<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1999
0-20159
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(Commission File Number)
CROGHAN BANCSHARES, INC.
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(Exact name of registrant as specified in its charter)
Ohio 31-1073048
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
323 Croghan Street, Fremont, Ohio 43420
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(Address of principal executive offices) (Zip Code)
(419)-332-7301
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
1,904,091 Common shares were outstanding as of March 31, 1999.
This document contains 12 pages.
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CROGHAN BANCSHARES, INC.
<TABLE>
<CAPTION>
Index
PART I. Page(s)
<S> <C> <C>
Item 1. Financial Statements 3 - 6
Item 2. Management's Discussion and Analysis 7 - 10
Item 3. Quantitative and Qualitative Disclosures About Market
Risk - There have been no material changes from the
information provided in the December 31, 1998 Form 10-K
PART II.
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibit 27 - Financial data schedule 12
(b) None
Signatures 11
</TABLE>
<PAGE> 3
CROGHAN BANCSHARES, INC.
Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
March 31 December 31
ASSETS 1999 1998
(Dollars in thousands, except par value)
<S> <C> <C>
CASH AND CASH EQUIVALENTS
Cash and due from banks $ 9,914 $ 10,334
Interest-bearing deposits in other banks - -
Federal funds sold 2,900 8,300
-------- --------
Total cash and cash equivalents 12,814 18,634
-------- --------
INVESTMENT SECURITIES
Available-for-sale, at market value 36,159 30,493
Held-to-maturity, at amortized cost, market value of $44,631 in 1999
and $45,935 in 1998 44,582 45,742
-------- --------
Total investment securities 80,741 76,235
-------- --------
LOANS RECEIVABLE 231,762 239,359
Less: Allowance for loan losses 3,386 3,418
-------- --------
Net Loans receivable 228,376 235,941
-------- --------
PREMISES AND EQUIPMENT, NET 7,703 7,821
ACCRUED INTEREST RECEIVABLE 2,654 2,752
OTHER REAL ESTATE OWNED - -
GOODWILL 7,868 8,027
OTHER ASSETS 802 734
-------- --------
TOTAL ASSETS $340,958 $350,144
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand, non-interest bearing $ 34,448 $ 34,518
Savings, NOW and Money Market deposits 115,567 116,887
Time 147,053 150,051
-------- --------
Total deposits 297,068 301,456
Federal funds purchased and securities sold under repurchase agreements 4,010 9,140
Borrowed funds 3,000 3,335
Dividends payable 324 285
Other liabilities 2,562 2,223
-------- --------
Total liabilities 306,964 316,439
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $12.50 par value. Authorized 3,000,000 shares; issued and
outstanding 1,904,091 shares in 1999 and 1,903,754 in 1998 23,801 23,797
Surplus 8 3
Retained earnings 10,103 9,731
Net unrealized holding gain (loss) on investment securities available-for-sale,
net of related income taxes 82 174
-------- --------
Total stockholders' equity 33,994 33,705
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $340,958 $350,144
======== ========
</TABLE>
See note to consolidated financial statements.
<PAGE> 4
CROGHAN BANCSHARES, INC.
Consolidated Statements of Operations and Comprehensive Income (Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31
1999 1998
(Dollars in thousands,
except per share data)
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans receivable $4,937 $5,139
Interest and dividends on investment securities:
U.S. Treasury securities 387 427
Obligations of U.S. Government agencies and corporations 443 376
Obligations of states and political subdivisions 171 142
Other securities 41 43
Interest on federal funds sold 69 76
------ ------
Total interest income 6,048 6,203
------ ------
INTEREST EXPENSE
Interest on deposits 2,589 2,749
Interest on other borrowings 103 110
------ ------
Total interest expense 2,692 2,859
------ ------
Net interest income 3,356 3,344
PROVISION FOR LOAN LOSSES 60 60
------ ------
Net interest income after provision for loan losses 3,296 3,284
------ ------
NON-INTEREST INCOME
Trust income 108 87
Service charges on deposit accounts 183 168
Gain (loss) on sale of investment securities - -
Gain (loss) on sale of loans 1 12
Other operating income 127 154
------ ------
Total non-interest income 419 421
------ ------
NON-INTEREST EXPENSES
Salaries, wages and employee benefits 1,468 1,402
Net occupancy expense of premises 163 160
Amortization of goodwill 160 160
Other operating expenses 863 872
------ ------
Total non-interest expenses 2,654 2,594
------ ------
Income before federal income taxes 1,061 1,111
FEDERAL INCOME TAXES 365 384
------ ------
NET INCOME $ 696 $ 727
====== ======
Net income per share, based on 1,903,878 shares in 1999 and 1,903,578 shares in 1998 $ .37 $ .38
====== ======
Dividends declared, based on 1,904,091 shares in 1999 and 1,903,578 shares in 1998 $ .17 $ .15
====== ======
COMPREHENSIVE INCOME $ 603 $ 717
====== ======
</TABLE>
See note to consolidated financial statements.
<PAGE> 5
CROGHAN BANCSHARES, INC.
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31
1999 1998
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 696 $ 727
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 316 295
Provision for loan losses 60 60
Deferred federal income taxes 50 (45)
FHLB stock dividend (24) (23)
Net amortization of investment security premiums and discounts 20 8
Loss (gain) on sale of investment securities - -
Loss (gain) on sale of loans (1) (12)
Loss (gain) on disposal of equipment 1 3
Decrease (increase) in accrued interest receivable 98 119
Decrease (increase) in other assets (68) (190)
Increase (decrease) in other liabilities 337 309
-------- --------
Net cash provided by operating activities 1,485 1,251
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities:
Available-for-sale (10,785) (4,998)
Held-to-maturity (6,096) (5,361)
Proceeds from maturities of investment securities 12,237 10,515
Proceeds from sales of available-for-sale investment securities - -
Proceeds from sale of loans receivable 112 300
Net decrease (increase) in loans receivable 7,394 5,869
Capital expenditures (75) (170)
Proceeds from sale of equipment - -
-------- --------
Net cash provided by (used in) investing activities 2,787 6,155
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (4,351) 5,031
Increase (decrease) in federal funds purchased and securities sold under repurchase agreements (5,130) (2,787)
Repayments of borrowed funds (335) (725)
Proceeds from issuance of common stock 10 -
Cash dividends paid (286) (286)
-------- --------
Net cash provided by (used in) financing activities (10,092) 1,233
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,820) 8,639
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,634 9,735
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,814 $ 18,374
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest $ 2,813 $ 2,836
======== ========
Federal income taxes $ - $ -
======== ========
Transfer of loans to other real estate $ - $ -
======== ========
</TABLE>
See note to consolidated financial statements.
<PAGE> 6
CROGHAN BANCSHARES, INC.
Note to Consolidated Financial Statements
March 31, 1999
(Unaudited)
(1) Consolidated Financial Statements
The consolidated financial statements have been prepared by Croghan
Bancshares, Inc. (the "Corporation") without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the Corporation's financial
position, results of operations and changes in cash flows have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. The results of operations for the period
ended March 31, 1999 are not necessarily indicative of the operating
results for the full year.
<PAGE> 7
CROGHAN BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information presented may contain forward-looking statements regarding
future financial performance which are not historical facts and involve various
risks and uncertainties. Actual results and performance could materially differ
from those contemplated in such forward-looking statements.
PERFORMANCE SUMMARY
Assets at March 31, 1999 totalled $340,958,000 compared to $350,144,000 at 1998
year end. Total deposits decreased to $297,068,000 from $301,456,000 at year end
and total loans decreased to $231,762,000 from $239,359,000 at year end.
Net income for the quarter ended March 31, 1999 was $696,000 or $.37 per common
share compared to $727,000 or $.38 per common share for the same period in 1998.
Operating results for the quarter ended March 31, 1999 were negatively impacted
due to a drop in fees generated from the Specialized Investments Divison. The
decrease in fees was a result of turnover in the department with quarterly
income decreasing to $11,000 for three months ended March 31, 1999, compared to
$54,000 during the same period in 1998.
DEPOSITS, LOANS, INVESTMENT SECURITIES, AND STOCKHOLDERS' EQUITY
Total deposits at March 31, 1999 decreased $4,388,000 or 1.5 percent from 1998
year end. The liquid deposit category (demand, savings, NOW and money market
deposit accounts) decreased $1,390,000 while the time deposit category decreased
$2,998,000. Total loans decreased $7,597,000 or 3.2 percent from 1998 year end.
Total investment securities increased $4,506,000 from 1998 year end.
Stockholders' equity at March 31, 1999 increased to $33,994,000 or $17.85 book
value per common share compared to $33,705,000 or $17.70 book value per common
share at December 31, 1998. The balance in stockholders' equity at March 31,
1999 included a net unrealized holding gain on securities classified as
available-for-sale of $82,000 (net of deferred income taxes totalling $42,000).
At December 31, 1998, stockholders' equity included a net unrealized holding
gain on securities classified as available-for-sale of $174,000 (net of deferred
income taxes totalling $90,000). Consistent with the Corporation's quarterly
dividend policy, a dividend of $.17 per share was declared on March 9, 1999 to
be distributed on April 30, 1999.
NET INTEREST INCOME
Net interest income, which represents the excess revenue generated from earning
assets over the interest cost of funding those assets, increased $12,000 for the
quarter ended March 31, 1999 compared to the same period in 1998. The net
interest yield (net interest income divided by average earning assets) was 4.23
percent for the quarter ended March 31, 1999 compared to 4.35 percent for the
quarter ended March 31, 1998.
PROVISION FOR LOAN LOSSES AND THE ALLOWANCE FOR LOAN LOSSES
The following table details factors relating to the provision and allowance for
loan losses for the periods noted:
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, December 31,
1999 1998
(Dollars in thousands)
<S> <C> <C>
Provision for loan losses charged
to expense $ 60 $ 240
</TABLE>
<PAGE> 8
<TABLE>
<S> <C> <C>
Net loan charge-offs 92 340
Net loan charge-offs as a percent of
average outstanding net loans .04% .15%
Nonaccrual loans $ 565 $ 315
Loans past due 90 days or more 1,552 1,086
Potential problem loans, other than those
past due 90 days or more, nonaccrual,
or restructured 1,624 1,275
Allowance for loan losses 3,386 3,418
Allowance for loan losses as a
percent of period-end loans 1.46% 1.43%
</TABLE>
The first quarter 1999 provision for loan losses appearing in the Consolidated
Statements of Operations and Comprehensive Income totalled $60,000. This
provision compares to $60,000 expensed in the first quarter of 1998. Actual net
loan charge offs were $92,000 for the first three months of 1999 compared to
$27,000 during the same period in 1998.
Nonaccrual loans totalled $565,000 at March 31, 1999 compared to $315,000 at
December 31, 1998. Loans past due 90 days or more increased $466,000 and other
potential problem loans increased $349,000 from the December 31, 1998 figures.
These negative asset quality trends will continue to be monitored throughout
1999 to ensure adequate provisions are calculated and expensed. The
Corporation's allowance for possible loan losses as a percentage of outstanding
loans improved to 1.46 percent at March 31, 1999 compared to 1.43 percent at
December 31, 1998.
It is the Corporation's policy to maintain the allowance for loan losses at a
level to provide for reasonably foreseeable losses. To accomplish this
objective, a loan review process is conducted by an outside consulting firm
which facilitates the early identification of problem loans and ensures sound
credit decisions. Management considers the allowance at March 31, 1999 to be
adequate to provide for losses inherent to the loan portfolio.
NON-INTEREST INCOME
Total non-interest income decreased $2,000 or 0.5 percent for the quarter ended
March 31, 1999. Trust department fee income increased $21,000 between quarterly
periods and service charges on deposit accounts increased $15,000 between
comparable quarterly periods. Gains on the sale of loans to the Federal Home
Loan Mortgage Corporation (Freddie Mac) totalled $1,000 for the first quarter of
1999 compared to $12,000 for the same period in 1998.
Other operating income decreased $27,000 between quarterly periods. Included in
other operating income for the first three months of 1999 were $11,000 in fees
generated from the Specialized Investments Division which markets products that
are not FDIC insured (e.g., mutual funds and annuities). This compares to
$54,000 in fees earned during the same period in 1998.
NON-INTEREST EXPENSES
Total non-interest expenses increased $60,000 or 2.3 percent for the quarter
ended March 31, 1999 compared to the same period in 1998. Salaries, wages and
employee benefits increased $66,000 between quarterly periods and net occupancy
expense of bank premises increased $3,000 between quarterly periods.
Goodwill amortization associated with the August 1, 1996 purchase of Union
Bancshares Corp. was unchanged for the two comparable quarterly periods while
other operating expenses decreased $9,000 or 1.0 percent between quarterly
periods.
FEDERAL INCOME TAX EXPENSE
Federal income tax expense decreased $19,000 or 4.9 percent between quarterly
<PAGE> 9
periods due primarily to lower income before federal income taxes. The
Corporation's effective tax rate for the quarter ended March 31, 1999 decreased
to 34.4 percent compared to 34.6 percent for the quarter ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
An average federal funds sold position of $5,584,000 was maintained for the
quarterly period ended March 31, 1999. Short-term borrowings of federal funds
purchased and repurchase agreements averaged $5,341,000 for the quarterly
period.
Borrowings from the Federal Home Loan Bank totalled $3,000,000 at March 31,
1999. Of that amount, $1,000,000 is due in April 1999 and $2,000,000 is due in
October 2005. The remaining borrowings from NBD Bank advanced to fund the 1996
purchase of Union Bancshares Corp. were re-paid during the first quarter of
1999.
Capital expenditures for bank premises and equipment totalled $75,000 for the
quarter ended March 31, 1999. This compares to $170,000 for same period in 1998.
Projected 1999 capital expenditures total $290,000.
YEAR 2000 PREPAREDNESS
There is considerable concern over the ability of many computer software
programs to function when the year 2000 arrives. This concern arises because
many existing programs use only the last two digits to refer to the year. As
such, programs do not recognize the difference between a year that begins with
"20" instead of the current "19".
Computer operations are a crucial part of The Croghan Colonial Bank's
(Croghan) operating strategy and a comprehensive program has been implemented to
verify that all internal software will operate properly. Certified Year 2000
compliant mainframe computer hardware and software was purchased and installed
in 1997. To ensure the validity of this certification, multiple testing sessions
were conducted during the fourth quarter of 1998. Additional testing occurred
during the first quarter of 1999 and sucessfully involved changing the
processing dates to December 31, 1999 and January 1, 2000.
A testing program has also been implemented to verify that all desktop
personal computers and network servers will function properly in the year 2000.
Year 2000 test software and date changing procedures have been effected on all
of the personal computers located throughout the organization. The network
servers were tested during the first quarter of 1999 and sucessfully handled the
date change.
Croghan's direct exposure to embedded microchip technology is of little or
no consequence. Unlike many manufacturers which use computerized robots,
controllers, and assembly lines, Croghan has only to assess its elevators and
HVAC systems. All such systems have been evaluated and were determined to be
free of embedded microchip technology.
Croghan also has a vested interest in the computer processing requirements
of its vendors and customers. Many primary suppliers have been contacted to
ensure their preparedness. A tickler system was instituted to follow up with
those vendors that have not replied or possibly indicated some question as to
their commitment to readiness. These vendors will be contacted throughout 1999.
From a customer standpoint, the problem could affect the ability of
Croghan's borrowers to service debts if their direct operations, vendors, or
customers were impacted. To raise the customers' level of awareness, Croghan
sponsored two Year 2000 seminars for local businesses in 1998. Additionally, the
Federal Reserve Bank instituted a Year 2000 examination process to which Croghan
is subject. As a part of that process, Croghan was required to identify those
commercial customers (borrowers and depositors) which exceeded a set threshold
and prepare written Year 2000 assessment work sheets. As of March 31, 1999
approximately 215 such assessments have been completed. A tickler system was
then instituted to follow up on those customers with a high inclination to Year
2000 risk. The Year 2000 risk assessment for Croghan's borrowers is a factor in
determining the provision for loan losses.
<PAGE> 10
A majority of the cost associated with upgrading Croghan's internal
hardware and software was incurred when the mainframe equipment was purchased in
1997. Additional direct expenditures attributable to Year 2000 internal hardware
and software approximated $32,000 in 1998 and are estimated at $25,000 for 1999.
Costs associated with the vendor and customer compliance portions of the Year
2000 preparedness plan are difficult to quantify, but direct costs of the
program were estimated at $25,000 in 1998 and should approximate a similar
amount in 1999. The estimated first quarter expenditure totalled $7,500. An even
more difficult amount to quantify is the personnel time required to verify
system integrity and assure compliance with the policies and procedures mandated
by the regulatory agencies. Such expense is estimated to have amounted to over
$100,000 since 1997 and will likely approximate $75,000 in 1999.
Croghan has a well established and tested contingency plan for mainframe
and personal computer processing. The plan has been implemented on various
occasions during times of electrical and telephone circuit interruption. A
worst-case Year 2000 scenario would likely be similar in nature to interruptions
that have been experienced in the past. At those times, Croghan has reverted to
the manual processing of customer transactions at the teller windows with
mainframe processing accomplished at the off-site disaster recovery location
(the off-site location was tested in October 1998, January 1999, and March 1999
for Year 2000 preparedness and found to be satisfactory). Croghan has strived to
ensure that its contingency plan, vendor, internal processing, and customer
segments of the Year 2000 preparedness plan are being executed.
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROGHAN BANCSHARES, INC
-------------------------------
Registrant
Date: April 15, 1999 /s/ Thomas Hite
------------------------ -------------------------------
Thomas F. Hite, President
Date: April 15, 1999 /s/ Allan E. Mehlow
------------------------ -------------------------------
Allan E. Mehlow, Treasurer/
Principal Financial Officer
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,914
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 36,159
<INVESTMENTS-CARRYING> 44,582
<INVESTMENTS-MARKET> 44,631
<LOANS> 231,762
<ALLOWANCE> 3,386
<TOTAL-ASSETS> 340,958
<DEPOSITS> 297,068
<SHORT-TERM> 4,010
<LIABILITIES-OTHER> 2,886
<LONG-TERM> 3,000
0
0
<COMMON> 23,801
<OTHER-SE> 10,193
<TOTAL-LIABILITIES-AND-EQUITY> 340,958
<INTEREST-LOAN> 4,937
<INTEREST-INVEST> 1,042
<INTEREST-OTHER> 69
<INTEREST-TOTAL> 6,048
<INTEREST-DEPOSIT> 2,589
<INTEREST-EXPENSE> 2,692
<INTEREST-INCOME-NET> 3,356
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,654
<INCOME-PRETAX> 1,061
<INCOME-PRE-EXTRAORDINARY> 696
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 696
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
<YIELD-ACTUAL> 4.23
<LOANS-NON> 565
<LOANS-PAST> 1,552
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,624
<ALLOWANCE-OPEN> 3,418
<CHARGE-OFFS> 124
<RECOVERIES> 32
<ALLOWANCE-CLOSE> 3,386
<ALLOWANCE-DOMESTIC> 3,386
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
