and matching
contributions to the 401(k) profit sharing plan totalled $272,000 for the year
ended December 31, 1997.
Pension expense relating to the two terminated plans amounted to $225,000 in
1996 and $134,000 in 1995. 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:
31
<PAGE> 33
NOTE 11 - RETIREMENT PLANS (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
(Dollars in thousands)
<S> <C> <C>
Service cost - benefits earned during the period $ 208 $ 164
Interest cost on the projected benefit obligation 250 166
Actual return on plan assets (271) (329)
Net curtailment loss 53 -
Net amortization and deferral (15) 133
----- -----
Total $ 225 $ 134
===== =====
</TABLE>
The funded status of the terminated retirement plans and amount recognized in
the December 31, 1996 consolidated balance sheet is as follows (dollars in
thousands):
<TABLE>
<S> <C>
Actuarial present value of projected benefit obligation, all vested $ (4,321)
Plan assets, at fair value (primarily corporate and government bonds and common stocks)
4,529
---------
Prepaid pension cost, included in other assets at December 31, 1996 $ 208
=========
Major assumptions used:
Discount rate 7.50%
Rate of increase in compensation levels 4.00%
Expected long-term rate of return on plan assets 7.50%
</TABLE>
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, 1997 and 1996:
<TABLE>
<CAPTION>
Contract amount
1997 1996
(Dollars in thousands)
<S> <C> <C>
Commitments to extend credit $47,766 $50,933
======= =======
Letters of credit $ 1,319 $ 1,580
======= =======
</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.
32
<PAGE> 34
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
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, 1997, letters of credit totalling
$1,274,000 expire in 1998 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, 1997 and 1996 approximates 100% of the commitments.
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, 1997 and
1996, that the Corporation and Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1997, the most recent notification from federal and state
banking agencies categorized the Bank as "well capitalized" under the regulatory
framework for prompt corrective action. To be categorized as "well capitalized",
the 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, 1997:
Total Capital (to Risk-Weighted Assets)
Consolidated $25,548 11.9% $17,244 *= 8.0% N/A
Bank 27,680 12.8% 17,244 *= 8.0% $21,555 *= 10.0%
Tier I Capital (to Risk-Weighted Assets)
Consolidated $22,843 10.6% $ 8,622 *= 4.0% N/A
Bank 24,975 11.6% 8,622 *= 4.0% $12,933 *= 6.0%
Tier I Capital (to Average Assets)
Consolidated $22,843 7.0% $ 9,817 *= 3.0% N/A
Bank 24,975 7.7% 12,970 *= 4.0% $16,212 *=5.0%
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets)
Consolidated $22,937 10.7% $17,207 *= 8.0% N/A
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 *= 4.0% N/A
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 *= 3.0% N/A
Bank 24,159 7.3% 13,218 *= 4.0% $16,522 *= 5.0%
</TABLE>
* Greater than
33
<PAGE> 35
NOTE 13 - REGULATORY MATTERS (CONTINUED)
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, approximately
$1,694,000 was available for dividends on January 1, 1998, 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.
NOTE 14 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
A summary of condensed financial information of the parent company as of
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
BALANCE SHEETS 1997 1996
(Dollars in thousands)
<S> <C> <C>
Assets:
Cash $ 9 $ 97
Dividends receivable from subsidiary 285 285
Investment in subsidiary 33,722 33,560
Other assets 89 99
------- -------
Total assets $34,105 $34,041
======= =======
Liabilities:
Borrowed funds $ 2,200 $ 4,063
Dividends payable 285 285
Accrued interest payable 30 53
------- -------
Total liabilities 2,515 4,401
------- -------
Stockholders' equity:
Common stock 7,932 7,932
Surplus 8,989 8,989
Retained earnings 14,587 12,622
Net unrealized holding gain on investment securities available-for-sale,
net of related income taxes 82 97
------- -------
Total stockholders' equity 31,590 29,640
------- -------
Total liabilities and stockholders' equity $34,105 $34,041
======= =======
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS 1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Income - dividends from subsidiary $ 3,102 $ 17,297 $ 1,050
Expenses - professional fees and other expenses,
net of federal income tax benefit 172 128 9
-------- -------- --------
Income before equity in undistributed net income of subsidiary 2,930 17,169 1,041
Equity in net income of subsidiary, less dividends 177 (14,114) 2,228
-------- -------- --------
Net income $ 3,107 $ 3,055 $ 3,269
======== ======== ========
</TABLE>
34
<PAGE> 36
NOTE 14 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
Dividends from subsidiary for 1996 include a $15,630,000 special dividend in
connection with the purchase of Union Bancshares Corp.
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS 1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,107 $ 3,055 $ 3,269
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in net income of subsidiary, less dividends (177) 14,114 (2,228)
Increase in dividends receivable - - (64)
Decrease (increase) in other assets 10 (59) 1
Increase (decrease) in accrued interest payable (23) 53 -
-------- -------- --------
Net cash provided by operating activities 2,917 17,163 978
-------- -------- --------
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 -
Repayment of borrowed funds (1,863) - -
Cash dividends paid (1,142) (1,142) (987)
-------- -------- --------
Net cash provided by (used in) financing activities (3,005) 2,921 (987)
-------- -------- --------
Net decrease in cash (88) (1) (9)
Cash at beginning of the year 97 98 107
-------- -------- --------
Cash at end of the year $ 9 $ 97 $ 98
======== ======== ========
</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,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
Carrying Estimated Carrying Estimated
amount value amount value
(Dollars in thousands)
FINANCIAL ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 9,735 $ 9,735 $ 16,094 $ 16,094
Investment securities 69,664 69,785 76,481 76,514
Loans, net 235,558 240,078 227,279 228,716
-------- -------- -------- --------
Total $314,957 $319,598 $319,854 $321,324
======== ======== ======== ========
FINANCIAL LIABILITIES
Deposits $289,053 $289,641 $295,310 $295,708
Federal funds purchased and securities sold
under repurchase agreements 8,663 8,663 6 039 6,039
Borrowed funds 3,200 3,200 6,563 6,563
-------- -------- -------- --------
Total $300,916 $301,504 $307,912 $308,310
======== ======== ======== ========
</TABLE>
35
<PAGE> 37
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, 1997 and
1996. These financial instruments relate to commitments to extend credit and
letters of credit. The contract amount of such financial instruments total
$49,085,000 at December 31, 1997 and $52,513,000 at December 31, 1996. 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
36
<PAGE> 38
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 issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" in June 1997.
Statement 130 establishes standards for reporting and display of comprehensive
income (as defined) in a full set of general-purpose financial statements.
Statement 130 will require classification of items of other comprehensive income
by their nature in a financial statement and display of the accumulated balance
of other comprehensive income separately from retained earnings and surplus in
the equity section of the balance sheet. Statement 130 is effective for fiscal
years beginning after December 15, 1997 and requires reclassification of
financial statements for earlier periods provided for comparative purposes.
Management does not believe the application of Statement 130 will materially
affect the Corporation's consolidated financial statements.
This information is an integral part of the accompanying
consolidated financial statements.
37
<PAGE> 39
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
38
<PAGE> 40
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.
J. TERRENCE WOLFE
STEPHEN A. KEMPER Vice President, Robert F. Wolfe Co.
Owner, Kemper Iron & Metal Company
CLAUDE E. YOUNG
DANIEL W. LEASE Chairman, Progress Plastic
President, Wahl Refractories, Inc. Products, Inc.
ROBERT H. MOYER GARY L. ZIMMERMAN
Chairman, Mosser Construction, Inc. Vice President, Swint-Reineck
Hardware, Inc.
Directors Emeriti
T. L. HILTY D.W. MILLER 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
OIC Commercial Loans OIC Consumer Loans
JAMES A. DRAEGER JACQUELINE L. LILLY
Vice President/OIC R.E. Loans Assistant Vice President
Agricultural Administrator Consumer Loans
JAMES R. WALTERS JEFF D. WILSON
Vice President Real Estate Loans Loan Officer
JEFFREY L. GEARY MICHAEL S. WISE
Assistant Vice President Loan Officer
Commercial Loans
GREGG C. COLEMAN
JEFFERY C. HUBER Loan Officer
Assistant Vice President
Commercial Loans COMPLIANCE AND SECURITY
SANDRA S. REED
NANCY C. RODDY Compliance/Security Officer
Loan Officer
39
<PAGE> 41
OFFICERS----------------------------------------------------------------------
TRUST DEPARTMENT HUMAN RESOURCE
BARRY F. LUSE PAMELA J. SWINT
Vice President/Trust Officer Human Resource Manager
RICHARD G. STEIN ACCOUNTING
Assistant Vice President/ ALLAN E. MEHLOW
Trust Officer Vice President
Chief Financial Officer
NORMA J. COZETTE
Trust Operations Officer LAWRENCE R. FULK
Vice President/Controller
AUDIT
JOHN C. HOFFMAN BALLVILLE OFFICE
Auditor JAMI L. SEVERS
Branch Manager
MARK A. LOHRBACH
Loan Review Officer GREEN SPRINGS OFFICE
THEODORE J. RUTHERFORD
OPERATIONS Branch Manager/
MICHAEL J. HARTENSTEIN Agricultural Representative
Operations Officer
MARILYN J. HUMBERT
DEPOSIT ADMINISTRATION Assistant Cashier/
ROBERT L. OVERMYER Assistant Branch Manager
Assistant Vice President
Deposit Administrator BELLEVUE OFFICES
DEE A. BLACKBURN
WEST SIDE OFFICE Branch Manager
JOSEPHINE L. WEYER
Branch Manager CLYDE OFFICE
RICHARD E. LAWRIE
EAST SIDE OFFICE Branch Manager
RONALD T. GOEHRING
Branch Manager MONROEVILLE OFFICE
DAVID M. SABO
COLEEN O. MILLER Branch Manager
Assistant Cashier/
Assistant Branch Manager
40
<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 FINANCIAL 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,735
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,197
<INVESTMENTS-CARRYING> 35,467
<INVESTMENTS-MARKET> 35,588
<LOANS> 239,076
<ALLOWANCE> 3,518
<TOTAL-ASSETS> 335,040
<DEPOSITS> 289,053
<SHORT-TERM> 8,663
<LIABILITIES-OTHER> 2,534
<LONG-TERM> 3,200
0
0
<COMMON> 7,932
<OTHER-SE> 23,658
<TOTAL-LIABILITIES-AND-EQUITY> 335,040
<INTEREST-LOAN> 20,440
<INTEREST-INVEST> 4,371
<INTEREST-OTHER> 245
<INTEREST-TOTAL> 25,056
<INTEREST-DEPOSIT> 10,753
<INTEREST-EXPENSE> 11,228
<INTEREST-INCOME-NET> 13,828
<LOAN-LOSSES> 180
<SECURITIES-GAINS> (27)
<EXPENSE-OTHER> 10,446
<INCOME-PRETAX> 4,716
<INCOME-PRE-EXTRAORDINARY> 3,107
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,107
<EPS-PRIMARY> 4.90
<EPS-DILUTED> 4.90
<YIELD-ACTUAL> 4.53
<LOANS-NON> 212
<LOANS-PAST> 582
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,992
<ALLOWANCE-OPEN> 3,368
<CHARGE-OFFS> 287
<RECOVERIES> 257
<ALLOWANCE-CLOSE> 3,518
<ALLOWANCE-DOMESTIC> 3,518
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
